Article by Annemieke Wessels , Maarten Tinnemans and Max van Drunen 1

Previously published by Law Business Research Ltd.

I. INTRODUCTION TO THE LEGAL FRAMEWORK

In the Netherlands, most real estate law is incorporated in the Civil Code, which contains laws on entitlement to real estate, use, sale and purchase, transfer and encumbrances. The Civil Code follows the old Roman distinction between rights in rem and rights in personam: rights on property as opposed to personal rights on performance of obligations. In contrast to a personal right, a right on property is 'absolute', as long as it is explicitly recognised as such in the Civil Code; this means that it is enforceable with regard to third parties. The most common absolute rights on real estate are ownership and the limited rights of leasehold, building rights, easement and mortgages (see Section VI.iv, infra). Common personal rights in respect of real estate are lease, agricultural lease, beneficial ownership and rights derived from a sale and purchase agreement. In general, personal rights cannot be invoked against third parties; however, personal rights can also have absolute characteristics (see Section VII, infra).

Ownership is defined as the most comprehensive property right and the most common title to real estate in the Netherlands. Other property rights, such as leasehold and building rights, are derived from ownership. Leasehold allows the leaseholder to hold and use real estate owned by another party. A building right entitles the holder to ownership of buildings or fixtures in, on or above another party's real estate. Leasehold and building rights can be limited in time, use and transferability, and a periodic fee may be payable to the landowner. Ownership, leasehold and building rights can be divided into apartment rights that may be transferred separately or encumbered with limited rights. An apartment right provides its owner with a share in the entitlement to the divided property and the sole right of use to the apartment. Housing and multifunctional complexes are often divided into apartment rights.

Dutch law draws a distinction between the purchase and the transfer of ownership of real estate. Purchase is understood to mean the legal basis for the transfer of the property and may be effected by means of a private instrument – or even orally – and is subject to virtually no mandatory provisions. Purchase agreements generally fall under the remit of regulatory law. The transfer of ownership of real estate or creation of limited rights only takes place, however, once a notarial deed of transfer of title or creation has been signed, and when such a deed has been registered with the Land Registry Office in implementation of the purchase agreement or other title.

i. System of registration

Real estate is registered in the public registers of the Land Registry Office.

The Land Registry Office has a statutory duty to register the geographical location of real estate in the Netherlands and any limited rights created thereon; this also applies to ships, aircraft and networks. The Land Registry Office registers the names and addresses of titleholders and stores the documents on which such entitlements are based. Attachments and restrictions under public law (see also Section VI, infra) are also recorded. The data are accessible to the public and it is also possible to consult them via the Land Registry Office's website.

In cases of transfer of ownership or creation of limited rights, registration of the notarial deed of transfer or creation is required. Such a transfer or creation is complete only once such registration has taken place. In practice, the civil law notary presents the Land Registry Office with an electronic copy of the deed immediately after signature, and it can be seen almost immediately in the registers that a change to the legal status of the property subject to registration in question has taken place. Within a few days the details of the registration are updated. In this way, the land registers are kept very well updated.

The civil law notary who has provided the Land Registry Office with the data is responsible for their accuracy. If the data are correct when provided but are processed incorrectly, then the Land Registry Office is in principle liable for any damage resulting from this. If the civil law notary provides incorrect data, then he or she is in principle liable for this.

ii. Choice of law

As indicated above, Dutch law states that the purchase of real estate generally falls under the remit of regulatory law. A purchase agreement that applies to real estate located in the Netherlands may also be governed by foreign law, for example as a result of the choice of another country's law.

The rules of Dutch private international law designate Dutch law as the law applying to the delivery of possession of real estate located in the Netherlands and the creation of limited rights on it.

II. OVERVIEW OF REAL ESTATE ACTIVITY

In 2011, the number of purchase and sale transactions in Dutch investment real estate fell. Volumes for 2011 are estimated at less than €5 billion, a reduction of around 25 per cent in comparison with 2010. Reports in the financial press have ascribed investor reluctance to a lack of financing possibilities, vacant office real estate and a general lack of confidence in the economy; however, demand for real estate investment products remains. In the office market, a large division has emerged between 'A locations' and 'B locations'. There is a fear that outdated office buildings at locations lacking a nearby centre of attraction will no longer find lessees, while demand for office buildings in Amsterdam's Zuidas district has, in contrast, increased. Municipal authorities are attempting to have the intended zoning designations of offices at 'B locations' changed, but transformation is not always possible or desirable.

