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Can you imagine the situation where a carefully selected and purchased plot of land ends up causing more losses than expected gains?  This article provides a practical overview of what to look out for so as to avoid ending up in such unfortunate situations.

In 2019, when the well-known supermarket chain Lidl sought to open its first store in Āgenskalns it raised a real protest storm and the construction of the new store on a plot of land chosen for this particular purpose was not supported by the Riga municipality (please see more information here).  Lidl had chosen the 7,331 square metre plot of land at Baldones street 7 for its new store, on which the Agenskalns Sports and Gymnastics Society House was established since 1910. In the 1930s, tennis courts were built there, which are still in use today. In 2019, information was published providing that on 21 December 2017 SIA “Centrālais tenisa klubs” concluded a real estate sales agreement with SIA “MMS Property Solutions” (new company – SIA “Lidl Latvija”), however, the change of ownership was not subsequently registered in the Land Register. Accordingly, SIA “Centrālais tenisa klubs” commissioned a local plan to change the purpose of the land. After receiving 52 applications (signed by a total of 1,723 people) expressing negative public opinion on the development of the land plot for the opening of a new Lidl store, the Riga City Council, at its 48th meeting on 27 February 2019, decided to reject the local plan version of the land plot at Baldones street 7. This leads to a scenario that can be summarized as “the land exists, but you cannot construct anything on it”.

When purchasing real estate land, with the primary aim of developing the land, it is necessary to evaluate various factors and nuances in order to clearly understand whether the selected land plot meets the planned purpose of use. Qualitative real estate research significantly reduces both possible risks and provides clarity on the final outcome.

What should be considered when buying real estate for commercial development?

In the context of this article, commercial activities are understood as being, for example, warehouse services, retail, wholesale, manufacturing, etc., and other similar commercial activities.

1.Purpose of use of real estate. When purchasing real estate, it is first necessary to evaluate whether it meets the intended use. It is essential to first evaluate what is the purpose of use, which is registered in the national cadastre information system. A land plot and part of a land plot may have several purposes of use, each of which imposes certain restrictions on the acquisition, development, and occupation of the property. Of course, the purpose of use may be changed, for example, when a building permit is issued or by applying to the municipality where the land plot is located.

If the purpose of use is registered as a forest, the land may be deforested. Deforestation is the conversion of forest into another land purpose use, caused by a person’s activity, and is described in the Forest Law. The State must be compensated for the costs of dealing with the negative consequences of deforestation. The amount of compensation is calculated using a formula and depends upon the area to be deforested, the average cost of reforestation and maintenance according to the Central Statistical Office, the type of forest, the purpose of deforestation and other factors.

It is worth considering whether the change of the land purpose should be an obligation for the seller before the transaction, as sometimes the land purpose may also impose restrictions on its disposal. For example, if a plot of land is primarily intended as agricultural land, there are various restrictions on how much land can be acquired by natural or legal persons, how the land can be used, and there is also a right of first refusal for the person administering the Latvian Land Fund.

2. Municipal territory planning. In addition to the purpose of the land use, restrictions on the use or development of the property may be set out in the municipality’s spatial plan.

The spatial plan is a long-term development planning document of a municipality, which sets out the requirements for the use and development of the territory, including functional zoning, public infrastructure, rules for the use and development of the territory, as well as other conditions for the use of the territory, which are binding on any natural or legal person.  The municipal spatial plan also includes the regulations on the use and development of the territory, which lay down general requirements for the planning, use and development of the territory at the local level.

Changing a municipality’s spatial plan is not as easy as changing the use of real estate. If the municipality’s spatial plan has been in force for a longer period of time, it is possible to detail it by creating a local or detailed plan. Unlike a detailed plan, a local plan can amend the spatial plan of a local authority. In practice, both can take about 1 year in smaller towns or villages, or even 2-6 years in Riga.

If the municipality’s approved spatial plan is coming to an end and the municipality has started work on a new spatial plan, interested parties can be involved in its preparation. The planning authority has a duty to seek the opinions of the public and organise public participation in the development planning of the area. The relevant municipality shall publish information on its website on the launch of the preparation of the spatial plan and its amendments, the procedure, place, and time limits for public consultation, where and when the spatial plan and its amendments can be consulted and how written proposals and comments can be submitted.

3. Binding regulations of local governments. In addition to territorial planning, local governments can also adopt other binding regulations or decisions that may affect the use or construction of the specific real estate; therefore, they must be considered when planning the purchase of the relevant property.

4. Encumbrances. It is not only the municipality that can restrict the development of real estate. Different restrictions can be agreed upon by the current or former owner of the property. Consequently, all mortgages, encumbrances, easements attached to the real estate must be assessed.

It must be specifically provided that the real estate seller resolves all issues related to registered mortgages, if any, and releases the real estate from all encumbrances that could create obstacles to the use of the land. It should be noted that easements in real estate, not personal easements, are usually registered in the Land Register. This means the easements are tied to the real estate itself, not the seller. If the easements are established on the real estate, it is important to familiarise yourself with the easement agreement, as its obligations may also be transferred to the future owners of the real estate.

