Georgiades & Mylonas

Our Monthly Newsletter November Issue 1 - 15 Years Anniversary

November Newsletter - Our 15 Year Anniversary

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Late Delivery of Immovable Property - Penalty Clause v Liquidated Damages:

Rebecca E. Howarth

Late Delivery of Immovable Property

Penalty Clause v Liquidated Damages:

As a buyer, you should be aware of the protection that is available to you in the event of the late delivery of the immovable property you have purchased and also some of the things you need to avoid including in your contract.

It is not unusual to find that the contract of sale contains a clause that entitles the purchaser to a specified sum of money for compensation in the event of late delivery of the property, for example, a monthly rate of compensation. However, it should be noted that this does not always guarantee that the purchaser will in fact be paid this amount.

Where the parties agree that in the event of a breach of contract, for example, the immovable property not being delivered to the purchaser on the stated date, the party who is in breach will pay a specified sum of money, the Court must consider whether the fixed sum should be classified as a penalty clause which is irrecoverable or as liquidated damages which are recoverable, which is a question of law. When making the decision, the Court will have to take into account the terms and inherent circumstances of each particular contract. This will be judged at the time of making the contract, not at the time of the breach.

The essence of a penalty clause is a payment of money stipulated as ‘in terrorem’ of the offending parties’, meaning that the provision is meant to act as a method of ensuring that a person complies with the terms of the agreement through fear of the consequences of non-compliance. The essence of liquidated damages is a genuine estimate of the likely damage.

The clause will be enforceable if it does not appear to exceed a genuine attempt to estimate, in advance, the loss the wronged party was likely to suffer from the breach of obligation in question. It will be enforceable irrespective of the loss actually suffered. It can be concluded that the sum must be a genuine estimate of the damage. The term genuine has not yet been interpreted by the Courts, but it can be taken to mean a serious attempt to estimate losses, made in good faith, irrespective of how unreasonable it may appear to others or how unreasonable it may in fact be at the time of the actual breach.

If the sum stipulated is for an extravagant and unconscionable amount in comparison with the greatest loss that could conceivably be proven to have been occasioned by the breach, it is likely to be held by the Courts to be a penalty. There is a presumption that it is a penalty when a single lump sum is made payable by way of compensation upon the occurrence of one or more or all of several events, some of which may occasion serious, and others, maybe trivial events. However, this is a mere presumption and is not a written law.

It is important for a purchaser of immovable property to ensure that the clause is not open to post breach attack as a penal sanction. In taking the above considerations into account, the purchaser may wish to consider the inclusion of a graduated damages clause, which can be done with the assistance of a lawyer. This is a clause where the amount of compensation increases in proportion to the seriousness of the breach. In the case of immovable property, this could be a set amount per week for delay in the performance of the contract.

As a purchaser, the best method to use to protect yourself and your interests is to be able to provide the Court with evidence of the damage and real and substantial loss which has occurred and provide a means of proving that the amount stated was a genuine estimate at the time of making the contract. It is advisable to get this evidence from an expert property valuer as this will be accepted by the court as reliable, acceptable evidence.

The Supreme Court of Cyprus has considered the issue of compensation in cases of late delivery of property and concluded that;

“The normal measure of damages is the value of the use of the land, which will generally be taken as its rental value, for the period from the contractual time for completion to the date of actual completion” (Metallika Iraklis Michaelides Ltd v. G & C Exchaust Systems Ltd (Civ. Appeal 10355) 26 April 20).

Investment Services and Activities and Regulated Markets Law 144(1) 2007 (Mifid)

As of November 2007, Cyprus has been fully compliant with the Markets in (Financial Instruments Directive), known as MIFID. The legislation passed on 25 November 2007 and published in the Cyprus Gazette on 26 November 2007. The new law replaces the Investment Firm Law of 2002.

The European Union is aiming, via MIFID, to facilitate the integration of Europe’s financial markets.

All of the enterprises that are involved with the provision and performance of investment services, activities and the operation of regulated markets must be licensed by the Cyprus Securities and Exchange Commission.

According to section 4(2) of the new law 144(1)2007, which came into force on 1 November 2007, the persons who are entitled to provide investment services are (a) Cyprus investment companies authorised to operate under S. 6 (2) of the law, (b) investment companies  of member states according to section 77(1) and S.80(1) (c) Third County investment companies under S.78(1) and banks under S.118 and co-ops.

