The recent months have brought a variety of legislative changes impacting the real estate industry in Luxembourg, and further legal initiatives have been announced in draft bills. Furthermore, Luxembourg courts have issued several important decisions related to real estate matters.
Below is an overview of the most relevant topics.
Recent changes in law and regulations
1 - Tax regime amendments
On 17 December 2021, the budget law for 2022 was voted by the Parliament (the "Budget Law").
The Budget Law provides for certain tax measures, among which, the main items are the following:
Revaluation of the multiplying coefficients applicable to acquisition prices
Pursuant to paragraph 6 of Article 102 of the Luxembourg income tax law, (the “LIR”), a new table of multiplying coefficients was introduced.
These coefficients serve to reevaluate the acquisition price of a real estate property while computing the capital gain amount realized at the disposal of said property within the scope of Articles 99ter to 101 LIR.
Significant changes for homebuyer savings contracts
Homebuyer savings contracts will undergo significant changes. As a reminder, they were put into place to allow the contracting parties to acquire or construct a residence for personal use at the end of the savings phase.
The Budget Law expands the list of fiscally encouraged tax purposes by adding the option to finance via this savings plan the maintenance and repair expenses of the residence for personal, as well as the installation of solar photovoltaic or thermal panels linked to the residence.
Previously, the installation of solar panels was not one of the categories of items on the list because it was considered operating equipment (Betriebsvorrichtungen) and not an integral part of the building to which they were linked.
Financial aid for the floods of 14 and 15 July 2021
Under certain conditions, any natural person residing in Luxembourg and having been affected by the natural disaster of July 2021, may request financial aid for a private home.
This aid concerns damage not covered by insurance and each person in this situation can thus request it from the Ministry of Family Affairs, Integration and the Greater Region. The request for assistance must have been filed before 31 December 2021 and mainly concerns repairs to primary residences.
The amount of aid varies depending on the extent of the repairs and the number of persons making up the taxable household.
Additionally, legal persons having obtained a trade license from the Directorate-General of the Middle Classes may request financial aid for damage they sustained directly caused by the floods.
2- Entry into force of the Sectoral Master Plans for land-use planning
By four grand-ducal regulations dated 10 February 2021, published in the Official Journal on 25 February 2021, the Sectoral Master Plans for land-use planning for 'housing', 'landscape', 'transport' and 'economic activity zones' (the “SMP”) went into force on 1 March 2021.
Previously, by circular of 22 February 2021 to the municipal administrations, the Interior Minister and Spatial Planning Minister informed the municipalities of the entry into force of the SMP.
The SMPs are based on the Law of 17 April 2018 on spatial planning and provide for written and graphic prescriptions imposing substantial restrictions on the municipal autonomy regarding communal planning and land use in these sectors, as well as the property rights of the owners of the land parcels impacted by the SMP.
A detailed review of the SMPs and their impact on the Luxembourg real estate industry would go beyond the scope of this review. However, it should be said that they represent the outcome of a long-standing effort of the Luxembourg government to impose centralized zoning and planning concepts on a supra-municipal scale that will have a substantial impact on the development of the impacted land parcels, and any plans for real estate development will have to be assessed with respect to their compliance with the SMPs.
3- The “Housing Pact” – “Pacte logement 2.0”
The new version of the "Housing Pact" (Pacte logement) is henceforth applicable following the adoption of the Law of 30 July 2021 on the Housing Pact with the municipalities to increase the availability of affordable and sustainable housing.
This “Pacte logement 2.0” essentially maintains the same objectives as those at the root of the first version of the Pacte Logement, i.e. to:
- Increase the availability of affordable and sustainable housing at the municipal level;
- Promote rapid servicing of lands able to support new housing construction; and
- Improve residential quality.
First of all, the law provides new provisions applicable to the relationship between the State and municipalities in the context of land use planning (local action program, implementation agreement for the program, reorganization of the regime for financial allocations to municipalities).
