Legalization of illegal buildings in the region - How will the new regulations affect the real estate market and investors?

Law on special conditions for recording and registering rights to immovable property actualized the issue of legalization of illegally built buildings in Serbia. The new law was conceived as a continuation of earlier solutions, with the aim of enabling the registration of existing buildings and the registration of owners` rights, but experts warn that the way it was prepared could have numerous negative consequences for citizens and the real estate market.

- In practice, the legalization procedure will cost the citizens several times more than the promised 100 to 1,000 euros, because they will only be able to protect their right to registration in the cadastre through a lawyer, whose tariff for submitting just one urgent application to the RGZ for processing the application is a minimum of 50,000 dinars, considering the high value of the real estate - notes Vukotić

Vukotić points out that the process of legalization of individual buildings in rural and suburban areas can take longer, because such illegal construction also happens in EU countries, where legalization is usually carried out when the owner wants to sell the building.

The new law is expected to establish order in the field of spatial planning, because the state, with the help of satellite images and digital procedures, will receive an effective tool for monitoring new construction and preventing illegal construction. Local self-governments are obliged to register all illegal objects on their territory within five months, thus establishing a comprehensive database on the situation on the ground for the first time.

According to the new law, owners have until February 14 to register their buildings in the cadastre and submit a request for legalization. If they don`t, they risk demolition (where the cost is borne by themselves) and loss of ownership. An important item of this law is that it will enable the legalization of all buildings, except those located on land planned for infrastructure (roads, schools, hospitals), then if they cross the plot boundaries, or if they are temporary and unstable structures. In some cases, legalization will also be allowed in zones without a planning document, but not in protected parks and areas of special importance.

Namely, the Law on Legalization prohibits the sale and lease of illegal buildings, as well as the performance of economic activities in them. The ban applies to buildings without a building permit or those that have been built with the building permit exceeded. The law gives the possibility that in an unlegalized facility intended for economic activity, it can be carried out for a maximum of three years, and that the owners are obliged to legalize such facilities during that period. If they do not do so, economic activity will be prohibited in them.

Due to this item, the real estate market could slow down, because notaries are not allowed to deal with illegal objects. Many transactions have already been suspended, which affects buyers and sellers, as well as real estate agencies, which warn of the constitutionality of the traffic ban.

The Association of Real Estate Agencies welcomes any initiative aimed at regulating the market and solving the long-standing problem of illegal buildings. According to them, the Law on Legalization is a necessary step towards a more transparent and stable market.

- It is important to emphasize that Montenegro started the process of legalization in 2018 through the Law on Spatial Planning and Construction of Facilities. The legal solution at the time did not allow the legalization of buildings that did not meet urban planning parameters, so a very small number of buildings were legalized. Over the years, we have witnessed various attempts to solve this problem, and as an association that actively participated in the creation of the legal framework for our activity, we understand the complexity of this issue - Nataša Grdinić, executive director of CMM Investment Consulting Group, president of the Real Estate Trade Group at the Chamber of Commerce (PKCG) and member of the Association of Real Estate Agencies, said in an interview for eKapija.

Grdinić points to the positive aspects of this law and welcomes the legislator`s clear intention to regulate the market and ensure confidence in investing in Montenegro.

- The aim of the law is to finally solve the problem that has burdened the market for years and creates legal uncertainty. Legalized facilities allow the owners to dispose of their assets without hindrance. Increasing the value of real estate is an inevitable effect that this law will bring. Facilities with proper documentation have a higher market value - she explains.

Also, access to financing has been facilitated. Banks more easily approve loans for legalized buildings with complete documentation. In the end, the organized market attracts serious domestic and foreign investors, so this is a great incentive for investing in our country, the eKapija interlocutor notes.

- What worries us is the way in which the law is interpreted and applied in practice, as well as the set deadlines in which legalization should be implemented. The provision of Article 33, paragraph 1 of the Traffic Prohibition Law was not sufficiently precise, which led to different interpretations. According to the opinion of the Ministry of Spatial Planning, the ban on traffic includes all illegally built buildings - both before and after the entry into force of the Act. This kind of restrictive measure practically blocks the real estate market - Grdinić points out.

According to her, the seriousness of the situation is illustrated by the data of the Chamber of Notaries - in Montenegro, there are between 100 and 150 thousand objects for which a request for legalization has been submitted, but nothing has been done with them. Also, for a large number of objects, the request was not even submitted.

- There is a justified concern that the state apparatus is not ready to process such a large number of requests, the cadastre as well as other state bodies in charge of legalizing buildings do not have the capacity to resolve such a large number of cases within the deadlines defined by the law. All illegal facilities as well as facilities without a use permit are currently out of circulation. This means that owners of illegal buildings cannot dispose of their property until they receive a legalization decision, which can take years. Disposition means that these properties cannot be sold, given away, gifted, inherited, pledged, etc. When we talk about publishing, a large space opens up for the creation of a new segment of the gray market - our interlocutor explains.

When asked what the Law on Legalization means for the investors themselves, Grdinić answers that it has a double meaning for them. On the one hand, it brings long-term benefits, but the current interpretation creates short-term challenges.

However, she adds, the current challenges are considerable.

- According to the current interpretation of the law, a huge number of buildings are out of business until they are legalized. This drastically reduces the supply on the market and can instantly increase the prices of legal facilities. Investors who are interested in objects in the process of legalization must wait for solutions, which slows down transactions and investment plans until all ambiguities in the interpretation of the law are clarified and until an efficient legalization process is ensured - she says.

- The law must be enforceable and efficient. The Ministry and the Legalization Directorate must ensure clear and unambiguous guidelines for the application of the law, an efficient and transparent process of legalization, realistic deadlines and adequate support for owners, as well as interpretations that will not block the market and the economy - she said.

- Current challenges in the application of the Law on Legalization are temporary. As an association that represents the leading companies in the sector, we will try to work on improving the application of the legal framework and its proper application. Our goal is a market that is regulated, transparent and functional - a market that protects both owners and investors. We invite all interested parties to work together on solutions that will enable the Law on Legalization to fulfill its purpose - to regulate the market - Nataša Grdinić concludes in an interview for eKapija.

Since the entry into force of the Law on Legalization from 2022, 20,927 requests for legalization have been submitted in 38 local communities, and 10,430 requests have been resolved. According to data from 2023, 7,340 decisions on the legality of buildings were made. The Ministry notes that, due to the lack of legally binding records, it is not possible to accurately assess how many buildings have not yet entered the legalization process.

- Free legalization, introduced by the Law from 2022, and a simplified procedure for certain types of facilities contributed to a greater number of submitted requests. The most common reasons for the non-legalization of buildings are incomplete documentation, unresolved property-legal relations, the need to divide plots or the absence of buildings on digital orthophoto plans - the Ministry points out.