The authorities which are authorised to regulate the operation of the investment companies under the provisions of this law are the Central Bank, the authority for the supervision and development of co-op societies and the Cyprus Securities and Exchange Commission.

Under the law, no-one is entitled to receive payment for services unless they have a licence to provide investment services and if they do so without one, this amounts to a criminal offence.

The criminal court has the jurisdiction to stay the activities of any person who is charged for any offence under the provisions of this law.

If he finds the accused guilty of an offence under the law, the judge can not only punish him with a fine and by imposing imprisonment, but he can also order him not to provide any investment services regulated by the law for a 5-year period.

Terms such as “investment services”, “investment activities”, “regulated market”, “stock exchange”, financial services, “stock broking services”, broker or any other similar words in any language may not be used by anyone unless he is licensed according to the provisions of this law.

Under section 6(5) of the law, the licence to operate investment companies is valid in all member states, either through a branch or by simply providing services or activities  in any of the member states.

According to the new law, the company is entitled to provide the services indicated in their licence and in order to avoid changing their memorandum and articles of association every time they want to expand their services, they are required to include in their memorandum and articles of association a clause providing that the company will provide the investment services specified in their memorandum of incorporation.

Requirements for granting the licence

The requirements for granting licence for an investment company to operate may be summarised as follows:

1. Initial share capital
(a) In cases of reception, transmission, execution, portfolio management and investment advice 200,000
(b) For reception, transmission, investment advice without handling any clients’ funds/instruments 80,000 or 40,000 and professional indemnity insurance with coverage in all member state countries for at least 1,000,000 for each loss and a total of 1,500,000 annually for all losses due to negligence
(c) for own account, underwriting and operation of Multilateral Trading Facilities MTF 1,000,000
(d) reception, transmission, investment advice without handling client funds/instruments and insurance intermediary 40,000 or 20,000 and professional indemnity insurance with coverage for all member states for at least 500,000 for each loss and 750,000 for all losses for each year.

2. In the memorandum of association, it must be mentioned that the company is operating as an investment company and provides the services provided in their licence, which was granted to them by the Commission.

3. The people who direct the company must have the required good standards of integrity and experience and the company must be managed by at least 2 such people.

4. The names of the shareholders or the ultimate beneficial owners must be disclosed and the shares they hold in the company. If the shareholders are not considered suitable, the Commission may refuse authorisation.

5. The persons employed by the company must have such integrity, good repute, skills, knowledge and expertise so that they can carry out their duties properly.

6. The company’s head offices must be located in Cyprus.

7. The company must be a member of the investor compensation fund.

According to the law, the Commission will not arrange authorisation if according to the laws, regulations or administrative provisions of a third country, the effective exercise of the supervisory functions of the Commission are prevented.

Organisational requirements

Many of the provisions of the law aim to protect the customers’ best interests by imposing organisational requirements. The organisational requirements may be summarised as follows:

The company must have certain policies and procedures to facilitate compliance with the legislation, rules for personal transactions, measures for protecting clients from any conflict of interest, to maintain continuous and regular performance of services, activities, outsourcing of functions, services, activities to third parties in such a way that it will not influence the internal control and efficiency of the investment company when complying with their obligations, maintaining proper governance with transparency. Use of efficient administrative accounting procedures and internal audit mechanisms, risk management procedures and arrangements for information processing systems, good recording of services and activities, prevention of money laundering (separate directive will be issued), policies, arrangements for the safeguarding of ownership/interests and prevention of the use of clients’ instruments/funds.

There are some additional requirements in cases of Multilateral Trading Facilities (MTF). The company must also use in this case the rules and procedures for trading and criteria for the execution of orders and for determining the instruments, provision of publicly available information and access to such information, rules governing access to the MTF and provide information to users for their responsibilities for the settlement of transactions and maintain procedures to facilitate the settlement of transactions:

The investment company must have an internal procedure’s manual which includes all of the policies, procedures, regulations and mechanisms and the employees must acknowledge its existence and be aware of its context.      

The procedures and mechanisms to be implemented must be proportionate to the nature and complexity of the business activities of each investment company.

The Commission is entitled to issue a separate directive concerning what they consider necessary in order to clarify, specify or add things.

Application

According to S.21(1), enterprises which are interested in applying for a permit must file an application using the prescribed forms from the Commission.

