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Bulgaria: Lease Agreement Trends and Issues

Bulgaria: Lease Agreement Trends and Issues

Issue 10.3
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The end of the COVID-19 pandemic led to growth in the commercial real estate market in Bulgaria. So far, the biggest winners are the office, industrial, and logistics sectors, since most investors and retailers are still hesitant about the future of shopping centers. According to the latest reports, the available office space in Bulgaria increased by 7% in the second half of 2022, and more than 180,000 square meters of office space were leased during the same period, the highest amount since 2017.

This led to higher average rents, currently between EUR 13.5 and EUR 15.5 per square meter for office class A, and between EUR 9 and EUR 10 for office class B. There are similar trends in the industrial and logistics real estate market, which have both continued to grow in 2022.

ESG

Although Bulgaria is falling behind in implementing the EU ESG requirements into its national legislation, partially due to the political instability in the last two years (with five parliamentary elections including the upcoming one in April 2023), the real estate market has already developed its own requirements. According to real estate agents, at least a third of new office lease agreements signed in 2022 is for relocations, since the tenants are seeking “green” buildings with better attributes. Currently, the available area in class A office buildings is less than 11%, compared with approximately 16% for class B.

Owners of “older” office buildings are already looking into the possibilities of upgrading their assets to meet the new “green” requirements. Additional pressure on them is expected from banks and investment funds, which are already looking at how ESG will affect their portfolios. And while ESG and green clauses are still a rarity in standard Bulgarian lease agreements, owners and tenants are taking a closer look at them.

Also, higher electricity prices due to the war in Ukraine have forced industrial tenants to opt for solar energy. The large roof spaces of most industrial buildings and Bulgaria’s sunny skies provide perfect conditions for investment in rooftop solar plants. However, the legislator is again falling behind in this area by complicating the development procedure for owners and tenants with too much red tape. 

Legal Issues

The rapid development of Bulgaria’s real estate market over the last 15 years, following the country’s accession to the EU and the entry of major foreign companies, has led to more sophisticated lease agreements. However, the legislation on leases adopted back in 1950, based on the planned state economy, did not change except for the removal of the restriction on lease agreements of over ten years. Thus, the courts must interpret and make rulings on complex lease agreements using laws from another era.

Bulgarian law allows for lease agreements to be registered in the Real Estate Register, to protect the tenant’s rights if the leasehold is sold by the owner, including in case of a forced sale during enforcement or insolvency procedures. However, the law is not clear on whether the new owner replaces the landlord as a party to the existing lease agreement or whether the new owner must observe the terms of this agreement. In addition, there are complications regarding the payment of rent, service fees, etc.

Case law on the matter is either missing or not very helpful. The Bulgarian Supreme Court may be expected to issue a special ruling that will be mandatory for the lower courts until the legislator clarifies the law. Until such a ruling is issued, however, the matter will remain up for debate by scholars and judges alike.

Finally, another issue that has been getting more attention is what happens to the lease agreement in the case of a spin-off where the lease is to be assigned to the newly founded company. Such reorganizations, especially among major foreign companies with branches around the world, are becoming more frequent. But the law is again unclear about whether the new company (subsidiary) becomes a tenant and replaces the parent company or if both companies remain jointly liable to the owner. The legislator must therefore resolve this and other questions to better protect the interests of both owners and tenants. 

By Dimitar Vlaevsky, Head of Real Estate, Schoenherr Bulgaria

This article was originally published in Issue 10.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here

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