Real Estate COVID-19 Help Desk in Latvia

Country Introduction

Up till beginning of June 2020 total number of people infected by COVID 19 in Latvia has been 1088. Total number of deaths was 25 (or 13 per 1 000 000 of the population), which is considered as a relatively low number in the EU. On 13th of March 2020 state of emergency  was declared by the government of Latvia, prolonged once per month it has been kept effective till the 9th of June 2020 to reinforce government reaction pace on fighting the pandemic. Subsequently, in the light of the number of people affected by COVID 19, the limitations imposed on legislative level were lighter comparing to other EU countries that have suffered the most. Nevertheless, economy was still affected due to both local and international trade limitations. As a consequence the expected decrease of GDP for Latvia varies between 7-10% for the year 2020, with the recovery expected to happen in 2021.

In respect to investment into real estate – Latvia has at all times been attractive destination due to it’s nature suitable for farming and greenfield projects in different business areas, as well as because of variety in the offered industrial and office spaces.

As many countries worldwide, in year 2010 Latvia launched a real estate acquirer visa program for foreigners thus increasing investment significantly; however mainly in the residential area. In year 2014 the immigration program in this respect was changed by significant increase of real estate value threshold for obtaining a residence permit and introducing other additional conditions and costs (from the real estate value of EUR 100,000 with which the program was introduced, increased up to the minimum transaction value of EUR 250,000 and additional payment of a state budget contribution worth 5% of the real estate transaction value). These changes significantly slowed down the investment flow and in couple of years, although the prices of real estate became more affordable to local people, the investment at value above the threshold established by immigration laws ceased thus also slowing down overall investment in this field.

Since the previous worldwide financial crisis in 2008-2011 when real estate market of Latvia collapsed with tremendous consequences for all parties involved, the market up till now has recovered and steadily grown thus becoming stable and reliable investment field. If previous collapse of the market was due to bubble burst, today due to COVID 19 the major hindrance is due to staff reductions which affect individuals, and resistance of banks to issue loans as circumstances at the hand are qualified as unpredictable.

In general, as for a commercial and retail real estate, Latvia is providing more competitive yields for the investors (6-8%) on purchasing the ready made business comparing to Western European countries, with the strong demand and competitive vacancy rates expected to increase due to COVID 19 by about 10-15%.

In its turn residential real estate sector is driven by the private banks and loan availability. Several regulations in respect to the real estate financing for the banks were implemented during the real estate market crisis in 2008-2011, including requirement for certain level of down payment, more strict valuation of the debtor’s income and strict general KYC. Thus since 2008 the total amount of loans issued to the residential sector has decreased by 40% and currently there is no efficient government support system for the residential property buyers (guaranty of the down payment at the amount 10-20% while crediting the purchase of the property worth up to EUR200,000 for the families with kids does not meet needs of most of the consumers), so the demand for the new housing is growing at the rate below average levels met in Europe.

Moreover, due to the lack of legislative support (poor rental conditions for the lessor, historically excessive legislative guaranties for the lessees, and long legal proceedings in case of the disputes), new rental apartments are also currently not being developed at the reasonable amount.

Are there any emergency and/or interim measure regarding Commercial Lease Agreements in Latvia?

In general there are no emergency or interim measures implemented on legislation level. COVID 19 circumstances are not deemed force majeure thus the parties to lease agreements have to fully comply with undertaken liabilities.

However on 3rd of April 2020 due to strong public discussions in this respect a regulatory protective instrument was though introduced – State and municipal authorities and State owned entities performing as lessors of real estate based on application of lessee must apply release on lease payments or decrease them, as well as not apply penalties for delayed payments, provided however that the lessee corresponds to the statutory criteria. The statutory support can be applied with retroactive effect (as of 12th March 2020); however not longer than until the special laws in respect to COVID 19 circumstances remain in effect. Thus lessees in most affected sectors such as restaurants (for inner and outer space), hotels etc. received certain support.

Several industries, affected most and which stopped almost for 100% (e.g. airports and sea ports serving international passengers) received larger support from the State, but these cases shall be deemed exclusions from the general rule.

Whereas private sector lessors are not always following this practice, and agreement on rent discounts has to be agreed ad hoc. But the suffering industries can obtain indirect support from the State – compensation of idleness for the employees up to EUR 700 per month for one person.

Is it possible to cancel, suspend or modify the Lease Agreements conditions due to the COVID-19 crisis?

Due to the relatively low numbers of COVID 19 infection cases, no general regulation has been implemented on the legislative level to consider COVID 19 as a general force majeure.

An exception has been though airport and airlines business as those are State owned thus received State aid (including the national air carrier AirBaltic).

Accordingly apart from few special regulations and solutions implemented for the rest all liabilities resulting from such agreements remain in full effect and are subject to fulfilment, unless the parties to the agreement agree otherwise.

In case you are in the middle of a sales and purchase transaction - how can you handle this situation? Are there special urgent measures?