Under S.22, the Commission must decide on the outcome of the application within 6 months of the moment the application is completed. It is considered to be complete if it contains all of the information provided by article 21.

Conclusion

The new law and the directives afford better protection to the interests of clients of providers of investment services. It will improve transparency since under the law, the investment institutions are obliged to provide their clients with more information with regard to their transactions, activities and their product as well as warning them about various risks that the products that they offer might entail.

The Euro Zone:

As most of us are already aware, we are very close to our entry into the Euozone. The House of Representatives has already passed all of the necessary legislation in order to facilitate our transition into the Euro. The relevant law is the Adoption of the Euro Law of 2007. The law contains provisions for the conversion of Cyprus pounds into Euros, dual prices, dual circulations and measures for combating profiterring.

The governor of the Cyprus Central Bank, Mr Athanasios Orphanides, recently stated that our admission to the Eurozone was a ‘tremendous achievement… for Cyprus.

 

In June 2007, the EU Commissioner for the internal  Market said at a meeting of the Cyprus Chamber of Commerce that the introduction of the Euro into Cyprus is ‘a major success story’ since the currency has removed trade barriers and in this way will improve the Cyprus economy.

We will just have to wait and see whether our entry into the Eurozone will prove to be a major success

Estate Agency Practice In Cyprus:

The Law governing the practice of estate agents in Cyprus as enacted in 2004, restricted the possibility of citizens of other EU member states to practice the profession of an estate agent in Cyprus. 

Furthermore, practice of the profession of estate agents in Cyprus by legal entities that practice legally as estate agents in other EU member states, was prohibited. Thus, the Cyprus law on the matter of estate agents had been incompatible with Directives of the EU and has been criticized by the European Community.

As a result the European Commission sent a notification letter dated 12/10/2006 to the Cypriot Minister of Interior by which it called upon the Republic of  Cyprus, as a member state of the EU, to proceed with all the necessary amendments of the relevant law in compliance with the Directive 2006/123/EC on services in the internal market, which establishes general provisions facilitating the exercise of the freedom of establishment of service providers and free movement of services between member states, and the Directive 2005/36/EC on the recognition of professional qualifications.

As a result of the European Commission’s intervention and in order to comply with the acquis communataire, the Republic of Cyprus enacted Law 118(I)/ 2007 by which new provisions of the already existed law, Law 273(I)/2004, have been introduced in order to amend the previous Law. 

The enactment of the new law has introduced the following provisions according to which the definition of an estate agent includes both individuals and legal entities:

- Any individual can register as an estate agent in Cyprus provided that he:

· is a citizen of the EU.

· is not any way legally incapable

· has not been convicted for any offence of immorality

· has acquired a recognized 3-year diploma relevant to the practice of the profession of an estate agent and one year relevant experience in a member state of the EU.

-An individual who has not acquired a recognized diploma but has acquired a 5-year experience relevant to the profession of the estate agent, is also eligible to be registered as an estate agent in Cyprus.

A legal entity can become a registered estate agent in Cyprus provided that:

· it has been established under the Laws of Cyprus or of any other EU member state

· has its registered office in Cyprus

· its exclusive purpose is the provision of services of an estate agent

· it is not under a procedure of liquidation or winding up and

· at least one of its directors or his representative who is fully authorised to provide, on behalf of that director, services of an estate agent in Cyprus, is a licensed estate agent.

In addition, the relevant law as amended, allows for individual estate agents or legal entities that provide their services in other EU member states and are not settled in the Republic of Cyprus to provide their services as estate agents in Cyprus without being necessary for them to register in Cyprus  provided that :

· they are EU citizens or established under the Cyprus Laws if referring to a legal entity

· they legally practice as estate agents in the EU member state to which they are settled and

· the estate agent or the employees via which the legal entity provides its services, have succeeded to the required exams or provide services to the Republic of Cyprus via a lisenced estate agent.

Τhe new development in relation to the Cyprus law for estate agents, has raised  several objections from Cypriot estate agents who claim to be discriminated against European estate agents, in the context of the required qualifications for practicing in Cyprus.

Vendors can be Forced to Issue Separate Title Deeds:

Purchasers of immovable property can seek a Court Order with which the vendor will be ordered by the court to take all due and necessary actions for the obtainment of the requested permits and approvals to include the application for the issue of separate title deeds within a specified time limit.

