Have You forgotten About Your Romanian Investment?

During the last period, we have received enquiries concerning property transactions and property led transactions all of which arose out of property purchases prior to 2009.

Many investors both foreign and local made purchases during those times which they now regret.  The reasons for this regret are many but they now have to deal with the position that they did make such an investment in Romania and now they need to deal with it in a proper manner.  As an international law firm in Romania, we receive emails from people who made such an investment using an agent and now the agent has disappeared.  What can they do?

Many agents tried to do their best for the Clients at the time of purchase but at the end of the day, the agents made their money by selling the properties to those clients who they were then advising.  Sometimes a conflict of interest arose of which the clients were not aware.

From what we see as Romanian lawyers is that the basic information was given to enable the client to purchase the property, usually through a Romanian company.  The advertising for these property purchases sometimes offered guaranteed rewards and there was always the unwritten promise of an exit by sale in the future at a profit.  Everything seemed very positive in those days.

When we acted for foreign investors as independent advisors, I was always amazed at how many people did not come to Romania to view the investment but just bought off-plan.  This was fine provided the property was lettable; had good access and there was a market for the resale of the property or the land.

This all came to a sudden end in 2008.  The market collapsed and clients were then left in a limbo where they needed additional advice and assistance and I am afraid in many cases this was not given.  The basic information had been given as to how to purchase the property but not what to do on-going especially if there was a market collapse.  More importantly, it has become clear that although the initial advice as mentioned above was technically correct the advisor failed to cover the additional costs and expenses that could be involved by maintaining the Romanian law firm and investment.

It must be remembered that prior to 2012, EU citizens and many purchasers were EU citizens could not own land in Romania and therefore a Romanian company was required.  We have had to deal with a number of cases where clients were unaware that they had to maintain and keep the company in existence; maintain the company registration by keeping a registered address and paying rent for this; employing an accountant to continue to file the relevant returns with the financial authorities.  Even when they were advised about this they were not told in clear terms that if the administrative functions were not maintained then the company would be dissolved and liquidate by the Trade Registry as required by law.  This could then mean that they lost their investment.

Some foreign investors I think lost their nerve and in fact did not know what to do.  They just saw a mounting bill of costs with little or no results.  In many cases, the value of the investment had fallen by up to 50% if not more and they felt that it was easier to walk away from the property rather than deal with the administrative issues surrounding the company and the land.

This has in itself produced further problems.  We are being instructed by foreign investors in Romania who have “sold” an interest in the Romanian company or the land and property to another investor, but yet there is no paperwork to support the transaction.  Unlike in England and the USA where verbal agreements are more enforceable than in Romania, the Romanian Civil Code often requires detailed written evidence of such a transaction.  This means an investor may not have the security of investment that he thought they had.  If it can be shown that there is a proper investment agreement then the other investor maybe in a position to show that they are a creditor of the company and prove in the liquidation and recover the money which they paid.

All these problems can and could be avoided.  Any person who has made a passive investment in Romania through a company should as a matter of good housekeeping review their investment periodically and check that the filings etc. are up to date.  The Romanian economy is expanding and will continue to do so over the next few years.  The investment they made will then have an increase in value which should not be overlooked.  It may take time and energy to review the situation and rectify any defects, but steps taken now will be worth it as the value of the investment recovers.

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