Institutional investors appear primarily to want to expand in retail and housing real estate. Other institutional and non-institutional investors are increasingly often invited to participate in private funds. A recent example is the ASR Dutch Prime Retail Fund, a new retail fund with a total value of €1.1 billion. The housing market is also being viewed as a solid investment with acceptable direct returns. One in three Dutch homes is owned by a housing corporation. The regulations governing sales by housing corporations were eased recently, as a result of which investors now have the opportunity to acquire home ownership.

III. DEVELOPMENTS IN REAL ESTATE PRACTICE

i. Public-private partnerships

Large and complex infrastructure projects (such as wind farms and motorways) are increasingly often being realised through public-private partnerships ('PPPs'). As the commissioning party in this context, the government does not set out in detail the manner in which such projects are to be realised, but limits assignment descriptions to their fundamental aspects; the private sector then has considerable freedom in realising the project in its own terms. In this way, the government makes use of the market's capacity to innovate. The most common form of PPP is the DBFM contract (design, build, finance, maintain). Recently, PPPs have been structured in a way that better facilitates financing by institutional investors.

ii. Crisis and Recovery Act

With regard to the current economic situation, the Crisis and Recovery Act entered into effect in 2010. This Act is intended to stimulate the construction sector by accelerating procedures for the realisation of a number of large-scale construction projects. Primarily, this concerns infrastructural works and other projects in the field of home construction, sustainability and water management. The projects are expected to contribute considerably to the economy, employment and accessibility.

iii. Temporary reduction of real estate transfer tax on homes

The rate for real estate transfer tax on homes has been temporarily reduced to 2 per cent in order to stimulate the housing market. The standard rate is 6 per cent (see also Section VI, infra). The reduction period is one year and runs until 30 June 2012.

iv. Networks

According to Dutch law, a network of one or more cables or pipes constitutes individual immoveable property. The owner of a network is its authorised constructor or the legal successor. Transfer or encumbrance of a network is only possible following registration thereof in the public registers. Registration of a network is done by means of a notarial register certificate, in which the civil law notary states that the ownership of the network has been demonstrated sufficiently. In order for this to happen, the civil law notary needs to make enquiries concerning the constructor's authority. In practice, it appears virtually impossible for network companies to prove such authority to construct in relation to some older networks. In such cases, no registration can be made, as a result of which transfer and encumbrance are not possible. In order to accommodate network owners, transitional legislation came into effect in 2010. On the basis thereof, those who acted as network owners on 1 February 2007 may proceed with the registration of such networks in the public registers, and subsequently with publication of the registration and finally transfer and encumbrance of the network. Following publication of the registration, an expiry period of one year commences, within which third parties who consider themselves a network's rightful owner may contest the registration at law. This legislation calls for various types of action to secure claims of these very valuable assets.

v. Restructuring

As a result of the current economic situation, a significant increase of work in the field of restructuring has occurred. There is also an increase in disputes relating to breach of contract.

vi. Disposition of non-core or redevelopment locations by large and multinational companies

Large and multinational companies are taking a closer look at their real estate. This has led to a number of disposition processes and sale-and-lease-back transactions.

vii. Park management

Professional land management in the form of park management is being seen increasingly often in the Netherlands. Due to high land prices and a shortage of possibilities for expansion, the intensive use of space has become a basic principle. Business parks increasingly combine functions to include activities such as sport and dance schools alongside commercial activities. Properly functioning park management is increasingly being seen as necessary for the smooth running of multifunctional premises. In setting up the management of a park, it is generally assumed that optimised park management can only be achieved if it has a foundation in mandatory law. This means that 'free riding' must not be possible and that the legal successors of the various right holders in the business park are bound to the park management's rules. In the Netherlands a link is generally made here between a property law construction – such as a division in apartment rights (see also Section I, supra) or creation of easements – and the membership of a managing legal entity. In this regard, there seems to be a preference for management associations, as these have a consultative structure based in law.