The remedy is based on Law 96 (I)/97 which gives the court authority to issue an order against the vendor; it can also place him under court observation to ensure that within a reasonable time period, which would appear to be within  six months, separate title deeds are issued.

Any purchaser who has deposited his contract of sale with the Land Registry and has been waiting for the vendor to issue the separate title deeds will be able to make use of this remedy. The court can order the issuing of the title deed before a claim for specific performance.

In the event that the vendor does not transfer the property into the purchaser’s name after the issuance of separate title deeds the purchaser can request the court to order the specific performance of the contract of sale.  The specific performance order cannot be issued unless a separate title deed has been issued and provided the vendor continued to deny or neglect to transfer the property into the purchaser’s name.

Non compliance by the vendor with the court order results in court order disobedience and gives way to liability, the court has the authority to punish the vendor with imprisonment.

It is therefore possible to obtain your title deeds using the correct legal procedures.

Don't Lose Your Rights - File Your Action Within The Time Limits:

The first Act in Cyprus regulating limitation periods is the Limitation of Actions Law, Cap. 15 which is based on the English Limitation Act 1933.

The Limitation of Actions Law incorporates all the previous Regulations enacted in Cyprus setting down limit periods depending on the nature of the claim. Cap 15 provides, inter alia, a limitation period of fifteen years with regard to claims in respect of bonds and mortgages; twelve years with regard to claims to estate; six years for claims with regard to Bank debts and a period of six years for any other cause of action.

In 1964, the Limitation of Actions Law was suspended by the Limitation of Actions (Temporary provisions) Law 57/64 due to the inter-community conflicts of 1963-1964. In particular Law 57/64 provided that the period commencing on 21/12/1963 and terminating after three months by a notice of the Council of Ministers was excluded from the limitation periods laid down in any applicable Legislation.

Turkey’s invasion of Cyprus in July 1974, led to the amendment of Law 57/64 by Law 36/82 which provided that the period (suspension period) between 20/7/1974 until its termination by the Council of Ministers ending the suspension period, was not to be included in the limitation periods provided in any Legislation. In 1990, the Limitation of Actions (Temporary provisions) Law 217/1990 was enacted which provided that all actions relating to the tort of negligence that had occurred before 31/10/1984 could not be filed after 31/12/1993.

Laws 57/64 and Law 36/82 were annulled by the Limitation of Actions (Temporary provisions) Law 110(1)/2002 which provides that the suspension period commencing on 20/7/1974 still applies with regard to claims relating to movable or immovable assets in the occupied, by the Turkish Troops, area of North Cyprus. Furthermore the new Law provided that in all other claims the suspension period applies only where the claimant proves that due to the disorder that occurred due to the Turkish invasion in 1974, he/she was unable to proceed with the legal action.

In addition, Article 68 of the Civil Wrongs Law (Cap 148) provided that no action could be brought in respect of any civil wrong unless such action be commenced within two years after the act, neglect or default of which complaint is made. This period however was suspended under Law 57/64 which as stated above was annulled by Law 110(1)/2002. Recently, Article 68 of Cap 148, has been amended by Law 171(I)/2006 which extends the limitation period with regard to actions relating to civil wrong acts or defaults, to three years after the tortuous action or default.

Another Act providing for limitation periods is the Motor Vehicles (Third party insurance) Law 96(I)/2000 which provides that any action under this Law, must be filed in Court within two years from the accident, irrespective of any provisions of another Law.

The most important thing to remember is to ensure you understand the time limitations and file your action within the specified time limit to ensure you can rely on the rights available to you.

Procedure for Incorporation:

The procedure for registering an International Business Company (IBC) or a local company in Cyprus is fairly simple. Initially, an application is filed with the Companies Registrar for the approval of a name. The application can also be submitted online. Once approval is received, the memorandum and articles of association are prepared, indicating inter alia the company’s activities, the names of the shareholders, the authorised share capital and the number of issued and paid-up shares that each shareholder holds. Cyprus company law is based on English Company Law of 1948 and it has been amended accordingly in order to comply with the European Law.

The memorandum and articles of association together with the relevant forms which specify the names and details of the shareholders, directors, secretary and the registered office are filed with the Registrar with a request for a certificate to be issued in Greek or in English regarding the shareholders, the directors, secretary and registered office and a certified copy of the company’s memorandum and articles of association.

