Provided by NYD Law
In the recent years Bulgaria became a very desirable destination for investing in real estate. The most popular areas foreign investors purchase properties are the ski and Black Sea resorts, the capital etc.
Some foreign investors are purchasing properties that they hope to be able to rent out and thus receive a percentage annual return on their investment and they plan this as a long term investment. Other investors are simply purchasing the properties so they can sell them in a few years and receive a greater profit from the capital growth of the value of the property.
Owning a property in another country does however have its pitfuls and could sometimes be a daunting experience if buyers do not have appropriate advice and professional assistance.
In relation to renting the properties, the necessity for constant attendance and marketing of the properties, it was proved to be most convenient this tasks to be entrusted to Management companies with which the owners would sign management and rental agreements and they will rent out and manage the properties for them.
It is in fact, the current practice is a Management and Rental agreement to be signed either when Preliminary Purchase contract is signed or when the ownership of the property is transferred to the buyer with signing the Notary Deed.
All foreign owners of properties in Bulgaria should be aware that they are liable to pay taxes on their gains from renting the properties and an annual tax return should be submitted. Non compliance with this legal requirement can lead to the state sanctioning the foreign owners for a tax offence. Therefore it is important, when a Management and Rental agreement is signed, the buyer to specifically clarify whether the Management company will be responsible for paying the taxes on behalf of the buyer and to fill in and submit a tax return on the buyer’s behalf.
One important point that we feel we should draw the buyer’s attention to is that very often in the Preliminary purchase contracts the apartment complex is referred to as a “hotel” or “hotel style” complex. Special attention should be paid here as there could be a breach of the Tourism Act according to which, in order to function as a hotel or a hotel style apartment complex, one building must be categorized by the State Agency of Tourism after it is established the it complies with the legal requirements. If the building is not categorized by the State Agency of Tourism according to the law and is not given license to operate hotel style accommodation, the apartments can only be rent privately by the owners themselves. Therefore the buyers signing Management and Rental agreements should make sure that the contract contains a provision specifying that the Management company is responsible for obtaining all necessary licenses and categorizing the apartment building. Otherwise the owners of a property in the building could find themselves in a position of being sanctioned for non compliance with legal requirements and fined.
Typically, two types of Management and Rental contracts are used. Under one of them the Management company rents the property from the owner and then sub-rents it to third persons. Then the owners normally receive an agreed guaranteed rental income from the Management company and are not concerned whether or not and for how many days a year the property has been sub-rented. The rental arrangements between the Management company and the third persons to which the company is renting the property to are subject to separate agreement and should not be included in this contract.
Under the second option, the Management company is commissioned to rent the property on behalf of the buyer. In this case the buyer will receive whatever income has been obtained from renting the property after the expenses of the Management company have been deducted.
One other point that we would like to draw the buyer’s attention to is the financial obligations in relation to the maintenance of the apartment. Under the Bulgarian law, when a property is rented, the person renting the property is responsible for all outgoings and utilities. Nevertheless under the Management contracts that are most commonly used, the buyers are required to pay one fee for maintenance of the building and the apartment and a separate fee for the rental management service. In our opinion there should be only one fee payable which includes the necessary expenses and the remuneration of the Management company for its services.