IV. REAL ESTATE AND FOREIGN INVESTMENT

Where entitlement to immoveable property is concerned, the law makes no distinction between Dutch and foreign investors. There are no restrictions that apply to foreigners but that do not apply to Dutch participants. With regard to investment regulations and the tax aspects of real estate transactions, too, Dutch and foreign actors are in principle treated equally.

Many German parties are active in the Dutch real estate market; Anglo-US investors are also well represented. In recent years, the importance of investors from emerging countries has increased. Islamic investors often make use of shariah financing arrangements.

V. STRUCTURING THE REAL ESTATE INVESTMENT

A real estate investment can be structured in many different ways. Amendments to the law and regulations regularly result in new structures or in variations on existing structures. Obviously, specific investors' needs are also a factor on a tax, legal, financial and organisational level.

i. Companies

The private company with limited liability ('BV') and the limited liability company ('NV') have legal personality, are incorporated by a notarial deed and have a share capital divided into shares held by one or more shareholders. The shareholders in a BV or NV are not personally liable for acts performed in the name of the company, nor are they liable for contributing to losses of the company in excess of the amount that must be paid up on their shares. Different voting, dividend or liquidation rights between shareholders can be created by the issue of preference shares or separate classes of shares. The main differences between the BV and the NV are:

  1. the shares in an NV are in bearer or registered form; the shares in a BV are in registered form only;
  2. the minimum authorised, issued and paid-up capital of an NV is €45,000; a BV's minimum authorised, issued and paid-up capital is presently €18,000; and
  3. in its articles of association, a BV must restrict the transfer of its shares, whereas such restriction is optional for an NV; because of the mandatory restriction on the transfer of its shares, the BV is particularly suitable for companies with a limited number of shareholders, such as wholly owned subsidiaries, joint venture companies and family businesses.

Currently, a draft bill is before the Dutch parliament, which aims to create a simpler and more flexible legal framework for BVs.

ii. Limited partnerships

A limited partnership ('CV') is an entity without legal personality, entered into by an agreement between one or more general partners and one or more limited partners as money lenders. The general partners act on behalf of the CV and are severally liable for the CV's obligations. The limited partners are only liable for the amount of their capital contributions, pursuant to the partnership agreement. However, if a limited partner acts in the name of the CV or has a decisive influence on the performance of the general partner (or partners), the limited partner becomes severally liable.

Because the CV has no legal personality, its assets are usually owned by the general partners. However, the assets can also be owned by the general partner(s) and the limited partners together or by the limited partners jointly. The partnership agreement can provide that a partner may transfer its interest to a third party, subject to such approvals, consents and other requirements as the partnership agreement sets forth. The partnership agreement can be a private instrument and does not have to be in a notarial form. Another benefit of the CV is that it does not have any minimum capital requirements; however, the main reason the limited partnership is a popular investment structure is that it can be established in such a way that it is transparent for Dutch tax purposes. As a result, the CV is not subject to corporate income tax and dividend withholding tax in the Netherlands.

iii. Funds for joint account

The fund for joint account ('FGR') is often used as an investment vehicle. An FGR does not have legal personality; it is an agreement governing the relationship between the manager, the depositary and an individual investor. This agreement is often referred to as the 'terms and conditions' and deals with the management and custody of the fund. The terms and conditions often provide that an investor is not liable towards third parties and that its (internal) liability is limited to the amount that it has agreed to contribute.

Dutch civil law does not specifically provide for FGRs. This allows great flexibility in how the terms and conditions are drawn up, and this flexibility makes an FGR a suitable vehicle for real estate investment funds.

For tax purposes a distinction can be made between a 'closed' FGR and an 'open' FGR. A closed FGR is transparent for tax purposes and is itself not subject to corporate income tax. An open FGR is not transparent for tax purposes and is subject to corporate income tax (at fund level). An FGR is closed if:

  1. units in the FGR are transferable only with the consent of all investors; or
  2. units in the FGR are only transferable to the fund itself by way of redemption without the requirement of the consent of all investors.

iv. Cooperative

The Dutch cooperative ('coop') has recently enjoyed considerable popularity as a vehicle for structuring tax-efficient cross-border investments for foreign investors. Subject to limited conditions:

  1. distributions made by the coop are not subject to dividend withholding tax; and
  2. no corporate and individual income tax will be levied on the coop's non‑Dutch resident members in respect of their membership in the coop.

