Law Firm Novelconsult

Acquisition of Real Estate Rights for Construction of Wind Power Farms

Aughtor Petia Kolcheva

March 21, 2012

I. Legal framework
Real estate rights in the energy sector are regulated by the special provisions of Chapter V “Real Estate Rights” of the Energy Act (“EA”) as well as the general provisions of the Spatial Development Act, Ownership Act, Agricultural Land Ownership and Use Act, Agricultural Land Protection Act, Forest Act and the subordinate legislation on their application.
Depending on the type of the land – agricultural or forest land, and on the ownership title – state, municipal or private ownership, there are different procedures provided in the Bulgarian legislation for acquisition of real estate rights or lease that shall be discussed below.

II. Special provisions of the EA
Pursuant to Art. 62 of the EA when site and/or linear energy works shall be constructed or expanded on a real estate constituting private state or municipal property, the competent state or municipal authorities shall establish an in-rem right to construct on the land against compensation without auction or tender procedure in favour of the person that shall operate the plant.
In that case, the energy company is entitled to take advantage of the favourable regime under the EA and to request that the right to construct be created without auction or tender procedure (which would be the normal case). The value of the right to construct shall be determined by an independent licensed valuer, selected by the competent state or municipal authority. The value determined by the licensed valuer shall be taken as the lowest market price that may be paid for the right to construct on the specific property.[1]
Furthermore, when site and/or energy works shall be constructed or expanded on a real estate constituting private property, the energy company must acquire in advance and for payment a right to construct or title of ownership over the land. In case of refusal or impossibility to acquire it in advance for reasons beyond the control of the energy company, the real estate shall be expropriated under the terms and according to the procedure established by the State Property Act, and thus the energy company may use the real estate solely for the purposes for which it has been expropriated.
The EA defines energy company as a legal entity which performs one or more of the activities comprehended in the generation, conversion, transmission, storage, distribution, delivery and supply of electricity on the grounds of licence issued under the EA.
The following conclusions can be made based on the above:
We may conclude that the EA refers only to two forms of land rights – right to construct and ownership of the land;
For private municipal or state land, it is possible to obtain only a right to construct – article 62, para. 1, EA;
For privately owned land next to the right to construct obtaining of ownership is envisaged – article 62, para. 3, EA;
Although article 62, para. 1, EA refers to “entity that shall operate the plant” and article 62, para. 3, EA refers to “energy company”, practically both provisions mean one and the same entity – namely the energy company;
According to the legal definition of “energy company”, we may conclude that only energy companies, which have been licensed by the Regulator and already perform the licensed activity may benefit from the regime of article 62, para. 1, EA. However, such interpretation will be wrong as land rights are settled practically before obtaining the generation licence and in any case, before commissioning of the plant.
The fact that EA discusses only the in-rem right to construct for municipal or state owned land, and only the in-rem right to construct and ownership for privately owned land does not mean that no other schemes for land rights are admissible, such as, for example, lease, acquisition of ownership over private municipal land, etc. Simply the other schemes shall be governed not by the EA, but by other specific pieces of legislation such as the Municipal Ownership Act, State Ownership Act, Concession Act, etc.

