Cyprus is a popular destination for setting up a business, mainly due to its geographical location, its full European Union membership, its favourable tax regime, and the fact that English is widely spoken on the island. It is also a very attractive destination for Europeans and third-country nationals looking for a place to invest or relocate for work or retirement.

For example, under the Cyprus Permanent Residency (Fast Track) Programme (PRP), an investment programme that provides significant tax and other incentives to non-EU nationals who obtain permanent residence status, applicants are required to purchase a residential property with a combined value of €300,000 (plus VAT, if applicable). The property purchase must be a "first-time" sale, meaning that it must be bought for the first time, from a property development company.

However, due to the regulatory framework relating to the real estate and construction markets in Cyprus, buying real estate property, whether for personal use or as an investment, can present significant challenges when it comes to protecting legal rights and financial interests in such property.

To identify any legal risks, it is therefore essential to know how the construction industry in Cyprus works and to always seek legal advice before buying real estate property.

  1. Ownership of Real Estate

Cyprus maintains a well-organised land registry system in which all immovable property is registered. Every district in Cyprus has its own local land registry office, where any transactions relating to immovable property must be registered.

The title deeds of real estate property constitute proof of legal title and guarantee to the registered owner the exercise of ownership rights in the property, including the right to sell, mortgage, or otherwise dispose of the property, subject to the provisions of the Transfer and Mortgaging of Immovable Property Law of 1965 (N. 9/1965, as amended).

As a rule, a piece of land, along with everything attached to it, belongs to its registered owner. The Roman private law maxim "Cuius est solum eius est usque ad coelum et ad infernos" translates to "[for] whoever owns [the] soil, [it] is his all the way [up] to Heaven and [down] to Hell".

According to the Immovable Property (Tenure, Registration, and Valuation) Law (Cap 224, as amended), "Private ownership of any land shall, subject to the provisions of this Law or any other law in force for the time being, extend to the substance of the earth beneath the surface and to the space above the surface, reasonably necessary for the enjoyment thereof...".

The transfer of property, in respect of which title deeds exist, from one person to another can be a relatively simple procedure consisting of the presentation and validation of a written declaration of transfer before the land registry. However, things can become complicated where no separate title deeds exist, such as in the case of "commonly owned buildings" (i.e., buildings that consist of at least five units, even if all units are owned by one owner). A "unit" for the purposes of the law is a floor or section, or part of a floor, room, office, flat, or shop, or any other part or area of a commonly owned building that can conveniently be occupied as a complete, separate, and self-contained unit for any purpose for which a building permit was obtained.

This is usually the case when property developers in Cyprus acquire large plots of land for the construction of multiple residential or commercial units, such as blocks of flats, houses, villas, shops, offices, etc.

  1. How the Construction Industry Works

Over the past decades the Cypriot economy has relied significantly on the real estate market to attract foreign investments. However, since the vast majority of new constructions are financed by loans, the long wait for these permits and for the title deeds to be issued does not work in the best interests of anyone, including the Cyprus government, which misses out on taxes, transfer fees, and ultimately its reputation.

To finance big construction projects, developers in Cyprus usually take loans from banks and secure them, inter alia, with mortgages registered against the land itself, with the intention of paying off the loans from the proceeds they will receive from the sale of the units.

Because of the way the system currently works, securing all the necessary construction permits and authorisations in Cyprus can be a lengthy process that can take years to complete. This inevitably leads to considerable delays in obtaining separate title deeds for purchasers of units in commonly owned properties, even where due process has been followed by the property developer.

The relevant authorities in Cyprus have long recognised this problem and expressed the intention to simplify and expedite procedures to better secure property purchasers and facilitate investments in real estate in general. Certain steps in the right direction have been taken from time to time; however, it is generally accepted that there is still a long way to go. At the same time, the authorities are showing flexibility when it comes to enforcing the law, which has often led to abuse of the system and serious problems for unsuspected purchasers.

The law in Cyprus prohibits the commencement of construction work without the appropriate permits first being obtained. The main permits are the Planning Permit, issued under the Planning Law of 1972 (N. 90/1972, as amended), and the Building Permit, issued under the Roads and Buildings Law (Cap. 96, as amended), after the Planning Permit is obtained. However, the authorities in Cyprus do not enforce the law aggressively but rather tend to "tolerate" the commencement of construction works without the necessary permits and authorisations, due to the time usually required for examining the applications on their part. As a matter of practise, property developers tend to commence construction work as soon as the Planning Permit is issued and while applications for Building Permits are still pending.