The coop is an association incorporated by notarial deed. The coop must provide for certain tangible needs of its members, specified in its articles of association. The activities of the coop should have a certain relevance to the activities of the members themselves. This can be the case if a coop invests funds received from members that are themselves also active as investors.

Especially for coops that are part of a group of companies that carry on an enterprise, including groups that are ultimately owned by private equity firms, the Dutch tax authorities are generally willing to confirm in an advance tax ruling that distributions made by the coop are not subject to dividend withholding tax, and no corporate and individual income tax will be levied on the coop's non-Dutch resident members in respect of their membership in the coop.

v. Fiscal investment institution

The NV/BV, CV and FGR can be structured as a 'fiscal investment institution' ('FBI'). An FBI is subject to corporate income tax, but at a zero rate. In order to qualify as an FBI, certain requirements have to be met, including restrictions on leverage, shareholders and members of the managing board.

VI. REAL ESTATE OWNERSHIP

i. Planning

An owner's rights to the use of immoveable property are regulated by the Spatial Planning Act and the Environmental Permitting (General Provisions) Act. The zoning plan is a central element in the Spatial Planning Act. This plan is drafted by the municipal authorities and designates the purpose for the land in the plan, be it housing, offices, retail, agricultural use, public space, etc. In addition, the zoning plan sets out the rules regarding the use of the land and the immoveable property situated on it. The zoning plan has both a preventative and a repressive effect. It is preventative in the sense that permits concerning the construction of immoveable property can only be issued if the intended use is in keeping with the zoning plan. It is repressive because there are possible enforcement measures should the prescribed use not be complied with.

Should a landowner desire to construct immoveable property, convert existing immoveable property or carry out activities harmful to the environment, a permit is required. On the grounds of the Environmental Permitting (General Provisions) Act, which entered into effect in 2010, a single permit can be requested which is sufficient for all of these activities jointly. This is known as the single environmental permit. A large number of permits, exemptions and notifications (around 25) are integrated in this single environmental permit.

ii. Environment

Liability for soil pollution is regulated under the Soil Protection Act. This is based on the 'polluter pays' principle. When it is not or no longer possible to identify the polluter, the owner is in principle held liable. The owner may also be held liable if the pollution spreads or if others suffer damage as a consequence of exposure to it. Among the means at the government's disposal is forcing polluters or owners to clean up by ordering them to do so. If this is not possible, the government itself takes on the responsibility for remediation. In summary, the general order of liability is: polluter, owner, government.

The strict liability of the owner or leaseholder of a business park has been expanded since 1 January 2006. The owner or leaseholder is obliged to clean up after the occurrence of serious soil pollution for which a need of remediation has been established, regardless of whether the pollution was caused by the owner or the leaseholder. The obligation to remediate the soil lies with the owner or leaseholder of the business park in which the source of the pollution is located. For business parks, the 'polluter pays' principle also applies.

iii. Tax

Pursuant to the Real Estate Transfer Tax Act, a 6 per cent real estate transfer tax is in principle levied upon acquisition of immoveable property located in the Netherlands. The same applies to rights to which immoveable property is subject, such as leasehold or building rights. The term acquisition includes the acquisition of beneficial ownership. There is a notional provision designating shares in a property entity as immoveable property. As a consequence, the acquisition of shares in a property entity is also subject to real estate transfer tax under certain conditions. Through this legal assumption, the legislature wants to prevent real estate transfer tax avoidance through the transfer of shares in a legal entity that holds immoveable property, instead of a direct transfer by that legal entity of the immoveable property itself. As a result, such acquisitions, which from the legislature's point of view are comparable in an economic sense to 'ordinary' acquisitions, are treated equally in terms of taxation. A property entity is an entity with its capital divided into shares (both with and without legal personality), of which:

  1. the majority (more than 50 per cent) of the possessions at the time of the acquisition of the shares or at any point in time in the year previous to that time (reference period);
  2. consist or have consisted of immoveable property and at least 30 per cent of the possessions consist or have consisted of immoveable property located in the Netherlands (holding requirement); and
  3. the immoveable property (taken as a whole) are or were primarily (for 70 per cent or more) of service to the acquisition, disposal or operation of that immoveable property (purpose requirement).

