Amendments to the Law on Property Restitution and Compensation

Amendments to the Law on Property Restitution and Compensation

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The Republic of Serbia cannot boast of a speedy and successful transition. Privatization, creating a predictable business environment and forming a stable legal system began with Serbia already lagging significantly behind other countries in the region.

This tardiness could provide Serbia with only one advantage, namely the experience of other countries with the same or similar problems which are encountered during transition.

Among other, numerous, issues that arose with a view to successful transition and forming of a modern society ready to become part of the European Union, there was the issue of the conflict of the right to restitution and the need to right a decades-long injustice, on the one hand, and the protection of the acquired rights of entities who, directly or indirectly, in transactions for a consideration, mostly through privatization, acquired property which can be subject to restitution, on the other.

Companies that were privatized were, for the most part, established on property that was once expropriated from someone. Still, investors in privatization procedures had faith in the law specifying that the proceeds of privatization are, in part, paid into the restitution fund, wherefore it was reasonable to expect that the subjects of privatization and foreign investors would be relieved of obligations in the upcoming restitution. Restitution obligations were expected to be assumed by the Republic of Serbia, if for no other reason, then for reasons of equity, this being the entity that first confiscated, and then sixty years later sold and collected on the expropriated properties.

The conflict between the right to restitution and the rights of buyers of privatized companies is additionally complicated by the unresolved property rights to publicly-owned construction land and the right to conversion of right of use into ownership rights. The right of privatized companies to convert right of use into ownership rights for a fee prevailed over the right to restitution, as prescribed by the Law on Property Restitution and Compensation ("Law on Restitution") itself. In this case as well, privatized companies have to pay a conversion fee, and 50% of the conversion fee is paid into the restitution fund. Therefore the investors and the privatized companies, relying on the regulations governing construction land, had every reason to expect that the obligations relating to restitution would be assumed by the Republic of Serbia.

As in the other countries in the region, the legal solutions so far, which resolved these conflicts of rights in favor of subjects of privatization, gave clear indications that the Republic of Serbia would assume the obligation to compensate the former owners. This position was also taken by the Law on Restitution from 2011, in which the only restitution obligor was the Republic of Serbia and its related parties, and which excluded the property of subjects of privatization from the possibility of restitution in kind. This law clearly protected the acquired rights of all parties, including privatized companies, which is logical given the other regulations whose purpose was to fill the budget of the restitution fund.

Apart from protection of the acquired rights of investors in privatized companies, the Law on Restitution favored conversion of right of use into ownership rights to construction land over restitution.

On the other hand, the provisions of the Law on Restitution from 2011, which regulate the right to compensation, clearly indicate that the compensation the Republic of Serbia is to pay is nowhere near the true value of the confiscated property.

This, naturally, did not suit the former owners and their successors, who are interested in having their confiscated property returned in kind and who, for the most part, are not interested in whether this property was the subject of privatization and whether it was included in the property of privatized companies. The requests of former owners for restitution to be in kind are strengthened by the fact that the amount of compensation is far from equitable.

The legal solutions from 2015 indicate the trend of the conflict of the right to restitution with other rights being resolved in favor of the right to restitution in kind, to the detriment of acquired rights.

First the Law on Conversion of Right of Use of Construction Land into Ownership Rights ("Law on Conversion") was enacted in August, having been amended during the parliamentary procedure by amendments proposed by the members of parliament so as to delay implementation of the procedure of conversion for a fee, in case the land to be converted is also the subject of a request for restitution. The effect of this provision is in essence to, indirectly, indicate that land to which a subject of privatization has right of use, which it wants to convert into ownership rights, can be taken from the subject of privatization and returned in a restitution procedure.

Then a draft of proposed amendments to the Law on Restitution was announced in November, indicating, explicitly, that the restitution obligor would be the company bought in privatization procedure, or the buyer of property in bankruptcy or privatization proceedings. The draft includes amendments to the provisions of the law relating to exclusion of property of privatized companies from restitution, specifying that property acquired as property owned by the subject of privatization would be exempt from restitution in kind, meaning that things to which other rights were held, such as right of use and right of disposition over socially- or state-owned property are not exempt from restitution in kind. These provisions of the amendments to the Law on Restitution indicate the resolve to transfer the burden of restitution of confiscated property from the state to the investors who bought capital and property in privatization procedures.

As soon as the draft of the amendments to the Law on Restitution was made public, the question arose of its retroactive application, that is, the possibility of the obligation to restitute property in kind being transferred to already privatized companies, namely to buyers of socially-owned property.

By linguistic and systematic interpretation of the draft amendments to the Law on Restitution, and of the new legal solution to the matter of conversion of right of use to ownership rights for a fee, it can be concluded that the legislator's goal was to retroactively obligate privatized companies to restitute property in kind, restricting this possibility only to property that, at the time of the privatization, was owned by the subject of privatization. Namely, the law still protects ownership rights that existed at the time of privatization, but does not protect other acquired rights such as right of use, which comprised 99% of the property of subjects of privatization. On the other hand, the draft amendments to the Law on Restitution do not explicitly state, even in the reasoning, that the new provisions relate only to subjects that are yet to be privatized. Finally, the rights of privatized companies to conversion remain blocked until completion of restitution, regardless of when the privatization took place.

All of these deficiencies of the new Law on Conversion and of the amendments to the Law on Restitution will give deprived formed owners hope that they will be able to assert their rights through restitution in kind. The subjects of privatization and buyers of property being privatized will be exposed to restitution requests, and the former owners will constantly obstruct the business activities of restitution obligors, as has been the case so far, in the desire to secure their restitution-related rights in advance.

The Law on Conversion and the amendments to the Law on Restitution will create an unpredictable business environment which will repel potential investors for a long time to come. In the sharp international competition in the region, the smallest details are examined and considered when making investment decisions, and certainty of an investment and acquired rights is the first and foremost prerequisite for investing. The conducted and announced amendments to the law, even assuming they are not applied retroactively, will give every interested future investor the impression that any investment in the Republic of Serbia is uncertain and that they could be deprived of their investments.

These two regulations indicate the resolve of the Republic of Serbia to make a sharp turnabout, after 15 years, in the "investments before restitution" policy, but also to foist the burden of restituting property onto privatized companies and investors, without any obligation of the Republic of Serbia to even indemnify the restitution obligors.

In any case, the organizations fighting for a predictable business environment will have much to discuss, particularly if the amendments to the Law on Restitution are adopted as in the draft made public.

By Ivan Petrovic, Attorney at law, JPM Jankovic Popovic Mitic