It is also important to remember that an easement mark, unlike an easement record, does not create rights in rem. According to the case law of the Senate of the Republic of Latvia, the mark of easement creates only a pending right to record the easement in the Land Register. Therefore, easement rights are created only by a correctly created entry in the Land Register. However, not everything is as simple as it might seem at first glance and it is advisable for potential buyers to check why the marks have been made, if any. In practice, lawyers come across various situations which may, for example, turn out to be an error in the marking of an easement, for historical or other reasons, and in fact both property owners – the servient and the dominant – wanted to record the easement in the Land Register in the form of an entry.

5. Meteorological impact. Given that Latvia is a country rich not only in forests but also in water, it is advisable to assess whether the property is located in an area where there is an increased risk of flooding or flooding threats. This information is collected by the Latvian Environment, Geology and Meteorology Centre, as well as by the municipalities themselves.

Flood risks can be caused not only by natural factors, but also by man-made engineering structures – amelioration systems. Before buying real estate, it is advisable to check in the Land Amelioration Cadastre whether and which land amelioration systems are located on the plot of land. Land amelioration systems affect real estate not only with flood risks if the system is blocked, but also with various responsibilities and restrictions for the landowner. Among other things, the regulatory legislation provides that the landowner or the legal possessor operates and maintains relations with the amelioration system. The Protection Zone Law stipulates it is forbidden to carry out work with impact machinery, to drop weights, to dump and pour toxic and corrosive substances, fuels, and lubricants around amelioration structures, and to obstruct access roads. In the protective zones around amelioration structures and devices of state and national importance, it is prohibited to leave growing bushes and trees if they interfere with the amelioration system.

6. The protected area factor. When purchasing an undeveloped piece of land, it can be overgrown with plants or be a home for various animals and birds. And if at first glance it might seem like a beautiful visual addition to the real estate, however, we recommend checking that the property does not contain any plants, trees or natural monuments that are considered to be protected species, or that the property does not contain any protected animals or birds. Such areas, which fall into one of the protected area categories, have fairly strict restrictions on what kind of development can take place there.

7. Access options. From a practical point of view, one needs to be aware of where the property is located. This includes how the property can be accessed, what the neighbours are like, what the road access is like, etc. In many parts of Latvia, access to a property is only possible via a privately owned road or a road shared with other neighbours. All the risks of using private roads need to be carefully assessed to avoid potential disputes after the purchase of the land. The quality of the road itself, its connections to other roads (whether public or private) must also be assessed on the ground to see if it is fit for purpose of the use of land.

It should also be noted that national roads are subject to predicted traffic volumes. Consequently, in accordance with Latvian legislation, if facilities are planned which may result in increased traffic volumes and disruption to other road users, additional congestion and other negative impacts on transport infrastructure, a traffic flow diagram must be drawn up and included in the local plan, detailed plan, or construction design.

8. Noise compliance with regulatory enactments. Careful consideration must also be given to whether there are any private properties nearby. The Latvian legislation requires structures to be designed and constructed to ensure noise levels within and adjacent to buildings comply with the applicable noise levels. However, where industrial or other activities are planned which are likely to give rise to increased noise levels, the development regulations may impose additional conditions for the construction of noise attenuating features to reduce noise levels.

9. Electrical network connection. If the plot of land is not developed, there is a possibility it does not have a connection to an electricity grid. To install an electricity connection with a large power consumption, it is necessary to understand where the substations of the “Distribution Network” power network are located and the power consumption. In addition, one should also be aware whether such works will affect other real estate in the area.

Once the buyer decides the chosen property is suitable for the intended business, the parties can start working on a draft agreement. Given the conditions, stages, and prerequisites for this type of transaction, there is an established practice of how such transactions are implemented to the satisfaction of both parties. The core of such transactions is that the payment is split into several instalments (usually two). A down payment (usually 10%) is made at the time of conclusion of the agreement or shortly thereafter. To protect the interests of the buyer, a mortgage is secured on the real estate in the amount of the down payment. The buyer pays the rest of the purchase price when the building permit is issued or the building plan is approved by a building inspector, which means that it is possible to carry out the development of the property as planned by the buyer to suit the planned commercial activity. Knowing that a building permit has been issued or is likely to be issued, it is clear the intended purpose has also been accepted by the municipality. The vendor is therefore interested in assisting the buyer in obtaining all necessary permits and approvals.

VILGERTS’ advise against entering into a “cash” agreement in such transactions, as the final decision on the purchase of real estate does not always depend only upon the buyer. One of the most important aspects when purchasing real estate for commercial development is whether the chosen plot of land is suitable for carrying out the specific commercial activity. Therefore, it is safer and more profitable to conclude a real estate purchase agreement, which accurately and in detail describes the obligations of each party for obtaining the necessary permits.

By being aware of all the risks described above, the parties can more easily define the terms of the agreement and understand the structure of the transaction, reducing the possible ambiguities of the parties or such risks because of which the real estate cannot be used for the chosen commercial activity.

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Our experience in real estate is leading edge. We can cover all aspects of transactions, tax, and disputes. Among our clients are the largest real estate developers and major construction companies.

For any enquiries, please contact Real Estate & Construction partner Gints Vilgerts (email: [email protected]) or Elizabete Bartansone (email: [email protected]).