When an interest in a property entity is acquired, a tax levy only takes place if acquisition or expansion of interest constituting at least a third part of the property entity occurs (interest requirement).

The Real Estate Transfer Tax Act contains several exemptions, concerning, inter alia, an acquisition resulting from merger and divestment, transfers between group companies and the acquisition of networks. Furthermore, an exemption from real estate transfer tax applies to the acquisition of newly constructed immoveable property or building land in respect of which turnover tax is owed.

The delivery of possession of immoveable property is in principle exempt from turnover tax, unless it concerns:

  1. delivery of possession of new immoveable property taking place before, simultaneously to, or a maximum of two years, after the date of first occupation;
  2. delivery of possession of building land. Under the law, these forms of delivery of possession have a 19 per cent turnover tax imposed on them.

iv. Finance and security

Immoveable property may be encumbered with a mortgage. A mortgage is a limited security interest intended to provide recourse against the immoveable property for a claim for payment of a sum of money, with preference over other lenders. The financing of immoveable property with a mortgage as security interest for the financier is customary with regard to the immoveable property of both private individuals and businesses. A mortgage right is created by a notarial deed recorded in the public registers.

A mortgage right has three important characteristics. First, it is an absolute right that may be invoked against any other party. Should a mortgagor dispose of any immoveable property, the mortgage right on the immoveable property remains. Because the mortgage right is evident from the public registers, there is no room for protection by a third party. Second, the mortgagee has the right to summary execution. If the mortgagor defaults in the settlement of that for which the mortgage serves as guarantee, the mortgagee is entitled to sell the immoveable property. Third, should the mortgagor go into liquidation, the mortgagee is a secured creditor. The mortgagee can exercise its right as though there were no liquidation.

The procedure regarding the foreclosure by the mortgagee contains safeguards to prevent abuse of the right to summary execution and to maximise the proceeds in the interest of the mortgagor and any other lenders. In principle, the foreclosure must take place in the form of a public auction in the presence of a civil law notary. At the request of the mortgagee or the mortgagor and with court approval, a private sale under execution may also be held. At present, a legislative proposal is pending that is intended to make sale under execution of immoveable property possible via the internet. The aim is to make the sale under execution accessible to the wider public and, in doing so, to generate higher execution proceeds.

The mortgage right depends on the claim that the mortgage serves to guarantee. Should this claim be transferred, the acquirer also acquires the security interest pertaining to it. Another consequence of the mortgage right's dependent character is that the right is extinguished once the claim is settled. Bank mortgages are an exception to this rule. A bank mortgage involves the granting of security on all claims which the mortgagee has in respect of the mortgagor either now or at any time and for whatever reason. It may therefore only be created prior to the mortgagee's having a claim against the mortgagor.

As well as being created on the debts of the mortgagor, a mortgage may also be created on the debts of third parties. Such cases are referred to as third-party mortgages; the owner and not the borrower is then the mortgagor. Group company financing often involves third-party mortgages. A bank extends a credit facility to the parent company, on the basis of which a mortgage on the immoveable property of the operating companies is provided as security.

Under normal circumstances, the mortgagee is also the financier. If a banking syndicate performs as financier, it is not practical that all the banks become mortgagees considering the foreclosure process. By means of a parallel debt structure, an agent may be appointed as mortgagee, which agent the parties agree has an equal claim to those of the combined banks. Such a structure is not contrary to the dependent character of the mortgage right.

VII. LEASES OF BUSINESS PREMISES

Tenancy law makes a distinction between two types of business premises: retail premises and other business premises. Lease of retail premises covers, inter alia, use of the immoveable property for retail trading, as well as its use as a restaurant, café or craft workshop. The premises must include a space accessible to the public for the direct supply of movable goods or services. The regime for retail premises is intended to offer protection to the lessee by means of mandatory provisions due to the location specificity of the lessee's business. The 'other business premises' category is a residual one. This regime covers all built immoveable property that is not leased as retail premises or housing. The 'other business premises' category is very broad; for example, it includes offices, parking space, factory buildings, storage space and warehouses. The lessees of 'other business premises' receive only limited protection from the law. In this category, actors have much freedom in defining the terms of a lease as they see fit.