Further, and above all, it imposes new constraints on property developers who, after a transitional period ending 18 February 2022, will be required in certain circumstances to reserve up to 30 percent of the gross constructed surface they are to build as a New Neighborhood Specific Use Plan (PAP Nouveau Quartier) for moderately priced or “affordable” housing which must be transferred to public authorities after construction.
4- Grand-Ducal Regulation of 9 June 2021 on building energy performance
By adoption of a Grand-Ducal Regulation of 9 June 2021, Luxembourg amended the energy performance regime applicable to buildings.
The regulation transposes Directives 2018/844/EU of the European Parliament and of the Council of 30 May 2018, and 2018/2002/EU of the European Parliament and of the Council of 11 December 2018 into Luxembourg law.
It aims at improving the energy performance of buildings and provides that:
- Any building permit request for a new building or for an extension or modification of an existing building must be accompanied by a calculation of the energy performance and an energy performance certificate issued by an architect, a consulting engineer or a person accredited under the Grand-Ducal Regulation of 10 February 1999 on accreditation of natural or legal persons, public or private, other than the State for accomplishing technical tasks for the study and monitoring in the energy sector, as amended;
- A new energy performance calculation and a new energy performance certificate that reflects the building as-built must be issued and submitted for informational purposes to the mayor within two (2) months from the first occurring of:
1° the definitive receipt of the building or the concerned works; or
2° the beginning of use of the building or the concerned parts thereof.
It also synthesizes the minimal energy performance requirements to fulfill depending on the type of building concerned, as well as the calculation methods to apply.
The regulation does not apply to the following categories of property:
1° buildings constructed temporarily, the foreseen use of which does not exceed two (2) years;
2° agricultural workshops and buildings having a low need for energy;
3° buildings the use of which requires a broad and permanence opening towards the exterior;
4° buildings in which energy is used exclusively in manufacturing processes;
5° buildings used as places of worship and used for the exercise of religious practices; and
6° independent buildings the energetic surface reference of which is less than fifty square meters.
1- Reform of the Law of 25 February 1979 on housing assistance, as amended
On 24 December 2021, the Luxembourg government introduced two bills No. 7937 and 7938 before Parliament to reform the housing assistance regime currently governed by the Law of 25 February 1979, as amended.
The reform aims at stimulating the creation of affordable housing, while simplifying and broadening the individual housing assistance options granted to vulnerable persons.
Regarding the "creation of affordable housing", the reform is based on three points:
- Modernisation of the system of governmental financial aid to builders (aides à la pierre);
- Introduction of the concepts of social landlord (bailleur social) and affordable lease (bail abordable); and
- Establishment of a national affordable housing register, or RENLA.
Individual housing aid is also based on 3 points:
- Revision of the eligibility criteria and granting conditions to facilitate access to housing aid;
- Increase of the caps for amounts granted; and
- Administrative simplification and digitalisation of the entire system.
2- Amendment of the « Baulandvertrag » (building land contract) bill
The Luxembourg government presented on 9 November 2020 some new amendments regarding the Baulandvertrag bill.
This bill No. 7139, introduced in 2017, aims to improve the effectiveness of measures relating to the implementation of urban development plans (“PAG”) to cope with the chronic lack of housing in Luxembourg.
The bill has been fundamentally restated by the amendments, and now revolves around three new measures:
Introduction of new easements
The bill as amended introduces new easements, the purpose of which is to limit the mode and degree of land use over time in accordance with the urban development plan (“PAG”) implementation concept.
More specifically, the new easements are divided in two categories: the easements determining a limited servicing period (“CTV”) and the easements determining a limited construction period (“CTL”).
The implementation of CTV is mandatory each time a municipality is willing to reclassify a plot of land that was not primarily intended for housing into a housing zone or into a mixed zone subject to the elaboration of a specific development plan “new development” (“PAP NQ”).
As from the entry into force of the PAG, the owners of the lands subject to the CTV have a maximum of 12 years to significantly begin the servicing works, failing which the land will be automatically reclassified into its prior classification, or into an agricultural zone if it was primarily classified into a housing/mixed zone.
