It was amusing to watch as members of the British parliament waited on New Year’s Day at Luton Airport for a feared wave of Romanian immigrants. Good political theatre designed to win votes.
Likewise, frenzy was whipped up in Romania about foreigners going on a shopping spree for all the agricultural land in the country. First of January marked the end of the 7-year transition period since Romania joined EU, during which foreigners were not permitted to directly own land. (Somehow, amidst all the public handwringing and doom-saying, nobody mentioned to the Romanian public that foreigners of all stripes (whether European Union or otherwise) have indirectly owned agricultural land in Romania since the 1990s using a Romanian limited liability company.)
Challenging time for Romanian agriculture
At a time when it is in the national interest to encourage the consolidation of the impossibly fragmented network of agricultural land, the Government is enacting measures that will as a consequence perpetuate the problems that have persisted a quarter of a century. Without rapid and large scale consolidation, few major investors (whether local or foreign) will succeed in establishing new agribusinesses in Romania, and as a result agriculture will continue to lack critical funds for, inter alia, new machinery and infrastructure. And as a consequence, Romania will struggle to realise its full potential as an exporter of agricultural commodities for years, probably decades to come. Even as the press reports that agriculture comprised half of Romania’s economic growth in 2013, that statistic is more likely a reflection of the relative weakness of the rest of the economy.
The new law: restrictions
The new law – published in the Official Gazette on 13 March 2014 and entering into effect on 12 April 2014 puts in place measures that will further challenge investors, at a time when Romania is strongly perceived as a hotspot for agribusiness. As it stands, two elements of the new law are particularly problematic. Of course, there may be additional concerns once the implementing regulations (norme metodologice) are issued in mid-April (interestingly, the deadline for issuance is 7 days after the law takes effect, thus likely blocking sales of extravilan agricultural land during those 7 lost days).
Pre-emption right
The new law creates a pre-emption right in case of sale of extravilan agricultural land by physical persons and – since the latest revisions to the draft after it was sent by President Basescu back to Parliament – even by legal persons, i.e. companies. As such, starting 30 days after publication of the law, before any owner may sell extravilan agricultural land, a pre-emption right will have to be observed in the following order of priority: co-owners, tenants, neighboring landowners and the Romanian State.
Failure to observe this pre-emption right not only means that the sale transaction would be subject to absolute nullity but also would incur fines of up to RON 100,000 (a little over EUR 22,000). (The law is unclear as to who is liable to pay the fine. Perhaps both seller and buyer?) Since the price of agricultural land in Romania is generally south of EUR4,000 per hectare, any potential buyer would ignore this requirement at its peril (aside from the serious problem of absolute nullity itself).
Required approvals
The law also requires the Ministry of Agriculture & Rural Development or its local entities (depending on the size of the land) to issue a confirmation that the pre-emption right has been properly observed. As with the pre-emption procedure itself, failure to observe this obligation results in absolute nullity of the transaction and also generates fines of up to RON100,000. (Also unclear who is liable to pay the fine.) Although the law sets a 7 working day deadline by which the Ministry must issue a letter approving or rejecting a proposed transfer, it is difficult to predict to what extent such deadline will actually be observed and how this approval process will affect the timing of a transaction. By way of example, judges are required by law to write their decisions within 30 days of a hearing; however, it is not uncommon for the period to extend to 60, 90 or more days – even more than a year.
The new law: consequences
These new requirements are bound to have a chilling effect on much-needed agricultural land consolidation by making it even more cumbersome and costly than it already is for land consolidators to piece together large tracts of land from a multitude of smaller plots. To understand why, it is instructive to understand how land is often consolidated.
Firstly, a local consolidator with ties to a geographical area acts on behalf of an investor who signs pre-contracts with small landholders. These pre-contracts typically include an “opt-out” clause allowing termination to the extent that not enough contiguous or nearby land is ultimately contracted for purchase to make a large-scale agricultural venture commercially viable.
To give a sense for the scale, most investors with whom I have spoken are not likely to be interested to acquire less than 10,000 hectares. Even if one assumes that each plot is a hectare (many are much smaller than that), that still results in 10,000 separate plots of land to be acquired. Gaps created by third parties exercising statutory pre-emption rights can therefore be problematic. Also, the cost to acquire land may rise, since a purchaser will want to be sure that it is offering a high enough price so as to discourage the exercise of statutory pre-emption rights. (On the other hand, an argument can be made that overall prices may decline due to the added restrictions on sale.)
Romania does not need statutory pre-emption rights
A statutory pre-emption right does not in itself have to be problematic. Indeed, it forms part of longstanding rural land policy in places like France and Italy. However, the key difference between those countries and Romania is that there the land is already adequately consolidated to permit large-scale agribusiness, whereas Romania has yet to fully reach that stage.
The Government might argue that it is encouraging consolidation by giving neighboring landowners a pre-emption right. Yet this begs the question: If the neighboring landowner owns only a small plot of land and then “consolidates” by acquiring a small neighboring plot of land, then land consolidation in Romania might very well reach an optimal stage by the year 2214.
Conclusion
Personally, I am convinced that the average Romanian landowner does not yet realise that when he or she wants to sell a plot of land, the process will become slower and more complicated. Example: If Mr. Popescu wants to sell half a hectare of land to his cousin who lives down the street, he will have to wait 30 days and be subject to pre-emption rights by a laundry list of people and entities. (Ironically, if a foreigner – or an SRL owned 100% by a foreigner – owns neighboring land, then that foreigner or SRL will have a pre-emption right, too!) While admittedly there were limited pre-emption rights on agricultural land in effect after the Revolution until 2005, do Romanians truly want them back, and in a much more restrictive form?
Perry Zizzi is a partner within law firm Clifford Chance Badea