(Il)legality of Transactions Involving Illegal Structures Following the Entry into Force of the “Svoj na svome” Law

• The 2018 amendments to the Law on the Legalization of Structures introduced a mechanism for registering a prohibition on the disposal of structures undergoing legalization proceedings, after which transactions involving such structures were, in practice before notaries, almost completely suspended.
• The Law on the Legalization of Structures ceased to apply upon the entry into force of the “Svoj na svome” Law, and the new Law did not retain the previous general prohibition on disposal.
• Despite this, the practice of notaries remains inconsistent: some notaries allow transactions subject to the warning under Article 4a of the Law on the Transfer of Real Estate, while others continue to automatically reject them.
• A particular problem is the unclear status of previously registered annotations prohibiting disposal, since the new Law does not expressly regulate the manner of their deletion.
• The repeal of the Law on the Legalization of Structures does not mean that transactions involving every illegal structure are permitted. The prohibition on disposing of structures built after 27 November 2015 without a building permit or appropriate approval remains in force.
• The mere fact that a structure is not legal can no longer be sufficient grounds for automatically refusing solemnization. Each case must be assessed according to its specific legal and factual circumstances.

For years, practice proceeded from an almost axiomatic rule: an illegal structure cannot be the subject of an ordinary transaction because a notary will not confirm, i.e. solemnize, an agreement by which such a structure is sold.

However, following the entry into force of the Law on Special Conditions for the Recording and Registration of Rights in Real Estate, better known as the “Svoj na svome” Law, and the termination of the Law on the Legalization of Structures, the question arises as to whether there is still a legal basis for such conduct by notaries.

Judging by the practice to date, the answer to that question still varies depending on which notary office a party approaches.

What Happened in 2018?

Until 2018, transactions involving illegal structures were, depending on the circumstances of the particular case, generally possible.

The key basis for such practice was Article 4a of the Law on the Transfer of Real Estate. It provided that, when a notary determined that no occupancy permit had been issued for a structure or a separate part of a building, or that legalization proceedings were underway, the notary was required to warn the contracting parties of that fact and enter the warning into the notarial instrument.

Thus, the basic model was not a prohibition on transactions, but rather a transaction accompanied by a warning and the acceptance of the risk by the contracting parties.

The situation changed with the 2018 amendments and supplements to the Law on the Legalization of Structures. These amendments required the competent authorities, for all structures undergoing legalization proceedings, to ex officio submit to the cadastre a certificate for the registration of a prohibition on disposal in the form of an annotation.

Although this statutory solution was technically formulated as an obligation to register an annotation, notarial practice went a step further. The prohibition was generally not viewed merely as a restriction that produces legal effect upon registration, but as an expression of the legislature’s general intention to stop transactions involving structures undergoing legalization.

Practice naturally attempted to find alternative and often highly creative solutions, but such arrangements did not constitute a true equivalent to a direct transaction involving the structure and were often accompanied by significant legal risks.

In practical terms, from 2018 onward, a relatively simple rule applied: an illegal structure could not, subject to rare exceptions and alternative arrangements, be sold in the ordinary manner.

What Has Changed in the Meantime?

The Law on the Legalization of Structures ceased to apply upon the entry into force of the “Svoj na svome” Law.

At the same time, the new Law terminated the proceedings conducted under the Law on the Legalization of Structures, but it did not retain the previous mechanism requiring the registration of a prohibition on disposal for all structures that had been undergoing legalization proceedings.

In my opinion, this should also mean that the legal basis for the previous general notarial practice, under which an agreement was rejected solely because its subject matter was an illegal structure, has ceased to exist.

However, of course, the situation is not quite that simple, and the problem itself is twofold.

According to experience from practice, some notaries have continued to apply the previous approach and refuse to solemnize agreements whose subject matter is an illegal structure. Another group of notaries, in my opinion correctly, accepts such agreements, relying on Article 4a of the Law on the Transfer of Real Estate.

Under that approach, the contracting parties must be expressly warned that the structure does not have an occupancy permit and that its legal and cadastral status has not been fully regularized. If the parties understand and accept such risk, the mere illegality of the structure should no longer automatically constitute grounds for refusing solemnization.

