After almost 100 years of common history with Serbia, Montenegro – the fledgling state on the Adriatic Coast – declared its independence in June 2006. However, foreign investments in real estate had already begun to flow into the state union of Serbia and Montenegro before it split into two separate countries. The increased demand for real estate – concentrated along the Montenegrin coast and in Serbian towns – is driving prices up.

The constitutions of both Serbia and Montenegro formally enshrined the principle of the free purchase of property in Serbia and Montenegro. In both countries, it is possible to acquire ownership in real estate and parts of real estate as well as in buildings and parts of buildings – insofar as these are entered into the Land Registry as independent entities. Ownership in a single floor of a building is also possible.

The legal systems of both Serbia and Montenegro differentiate between urban construction land and other real estate. In Serbia, the law currently decrees that urban real estate is owned by the state. The state-owned urban real estate may be used, but not owned, by any entity or person other than the Serbian state. This means that the owner of a building situated on state-owned urban real estate only has a right of usage with regard to the real estate upon which the building stands. This right of usage is an interest similar to ownership; the urban real estate upon which the building stands is beneficially owned by the owner of the building. The right of usage itself is not capable of being traded and may only be transferred along with the building.

However, the existing usage rights in some undeveloped urban real estate in Serbia cannot be transferred. By means of a co-investment contract, the person or entity holding the usage rights to a certain piece of urban real estate combines this interest with the finance of an investor in order to construct a building on the undeveloped real estate. After completion of the building, the building and the usage rights in the urban real estate are divided up into shares pursuant to the co-investment contract.

A constitutional reform in Serbia in 2006 opened up the possibility of private ownership in urban real estate. However, the necessary laws on a sub-constitutional basis for implementing this into Serbian law have not yet been enacted.

Unlike Serbia, Montenegro allows the acquisition of private ownership in urban real estate. However, it must be noted that the Montenegrin coast is still state-owned; domestic and foreign legal and natural persons may acquire usage rights for commercial purposes and rights to erect a building in the coastal region (concession rights), whereby a concession fee must be paid.

It can generally be assumed that the ownership in a building follows the ownership of the piece of land upon which it is built. This principle applies both in Serbia and in Montenegro. However, this principle is breached by the concept of state-owned urban real estate in Serbia and ownership in a single floor of a building as described above.

Foreign natural and legal persons who do business in Serbia and Montenegro can purchase real estate with no public service function for commercial purposes. However, this is subject to the condition that the real estate property in question must be necessary for this commercial purpose. Furthermore, reciprocal agreements must exist between Montenegro/Serbia and the home country of the foreign investor intending to acquire the real estate. In such cases, the foreign natural and legal persons must obtain the prior approval of the competent ministry. The fulfilment of these conditions must be proven when filing for the entry of the acquisition into the Land Registry.

In practice, special purpose entities are founded in Serbia and Montenegro to circumvent these administrative difficulties. In order to counteract this circumvention of the law, the Montenegrin Real Estate Cadastral Office has instructed all Land Registries in Montenegro to bar the entry of ownership interests in real estate in favour of foreign natural persons into the Land Registry.

Ownership rights to apartments and residential buildings may be acquired by a foreign natural person under the terms of the relevant reciprocal agreement (see above). However foreign persons N natural or legal N may not acquire ownership in agricultural land.

The new draft of the Montenegrin Property Law only permits the purchase of real estate by foreign investors on the condition of reciprocity, thereby significantly liberalising the Montenegrin real estate market. However, this law has not yet been enacted.

Serbian and Montenegrin legal systems require a valid legal title (usually a purchase agreement) as well as entry into the Land Registry for the transfer of property rights. For the valid registration of property rights, consent by the prior owner must be given in the form of a declaration of assent to the conveyance. This does not have to be a separate document; it is usually included in the purchase agreement. Ownership is considered to be transferred upon the registration of the title with the Land Registry.

Note, that the Serbian system of land registry currently recognises four types of registration system: Cadastre of Land; Cadastre of Real Estate, Land Registry, and Title-Deed System.

The Land Registry exists only in Vojvodina and Belgrade, where they exist parallel to the Cadastre of Land, while in other parts of Serbia, only the Cadastre of Land and/or Title-Deed System are applicable. While the Cadastre of Land is a factual register containing data on real estate obtained directly through geodesic measuring of the land, the Land Register and Cadastre of Real Estate are considered legal records.

Only registration with the Land Register or Cadastre of Real Estate will have effect as against third parties. In addition, some regions of Serbia are covered by the so-called title-deed system which is less secure, since the deed evidencing ownership creates only a rebuttable presumption that the holder is the actual owner of the respective piece of real estate. However, the new Cadastre of Real Estate should supersede all of these registers as a unique register containing all relevant data on real estate in Serbia. This new system should be implemented by 2010.

Unlike Serbia, Montenegro only has a Cadastre of Real Estate, with the exception of the region of Boka-Kotorska (encompassing the cities of Boka, Tivat and Herzeg Novi), which has retained a system based on that used in the time of the Austro-Hungarian empire. In these towns, there is still both a Land Registry and a Cadastre of Real Estate. The Montenegrin Cadastre of Real Estate is fully modernised.

Jasna Zwitter-Tehovnik is a finance and projects partner and Biljana Paunovic a lawyer at DLA Piper.