There are no special regulations on general trade agreements implemented. However, several measures were imposed, including the restriction to file insolvency for the counterparty in case of the delayed payments and restrictions to start legal proceedings against private consumers in case of delayed payments. These restrictions where supported by most of the creditors by offering special support programs (postponement for the payment of the principal amounts) as their marketing practice during COVID 19.

On the international trade agreements there where no local measures introduced; however contractual parties can use COVID 19 as a de facto excuse for nonfulfillment, if there are any international restrictions (e.g. restriction on transportation of the goods) or local restrictions on certain activity (e.g. close of the production leading to a delay of the dispatch), which in essence could be deemed as force majeure conditions and therefore lead to justified non-fulfilment of contractual liabilities.

What is the legal situation regarding cancellations of rentals of tourist apartments, hotels or holiday homes?

There was no official ban on hotel or hospitality activity implemented in Latvia. However, most of the hotels have experienced temporary close down due to the fact that tourist flow had almost stopped. The situation was the same with the short term apartment rentals via platforms like Airbnb.

The agreements between the hotels and other tourism apartment providers and their customers where regulated under the booking conditions (either it can be cancelled or not), also taking into consideration the platforms bookings were made on. Intermediaries like strongly recommended to repay the reservations to the customers not able to travel, and these recommendations were mostly followed for marketing reasons.

Until 5th of June 2020 no special regulation was in place to solve the COVID 19 impact on the tourism sector. Today the government of Latvia finally has come up with supportive rules also here.  The new regulation provides for that in cases where a traveller has a contract for complex of tourism services and if either of the parties has terminated this contract due to  COVID 19, the tourism services provider (provided it has effective license and security of statutory amount) is entitled to issue a voucher to the traveller instead of paying back the received money, the voucher subject to use for purchase of new trips. It shall be though taken into account that there are special terms which shall be complied with when issuing the voucher. Whereas if the traveller refuses to accept the voucher the parties have to agree on repayment of the already paid amount for the cancelled trip provided it is paid back to the traveller within 12 months as of the moment the emergency state in Latvia is cancelled.

What effects does the current situation have on ongoing construction projects and contracts?

There was no government regulation to consider COVID 19 as the general force majeure in construction, either in private or public sector due to the relatively low number of the people infected. However, likewise as in general in Latvia, there were certain restrictions and security measures implemented on the construction sites, including maximum number of people in one room, use of the individual protective equipment, such as medical facemasks, distance of minimum 2 meters between the employees during performance of the work.

Same as in majority of other business areas, there are no statutory supportive measures introduced (including regarding contracts postponed), so the counterparties have to reach mutual agreement on how to proceed in COVID 19 circumstances and whether those can be considered as a force majeure and can serve as an excuse for postponement or nonfulfillment of contractual liabilities or not.

Which courts have jurisdiction, what are the expected trial times and what are the costs?

Real estate disputes are within the jurisdiction of general courts of Latvia. There are three court instances: (i) courts of first instance – the district/ city courts or regional courts; (ii) courts of appeal – regional courts and in certain cases the Supreme Court; and (iii) cassation instance – the Supreme Court. In case the parties to a lease agreement have agreed to resolution of disputes by means of arbitration, the dispute settlement would be within jurisdiction of this type of court.

At the moment introduction of special courts resolving certain economic disputes and for instance implementing simplified dispute resolution in cases of private lease disputes, is still at stage of planning and negotiations in the government.

Thus for the time being the average length of court proceedings in civil disputes is 12-18 months, depending on the value of claim, possibilities to collect from the debtor and other aspects. The disputes resolved by arbitration may be shorter in term. Since certain time courts of Latvia resolve cases also via online court sessions, which hopefully at certain moment will facilitate and shorten length of dispute resolution.

What financial assistance packages or ways to mitigate the financial impact have been adopted?

General financial assistance packages established by the government of Latvia in order to support businesses affected by COVID 19 include inter alia the following:

  • Taxpayers are permitted to apply for postponement of current tax payments for the period up to 3 years without the late payment penalty (1,5% per month in general tax regime);
  • The municipalities can postpone real estate tax payment terms; however just within frame of year 2020;
  • The State Revenue Service (tax authority) repays to taxpayers the accrued input value added tax within 30 days as of the moment the tax payer corresponds to statutory criteria and has fulfilled set requirements;
  • Compensation of the employees salaries due to idleness caused by COVID 19 the taxpayer faces up to EUR 700 per person per month;
  • Possibility to obtain loan guaranties from state owned credit organization Altum to receive bank payment holidays on the principal amount up to EUR5 000 000; however not exceeding 25% of the total turnover of the tax payer in 2019.

More assistance packages for general business are expected in coordination with EU institutions. There were also several exceptional assistance packages for the state owned companies otherwise prohibited by EU legislation (e.g. state owned airline AirBaltic).