Romania: Legal Mortgage Of Contractors – Triggering Applicability Disputes?

The Romanian Civil Code regulates the legal mortgage in favour of contractors, sometimes unjustly extended also to the benefit of subcontractors.

Conditions for registering a legal mortgage in favour of contractors

In order to guarantee the payment by the beneficiary of the price due or the works on the basis of a contractor agreement, the Romanian Civil Code establishes in favour of the contractor a legal mortgage on the performed works, particularly on immovables.

The Civil Code sets forth some essential conditions in order to grant the contractor the right to establish a legal mortgage, regarding (i) the beneficiary, (ii) the existence of an agreement between the contractor and the beneficiary, and (iii) the existence of an unpaid, due price for the finished works.

Are subcontractors also legally entitled to benefit from this legal mortgage?

The recipient of the legal mortgage is specifically determined by the Civil Code to be the contractor, which must have agreed with the beneficiary of the contractor agreement to fulfil certain works.1 From this point of view, it can be noticed that the law requests the contractor to directly agree with the beneficiary to fulfil certain works, such as erecting a building, to be allowed to register with the Land Registry of the building a legal mortgage.

It would seem like this condition should be able to clarify who is entitled to register a legal mortgage derived from a contractor agreement and, therefore, to eliminate any subcontractors that do not have a direct agreement with the owner from the benefit of the legal mortgage. The subcontractors cannot have contractual rights and obligations with the owner, as their relationship is only indirect, through the contractor. Thus, as mentioned, the law clearly states that the person who can register a legal mortgage regarding the property must have a direct contractual relationship with the owner.

Furthermore, the Cadastre Law2 states that, to register a legal mortgage encumbering the works performed, the contractor must present the agreement signed with the owner that is registered in the Land Registry of the property forming the object of the works.

Equally important, to be entitled to register a legal mortgage, another premise-situation requires a "due price" for the works. However, it is clear that without having a contractual relationship between the contractor and the owner/beneficiary of the works, it is impossible to have a directly owed price. This is thus an additional reason why the subcontractor cannot lawfully resort to registering a legal mortgage.

Can the subcontractors nevertheless register the legal mortgage in practice?

Despite the legal arguments presented above, practice has provided us with a few unpleasant "surprises" from the competent Romanian authorities: certain cadastre and real estate publicity offices and courts that applied a wider, unlawful interpretation on the matter. There have been cases where the registration of the legal mortgage was approved in favour of subcontractors or, even more unjust, in favour of subcontractors of the initial subcontractors. Such events must be clearly flagged and acted upon from an incipient stage due to their potentially extremely negative impact on the commercial circuit and on the interests of investors, both foreign and domestic, starting business in Romania.

These situations have arisen even if the beneficiary had paid the contractor for the works but the contractor had not paid its subcontractors.

But such a situation should not trigger the applicability of the legal mortgage in favour of subcontractors, who have other legal means for obtaining the due price from the contractor.

Why such a practice should be avoided

An extensive interpretation of the legal mortgage of contractors, in the sense of granting this right also to subcontractors, can lead to many practical problems. An example is the impossibility of financing or refinancing an investment if there is an unjustified legal mortgage registered on the property that should be granted as collateral, which could prejudice the developer, who will be forced to challenge these legal mortgages.

Another problem is that such procedures are extremely costly in both time and money: a full procedure for challenging such an unlawful registration can take one to two years.

Quote: Such procedures are extremely costly in both time and money: a full procedure for challenging such an unlawful registration can take one to two years.

Footnotes

[1] It is presumed for this article that the beneficiary of the works is also the owner.

[2] Law no. 7/1996 of the cadastre and real estate publicity, as further amended and supplemented.

This article was originally published in the schoenherr roadmap`14 - if you would like to receive a complimentary copy of this publication, please visit: pr.schoenherr.eu/roadmap.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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