The Planning and Building Permits are prerequisites to obtaining another type of regulatory authorisation under the Roads and Buildings Law, the Certificate of Approval. The law prohibits the possession or use of a building or any part thereof without a Certificate of Approval, and the owner of the Building Permit must apply for the issue of such a Certificate within 21 days from the completion of the construction. This Certificate will certify that the building was erected based on the approved architectural plans and studies (and the Building Permit). The Certificate of Approval is the final stage of the licencing procedures in Cyprus and, as such, a prerequisite for the issue of separate title deeds by the Land Registry.

Thus, the main risks involved in the purchase of real estate property from a property developer in Cyprus concern factors over which the purchaser has no control, such as the standing of the property developer and its ability to meet its financial obligations towards third parties, the developer's compliance with all regulatory requirements, and ultimately its ability to issue and transfer separate title deeds in the name of the purchaser. Failure in respect of any of the above can have a very detrimental effect on the purchaser's rights and severely affect the value of any property purchased or the property itself, so it is essential to be able to identify any such risks in good time and take mitigating steps as far as possible.

  1. Securing Ownership

If the property developer fails to observe legal or technical requirements, the process of issuing separate title deeds for the property can be seriously stalled. There may also be penal consequences for both the seller and the purchaser, while the property itself may be subject to demolition orders issued by the courts.

A Purchaser who wishes to purchase real estate property in Cyprus for which no separate title deeds exist is best advised to ensure the good standing of the seller and its reputation in the market first. It is also essential to appoint a legal professional to determine, inter alia, the ownership of the property and the existence of the necessary permits, as well as any registered encumbrances on the property.

The registered owner of the property should be required to provide all the necessary information, including a recent Search Certificate of Encumbrances from the Land Registry of the relevant district and a Certificate of Personal Restrictions. Furthermore, if the owner of the property is a legal entity, it should be required to provide a full set of up-to-date corporate documents and/or secretary certificates confirming good standing, ultimate beneficial ownership and control, legal representation, etc.

At the same time, it is also advisable to engage the services of an experienced technical professional, such as an architect, to carry out technical due diligence and report on technical matters. If allowed by the developer, the architect should also monitor construction works to ensure that the property will be constructed in accordance with the technical specifications, the architectural plans, and the relevant permits, so that separate title deeds for the property will be issued in good time. In any case, relevant provisions should be made in the contract of sale.

If the land on which the property is constructed is mortgaged, before entering into a contract of sale, the Purchaser should ensure that, as far as possible, sufficient assurances are provided by the seller that the mortgages will be removed and that when separate title deeds are issued, the property will be transferred to the purchaser's name free of any encumbrances and rights of third parties in good time. This is usually achieved by obtaining suitably worded bank waivers and/or bank guarantees from the seller's bank and by making relevant provisions in the contract of sale.

The purchaser must first arrange to have the contract of sale stamped by paying the applicable stamp duty in accordance with the Stamps Law (N. 19/1963, as amended). Then the contract should be submitted by the purchaser to the Land Registry for filing as an encumbrance on the property that is the subject of the transaction, meaning that the seller cannot sell the property to any other person unless the contract is removed. The contract must be in writing, contain sufficient particulars about the identity of the parties, adequately describe the property that is the subject of the contract, state the consideration, and be signed by all parties. The contract must be filed with the relevant land registry office where the immovable property is located within six (6) months from the date of its signing. The seller can only remove the contract with a court order. If the seller fails to honour its contractual obligations and does not transfer the property to the purchaser, then the purchaser can take legal action to force the seller to transfer the property to the purchaser's name under the Sale of Immovable Property (Specific Performance) Law of 2011 (Ν. 81(Ι)/2011), as amended.

The deposit of the contract by any of the contracting parties with the Land Registry is accepted only if there is an entry in the relevant Land Registry office in the name of at least one of the sellers in relation to the immovable property that is the subject of the contract or that includes a portion of such immovable property.

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.