A lot of clients prefer to use nominee services for the shareholders and directors, they also use registered address and a secretaries search. In the case of nominee shareholders trust deeds are created by the lawyer, according to which a member of the firm or a company is appointed as a trustee to hold the shares on trust for the beneficial shareholder (s).

The incorporation process takes between 10-12 days.

Establishment of Cyprus Companies by International Enterprises

It is clear that Cyprus after joining the EU recently has been an even more popular jurisdiction for registering international business companies (IBC). In an article written about Cyprus in OFC Report 2007, it has been described as a ‘rising international star’.

Apart from Russian and Ukrainian clients, there are a lot of other big companies from Europe who prefer Cyprus as a base for their enterprises. Cyprus has one of the lowest corporate tax rates in Europe (10%) and its tax system, like all its other laws, has been amended so that I complies with EU Acquis Communitaire.

Cyprus has been considered by international experts on Tax Planning as a very good choice, both for establishing a holding company and a trading company.

Nowadays, Cyprus, with its double tax agreements with about 43 countries, including the USA, by being a full member of the European Union, and by implementing various anti money laundering laws is considered to be a ‘clean’ jurisdiction with a very good reputation.

With regard to Holding Companies generally speaking, there is a full exemption from local taxation in respect of any dividends received by the company from its local and foreign subsidiaries. There is no tax on the sale of the shares of a Cyprus company in foreign subsidiaries. There is no withholding tax on outgoing dividends remitted by a Cypriot company to the ultimate parent company. Due to the existence of double tax treaties, the incoming dividends are either exempt from or are subject to low withholding taxes in the subsidiary’s jurisdiction. There is also exemption at source of interest where the beneficial owner is a non-resident. Interest expenses payable by a Cypriot company are fully deductible. A Cypriot holding company may also be capitalized with loans and the interest paid at arm’s length to the parent company will be deductible since in Cyprus, there are no specific rules on thin capitalization. Another advantage is that our Controlled Foreign Companies Legislation is relaxed and mainly targets certain types of income that does not derive from genuine business, ie. Passive income.

Cyprus is also attractive to trading companies for tax planning purposes. If the management and control of the company is situated in Cyprus, then the company is taxed 10% on its worldwide income in Cyprus. However, sometimes it might be proper to even establish the management and control of the Cyprus company outside Cyprus in a jurisdiction which only taxes income generated in its jurisdiction. In this case if the trading is taking place in jurisdictions other than Cyprus or the place where the company is permanently established, the company will not be subject to taxation in Cyprus or in the jurisdiction where it has been permanently established.

Late Delivery of Immovable Property - Buyer's Guidance

What happens if there is late delivery of the property that you have purchased?

As a purchaser you need to be aware that clauses in the contract of sale which predetermine the amount of damages in the event of late delivery of the property will be ignored by the court. These clauses are seen as a penalty being a punishment rather than a means of putting the purchaser into the position that they should have been. The measure of compensation will be determined by looking at damage and real loss caused to the purchaser.

Most contracts of sale contain a clause that entitles the purchaser to a specified sum of money for compensation in the event of late delivery of the property, for example a monthly rate of compensation.

However, it should be noted that in the eyes of the law this clause is viewed as a penalty clause and therefore does not allow the purchaser to demand that they are given the amount stated in the contract. The purchaser is only entitled to claim compensation for the damage and real losses which he has suffered due to the loss of use of the property as a result of its late delivery. The difficulty that the court has is quantifying the actual loss that the purchaser has been subjected to due to late delivery; the court will use the test of reasonableness.

As a purchaser the best method to use to protect yourself and your interests is to be able to provide the court with evidence of the damage and real and substantial loss which has occurred. It is advisable to get this evidence from an expert property valuer as this will be accepted by the court as reliable, acceptable evidence. It is vital that such evidence can be obtained as in reality the losses and damage can be substantial and if the court is not presented with such evidence they will only award nominal damages which may stand in stark contrast to the actual loss, leaving the purchaser in a situation where they suffer severe loss.

The Supreme Court of Cyprus has considered the issue of compensation in cases of late delivery of property and concluded that;

“The normal measure of damages is the value of the user of the land, which will generally be taken as its rental value, for the period from the contractual time for completion to the date of actual completion” (Metallika Iraklis Michaelides Ltd v. G & C Exchaust Systems Ltd (Civ. Appeal 10355) 26 April 20).