Business premises leases are customarily drafted in conformity with Real Estate Council of the Netherlands' models. These models are the commonly used standard leases for business premises in the Netherlands and are generally lessor-friendly. Among other things, the models concern the term, rent, rent increase, lessee liability and security aspects.

i. Retail premises

General leasing regulations apply to the 'retail premises' category. In addition, mandatory provisions apply, including those concerning the lease and notice periods.

The underlying principle of the retail premises regime is that the period of the lease must be at least 10 years. In practice, leases are often concluded for a period of five years with the possibility of extension for an additional five years. Even when no second five-year period is agreed, the lease is extended by an additional five years by operation of law. The underlying idea is that ten years is sufficient for the investments made by the lessee to be written off. Should the lease be for a specified period, notice may be given towards the end of that period. Should the lease be for an indefinite period, then notice may be given at any time, provided the duration of the lease has been at least 10 years, and the notice period must be at least one year. Notice given by the lessor terminates the lease only if the lessee agrees to the termination or the lease end date is fixed irrevocably by the court at the petition of the lessor. The lessor can give notice on the following grounds:

  1. the lessor urgently needs the leased property for its own use (including use as business premises of a different kind or renovation of the leased property that cannot be carried out without termination of the lease);
  2. the manner in which the lessee operates its business does not befit a good lessee;
  3. the lessor desires the realisation of the leased property's purpose as designated in a valid zoning plan;
  4. the lessee does not agree to a reasonable offer to enter into a new lease that does not include any change to the rent; or
  5. the lessor's interest in termination weighs more heavily than that of the lessee in continuation of the lease.

ii. Other business premises

General leasing regulations apply to the 'other business premises' category. Aside from these, considerable contractual freedom exists. No mandatory provisions with regard to lease and notice periods, etc. apply to these types of business premises.

The only mandatory protection the lessee enjoys is that against eviction. Should notice ending the lease be given, notice of eviction must also be given expressly. Should the lessee not agree to the termination of the lease, the lessor's obligation to vacate is suspended by operation of law for two months from the date on which notice of eviction was given. During these two months, the lessee can apply to the court to have the period of suspension extended. Extension by a period of up to one year is possible. The lessee may repeat such an application twice, so that suspension of the obligation to vacate can be extended by a maximum of three years (three x one year). In the assessment of such applications for extension (unless the lessee has – to put it succinctly – been guilty of misbehaviour), a balancing of interests is made.

There is no possibility of appealing the court's decision on an application for extension. During the period in which a lessee does not as yet have to vacate, the rights and obligations of the parties continue to apply. The compensation the lessee must pay to the lessor is in principle the same as the rent that applied on the date that notice of eviction was given; however, should one of the parties so request, the court will fix the compensation that the (former) lessee is to pay during the extension period to come. The court sets that compensation at an amount that is reasonable when compared to other rents in the locality.

VIII. OUTLOOK AND CONCLUSIONS

Dutch law regarding immoveable property constitutes a stable system. It is characterised by considerable legal certainty. The land registration system is of a high standard and offers transparency regarding the ownership of immoveable property to anyone that is entitled to it under a limited right such as building or leasehold rights, and who has been granted mortgage rights as security. A variety of investment vehicles are available to facilitate joint investment. As a consequence, tax, legal, financial and organisational arrangements can be tailored to any given situation. Tenancy law provides well-balanced rules for two types of business premises. For small, location-specific businesses, the necessary protection is offered while for the leasing of office premises and factories, parties have considerable freedom to define their mutual relationships as they see fit. Immoveable property in the Netherlands, therefore, constitutes an attractive object of investment for investors striving for a stable investment in the long term.

In the current economic climate, attempts are being made to stimulate the real estate sector through a number of measures including the Crisis and Recovery Act and the temporary reduction of real estate transfer tax on homes, thereby contributing to the economy, employment and accessibility.

Footnote

1. Annemieke Wessels is a partner, Maarten Tinnemans is a senior associate and Max van Drunen is an associate at De Brauw Blackstone Westbroek NV.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.