The implementation of CTL is mandatory each time a municipality is willing to reclassify a plot of land that was not primarily intended for housing into a housing zone or into a mixed zone subject to the elaboration of a PAP NQ or “existing development” (“PAP QE”).
The owners of the lands have maximum 4 years as from the entry into force of the PAG (PAP QE) or as from the expiry of the servicing delay (PAP NQ) to significantly begin the construction works, failing which they will only be allowed to build “constructions that correspond to a mission of general interest in terms of housing and accommodation”.
Introduction of a simplified modification procedure for the PAG
The bill as amended allows the municipalities to use a simplified procedure to amend their PAG, which is supposed to shorten the timeframe from 12 to 7 months.
However, this simplified procedure will only be available for minor adjustments of the PAG which do not affect its intrinsic logic and coherence.
Amendment of the urban reparcelling procedure
Finally, the bill as amended introduces a new procedure regarding urban reparcelling which should allow that the lands owned by recalcitrant landlords who refuse to cooperate in the servicing of the PAP NQ but vital for its development are exchanged with plots within the PAP NQ that can be developed at a later stage.
3- Amendment of the Law of 21 September 2006 on residential leases
Bill No.7642, tabled on 31 July 2020 by the Luxembourg Minister of housing plans to reform the Law of 21 September 2006 on the residential lease.
The explanatory memorandum of the bill points out that the continuous rise of the residential rents in Luxembourg makes it more and more necessary to establish new protective measures for tenants and to find new mechanisms to fight housing shortage in Luxembourg.
Four main “key elements” are proposed to face this challenge.
Agency fees and rental guarantee
The first proposal put forward by the bill is to introduce an obligation for the landlord to bear at least 50% of the real estate agency fees.
It is also proposed to reduce the maximum amount of the rental guarantee from 3 to 2 months of rent and to introduce binding time limits regarding the restitution of the guarantee by the landlord at the end of the lease.
Introduction of a flatsharing legal regime
Contrary to its neighboring countries, Luxembourg does not yet have a specific legal regime regarding flatsharing.
As flatsharing is however relatively common in Luxembourg, it is proposed to introduce a new chapter into the Law of 21 September 2006 that would remedy this deficiency.
Broadly speaking, the system would be based on a single contract between all the roommates and the landlord, rather than having a separate contract for each roommate. The relationship between roommates would be established in a separate “pact” to which the lessor would not be a party.
Precisions regarding invested capital
In Luxembourg, the maximum rent that a landlord can charge to his tenants is fixed at 5% of the capital he invested to build or to purchase the building.
In practice, the calculation or exact scope of the invested capital is often a source of conflict between lessors and lessees, and the bill proposes to bring some clarifications to the matter, as well as to set up new procedural guarantees to avoid any further difference of interpretation.
End of the “luxury housing” notion
There is a proposal to abolish the concept of “luxury housing” that concerns accommodations with “modern and non-standard comfort” that are currently excluded from the limitations applicable to the other housing regarding the maximum rent and the maximum rental guarantee that the landlord can require.
Reform to come: Property tax
During his State of the Nation address, the Prime Minister made announcements concerning a possible property tax reform with a view to slowing down real estate price speculation due to the blocking by the owners of hundreds of hectares of constructible land in the country. The Prime Minister announced that the Government’s aim was to introduce a bill "within the next twelve months".
The Government has not yet revealed the new property tax rate. It did specify that the property tax will be completed with an "additional component covering solely plots that were unconstructed during a certain period of time".
According to the Government, the taxation of the land would occur via a "progressive tax" which will increase "annually" starting from initial eligibility in order to reflect the increase of the properties’ market values.
In addition, the property tax reform should also target the landlords whose land is constructible but not built on.
The scale of the necessary works and development will also be taken into account in the calculation of the "new generation" property tax.
Recent case law
1- Impact of COVID-19 on existing contracts, in particular commercial leases
On 13 and 14 January 2021, the Luxembourg Justice of the Peace rendered two judgments which attracted quite a bit of interest among commercial lease lessors and lessees in Luxembourg.