III. Acquisition of In-Rem Rights

  1.  State and Municipal Title of Ownership
    Both cases of acquisition of in-rem rights shall be discussed separately based only on the ownership title – state or municipal – because of the differences in the competent bodies. The resume below focuses on private municipal or state land.
    A. Acquisition of In-Rem Rights over Real Estates with State Title of Ownership
    The competent body starting the procedure is the General Governor for real estates with tax evaluation up to BGN 500,000 and the Council of Ministers on proposal of the Minister of Regional Development and Public Works for real estates with tax evaluation over BGN 500,000. The procedure starts with order of the General Governor defining the tender terms and conditions. Depending on the results of the tender, the General Governor with order proclaims the successful bidder who shall pay the price and all taxes and expenses in 14 days. On the grounds of the order and presented payment documents, the General Governor shall conclude an agreement in written form without notary certification with the energy company that shall be registered in the Registry Agency with the Ministry of Justice.
    B. Acquisition of In-Rem Rights on Real Estates with Municipal Title of Ownership
    The competent body is the Municipal Council which resolves on the conducting of a tender procedure and authorizes the Mayor to conduct it. The Municipal Council also approves the evaluation of the real estate that shall not be lower than the tax evaluation. After the tender procedure is closed, the Mayor issues an order and on its grounds signs the agreement. The agreement is in written form without notary certification and is registered in the regional office of the Registry Agency with the Ministry of Justice. Note that each Municipal Council adopts a regulation on the acquisition and disposal with municipal property, so it is possible to have some variations in the different procedures applied in different municipalities.
  2. Real Estates included in Agricultural or Forest Fund
    Usually, wind farm projects are planned to be constructed on agricultural lands or forests, so it is obligatory to conduct a procedure to change the way of use of the respective plots.
    A. Agricultural Land
    The competent bodies are the commissions at the Regional Agriculture Directorates for sites with area under 50 decares and the Agricultural Land Commission for sites with area over 50 decares. The proposal is filed by the owner of the land or the investor. After decision of the commission or the Agricultural Land Commission a draft detailed zoning plan is prepared and Environmental Impact Assessment is obtained, if needed. After approval of the detailed zoning plan, the commission or the Agricultural commission issues a decision for to change the land use. A copy of the decision is forwarded officially to the respective regional office of geodesy, cartography and cadastre.
    B. Forest Land
    The Forest Act has an explicit provision that forest land shall be excluded from the state forest fund in case of change of land use for building of power plants. The competent bodies are the Council of Ministers for lands of private state ownership with face area over 100 decares; the Chairman of the State Forest Agency for lands of private state ownership with face area under 100 decares and other types of land. The application is filed by the owner of the land or the person with in-rem right to construct. The Chairman of the State Forest Agency delivers a resolution within 1 month for change or to make a suggestion to the Council of Ministers.

IV. Acquisition of Ownership title
The acquisition of ownership title over the plots is also an option, although it is not very recommendable for several reasons. Firstly, it is more expensive to obtain the whole plot rather than a little part of it where the generator shall be located. Secondly, sometimes the respective municipal council is more inclined to resolve to establish an in-rem right than transfer the ownership in order to keep the land within the municipal fund.
On the other hand, a number of advantages ensue from ownership rights. The owner of the real estate has the rights to use, possess and dispose with it in every possible way, as well as to repossess it and require any third party to refrain from actions related to the real estate. On the opposite, the in-rem right to construct allows only to construct over the real estate and generally ceases to exist if not exercised within 5 years. Sometimes, the construction of wind power plants is very time-consuming and this legal rule should always be considered when planning the construction process. In case the in-rem right to construct is granted for a limited time, after expiry of its term, the ownership title over the building passes to the owner of the real estate (i.e. the energy company will own the constructed facility only throughout the term of the right to construct). In case the right to construct is termless, when the construction is finished the title holder becomes owner of the built facility with the right to use the land beneath for the purposes of operation of the facility.
Shortly speaking, the ownership title by all means gives more confidence and guarantees to the investor with regard to the future operation of the wind power farm than the right to construct. Of course, we should take into account the financial parameters as well as the potential decisions of competent local bodies regarding the status of the real estates. But in any case it will be less expensive to acquire the in-rem right to construct than the ownership of the land. In terms of security as well, a mortgage over an in-rem right to construct has less value than a mortgage over land from both legal and financial prospective.

IV. Lease of the land
As noted, the EA does not view the lease of land as a form of land use for the construction of a plant. Furthermore, we would like to underline that lease is a contractual right while the right to construct and ownership over land are in-rem rights. The difference is significant, as the in-rem rights create more security for the counterparties of the generator (including with respect to connection) and also for the Regulator (when assessing the ability of the generator to produce electricity), can be subject to a mortgage, represent assets of the generator (while lease is not), etc.
Generally, under Bulgarian law the lease agreement is defined as an agreement upon which a lessor is bound to allow temporary use of a real estate to the lessee and the lessee – to pay the respective price. Furthermore, the term of the lease agreement cannot be longer than 10 years unless it is a commercial transaction (i.e. in case the landlord is natural person the lease cannot be for more than 10 years). Being a contractual right, the lease cannot create in-rem entitlements for the energy company. The general provisions of the Bulgarian real estate law provide that everything built on someone’s land (except in case of granted in-rem right to construct) becomes property of the owner of the land. Thus everything built on the leased real estate, shall become property of the lessor.
We should further note that only the owner of the land or the person with right to construct are entitled to change the land use as well as conduct the following procedures for approval of detailed zoning plan and issuance of construction permit. The Spatial Development Act defines explicitly that the “interested persons” in the process of approval of a detailed zoning plan are “the owners and holders of in-rem rights according to the particulars of the real estate register, whose real estates are immediately affected by the projections of the detailed plans”. The same is the definition of the principal in the construction phase, i.e. in case of lease, all of the above procedures have to be conducted in the name of the land owner.