Of course, this does not mean that every agreement involving the transfer of an illegal structure would have to be certified.

However, the mere fact that the structure is not legal, in my opinion, is no longer sufficient formal grounds for automatically refusing to certify the agreement.

The second issue concerns the annotations prohibiting disposal that have already been registered on the basis of the Law on the Legalization of Structures.

The new Law provides that the Agency’s certificate on the basis of which ownership rights are registered also contains a decision on the deletion of existing annotations relating to the status of the structure—for example, that the structure was built without a building permit, without approval for construction, or without an occupancy permit—as well as the corresponding change in its status.

However, the Law does not expressly state that, in this way, the annotation prohibiting disposal registered on the basis of Article 28 of the 2018 amendments to the Law on the Legalization of Structures is also deleted. An annotation stating that a structure was built without a permit constitutes information about its status, whereas an annotation prohibiting disposal constitutes a restriction on disposal.

Therefore, the question remains open as to whether, upon registration under the new Law, the old prohibitions on disposal will automatically be deleted as annotations related to the status of the structure, or whether a separate legal basis and a separate procedure will be required for their deletion.

This creates the possibility of a paradoxical situation: ownership of the structure is registered under the new Law, while the previous annotation remains in the cadastre, effectively preventing its transfer.

The Repeal of the Law on the Legalization of Structures Does Not Mean That Every Illegal Structure May Be Transferred

The situation described above must be clearly distinguished from the prohibition introduced by Article 106 of the Law on Amendments and Supplements to the Law on Planning and Construction of 2018.

That provision prohibits the disposal of structures or parts of structures built after 27 November 2015 without a building permit, i.e. without a decision approving the execution of works under Article 145 of the Law on Planning and Construction. This prohibition did not cease to apply with the repeal of the Law on the Legalization of Structures.

With regard to this category of structures, Article 4a of the Law on the Transfer of Real Estate cannot help. A notarial warning and the consent of the contracting parties cannot remove an express statutory prohibition on disposal.

By contrast, a structure that was built on the basis of a building permit, within the limits of that permit, but for which an occupancy permit was subsequently not obtained, is not covered by this prohibition merely because it lacks an occupancy permit. It is precisely for such situations that Article 4a of the Law on the Transfer of Real Estate provides for a regime of warning the contracting parties.

The Existing Legal Uncertainty Needs to Be Eliminated

First and foremost, it is necessary to expressly regulate the status of annotations prohibiting disposal that were registered on the basis of the Law on the Legalization of Structures.

The new Law or the relevant cadastral regulation should unequivocally prescribe whether these annotations are deleted ex officio upon registration of ownership rights under the new Law, as well as how they are to be deleted during the period before that procedure is completed.

At the same time, the Chamber of Notaries of Serbia should adopt and publish a uniform professional position or guidelines for the conduct of notaries. Transactions involving illegal structures should not be automatically rejected solely because of their status. Each case should be assessed on the basis of Article 4a of the Law on the Transfer of Real Estate, the general rules on the permissibility and definiteness of the subject matter of the agreement, and any specific restrictions that may apply, including the prohibition under Article 106 of the amendments to the Law on Planning and Construction.

Otherwise, transactions involving real estate will continue to depend on which notary office a party approaches.

Just to avoid any misunderstanding, my position is that even during the period when the Law on the Legalization of Structures was in force, the nullity of every agreement involving the transfer of an illegal structure was not directly prescribed, nor was the prohibition formulated as an independent general rule declaring every such transaction impermissible; rather, this was a product of notarial practice.

The Law did, however, establish a mandatory mechanism for registering a prohibition on disposal, and notaries interpreted that mechanism and the legislature’s intention very broadly. During that period, therefore, there was at least a recognizable statutory basis for such practice. Today, when the Law on the Legalization of Structures has ceased to apply, when proceedings initiated on the basis thereof have been terminated, and when there is no longer a general basis for registering a prohibition on the disposal of all such structures, the categorical refusal to solemnize an agreement cannot be based solely on the continuation of the practice that had previously developed.