In both cases, the lessees, exercising the commercial activities of café owner and textile seller, were sued for back payment of rent by the lessors, to which they responded by requesting a waiver or alternatively a reduction of the rent.
In support of their request, the lessees asserted that because of the legal and regulatory provisions adopted in the context of the fight against the COVID-19 pandemic, they were deprived of the enjoyment of the leased property and thus were not liable for payment of rent, or alternatively for payment of the entirety of the rent.
The court granted their requests by completely exonerating the textile seller commercial lessee from liability for payment of the rent and by granting a rent reduction of 50% to the café owner lessee for the periods of required closure of businesses imposed by the Luxembourg authorities.
To accommodate the request of the lessees, the judges applied in a particular way a legal concept specific to synallagmatic contracts: “risk theory “. On 21 January 2021, the Luxembourg justice of the peace once again applied risk theory in another case to exonerate a tenant from rent payments.
However, that jurisprudence was not upheld by the District Court on appeal.
By judgments of 30 March 2021 and 11 May 2021, the District Court dismissed all claims of two tenants requesting exoneration from rental payments, holding that risk theory did not apply to the matter at hand, given that the closings ordered by the Luxembourg authorities affected the use of the building, and did not constitute a loss of the building as such.
By judgments of 28 June 2021 and 12 July 2021, the District Court once again adopted a different approach, holding that if the risk theory was indeed not to apply to the case of the tenant prevented from using his property because of the closings ordered during the pandemic, the landlord nonetheless abused his rights by demanding payment of the entirety of the rents without taking into account the difficulties the closings and restrictions ordered by the authorities posed for the tenant.
More specifically, The Court deemed that the landlord’s repeated refusal to adapt the rent, despite the difficulties suffered by the tenant due to the pandemic, constituted a violation of its contractual good faith obligation under Article 1134, para. 3 of the Luxembourg Civil Code.
The Court thus decided in both cases that the tenants should benefit from a partial exoneration from rent payments for the periods of complete closing of their establishments and, to a lesser extent, for the periods of restriction.
Given the current fluctuation of the jurisprudence on this issue, it seems probable that the Court of Cassation will very soon have to rule on the issue.
In the meantime, it is strongly recommended that landlords and tenants include in their leases clauses to govern their respective rights in case of new closures/restrictions the Luxembourg authorities may impose.
2- Jurisprudence of the administrative Court regarding preemption right
Pursuant to Article 3 of Law of 22 October 2008, as amended (“housing pact law”), in the event of disposition in return for payment, municipalities benefit from a right of preemption, particularly on all unbuilt parcels in developed zones or zones to be developed in the municipality.
Under the same article, the preemption right can only be exercised with a view to the realisation of housing for low-income persons or the realisation of works on public roads or equipment, or work aimed at constructing municipal equipment.
In its 5 January 2021 landmark case, the Administrative Court specified that municipalities’ right to exercise such a preemption right obligatorily includes the obligation for the preempting municipality to indicate clearly and specifically the concrete objective by including at least one of the three above-mentioned reasons under the law.
This information must appear as soon as the municipality gives notice of its decision to exercise its right of preemption, failing which such a decision risks being invalidated by an administrative court.
According to the Administrative Court, such information should include the municipality’s commitment to realising the indicated objective, thus avoiding a municipality’s preemption right being turned into a mechanism for allowing them to expand their reserves of land available.
However, also according to the Administrative Court, municipalities are not obligated to being able to present a specific project, nor one in the process of being realized, but a precise indication of the use to be made of the pre-empted property, corresponding to the correlative responsibility of the pre-empting public entity to achieve this objective as soon as possible, taking into account the circumstances of the case in question.
Mario DI STEFANO, Managing Partner - Head of Real Estate and Head of Tax
Alex PHAM, Partner Tax
Quentin MARTIN, Senior Associate
Cathy NELSON, Jurist