Increased Number of Unsold Real Estate Properties, Canceled Contracts, and Endless Construction Disputes – Are There Solutions?
Rising construction costs, a complex building permit process, increasing bureaucracy, a growing number of unsold real estate properties, and housing prices that have risen by over 60,000 euros over the last five years – this is the current reality of the real estate market in Lithuania. However, despite these trends, the market today remains active, with the number of strategic and other major construction projects continuing to grow. Where there is a lot of activity, problems are inevitable, state the lawyers of the leading law firm “Ellex Valiunas.”
These and other current real estate sector issues were analyzed by Lithuanian and foreign experts at the “Ellex Construction Disputes Forum 2024,” organized by the law firm “Ellex Valiunas.” FIDIC and construction dispute law experts were invited to share their experience, insights, and observed opportunities with guests of the event – legal professionals and other representatives of the country’s real estate market.
Unsold Real Estate Properties, Complex Permitting, But There Is Light at the End of the Tunnel
According to Mindaugas Statulevičius, head of the Lithuanian Real Estate Development Association (LNTPA), one of the main challenges for real estate developers in Lithuania remains the increasing construction costs and the sometimes truly confusing legal regulations. “While we are happy about the gradually increasing wages, we must admit that this, along with various additional expenses, also drives up construction costs. This is not helped by the supply chain disruptions caused by Russia’s war in Ukraine. High interest rates have persisted for a while, reducing buyer activity, while projects planned earlier continue to be developed, leading to a steady increase in the number of unsold real estate properties,” said M. Statulevičius.
M. Statulevičius
The average price of a 60-square-meter apartment has increased by about 60,000 euros over the past five years. Still, M. Statulevičius noted that positive changes are already being felt in the market today, and we should see even more pronounced improvements next year. “We are gradually seeing an increase in the number of people obtaining loans, and financing is becoming more accessible. Real estate developers and buyers are adapting to our geopolitical situation, and decisions are being made with less concern about the risks of war,” said the head of LNTPA.
According to him, even if positive changes occur in the market, there is a significant possibility that increased market activity will also lead to a surge in construction disputes. The question today is not how to avoid them entirely, but how to implement maximum preventive measures so that the outcome of a dispute is as favorable as possible, and the process is as smooth as possible.
Price Indexation – A Way to Manage Risks in Construction Contracts
According to “Ellex Valiunas” lawyers, provisions for price indexation are currently found much more frequently in construction contracts than they were before 2020, when a significant portion of fixed-price construction contracts either did not have indexation clauses or had them in a standardized, rarely used form.
“From the client’s perspective, a fixed price is the desired outcome of the construction process. When the contractor agrees on a fixed price contract without discussing the mechanism for price changes, the opportunity for revision exists only under truly exceptional circumstances, and only if it is proven that such circumstances significantly impacted the specific contract’s execution. All these matters are handled on a case-by-case basis, so the likelihood of disputes remains high. A preliminary agreement between the parties regarding conditions under which prices can be indexed or otherwise adjusted brings clarity and helps manage the interests of both parties, reducing the risk of disputes,” shared Simona Budreikaitė, associate partner at “Ellex Valiunas,” who moderated a discussion on price indexation.
Insights were shared during the discussion by (pictured from left) Gediminas Jakutavičius, project manager at real estate developer “EIKA,” Inese Freivalde, lawyer at “Ellex Klavins,” Patryk Figiel, partner at the law firm “Linklaters,” Kirti Jürimäe, lawyer at “Ellex Raidla,” and Irmantas Beržauskas, head of legal and governance at “Lithuanian Railways.”
Arbitration Valued for Quality of Decisions and Confidentiality
“In large construction projects, arbitration remains a preferred method of dispute resolution among construction industry players. It is highly valued for advantages such as the ability to choose qualified arbitrators, the quality of decisions, and confidentiality. However, due to the complexity of the case and numerous legal and technical issues, the arbitration process can be prolonged. Involving experts for an expert decision can significantly speed up the process, especially in technical disputes. It should be noted that, for example, FIDIC contracts can use a Dispute Adjudication Board (DAB), consisting of experts appointed by the parties at the time of contract formation. The DAB can promptly resolve disputes as they arise, helping ensure smoother project execution and avoiding “holding up” contentious issues until the project’s end,” shared Edvardas Racius, an associate partner at “Ellex Valiunas,” who moderated one of the discussions.
E. Racius (on the right)
This topic was elaborated on at the “Ellex Construction Disputes Forum 2024” by (pictured from left) board member and lawyer Rytis Valūnas, Peter Hillerstrom from the world’s largest business litigation and arbitration law firm “Quinn Emanuel,” Kaj B. Möller, executive director of Swedish business consulting firm “FTI Consulting,” and arbitrator, mediator, and lawyer Renata Beržanskienė.
One-Fifth of Insolvency Cases in Lithuania Are from the Real Estate Sector
“In Lithuania alone, in 2023, 1,018 insolvency cases were initiated – 21 percent of them were related to construction. Thus, insolvency has become quite common when it comes to the successful progression of the construction process. The main reasons for insolvency are often high debts or insufficient working capital,” explained Olga Petroševičienė, a partner at “Ellex Valiunas” who moderated another discussion.
Panelists from Poland, Sweden and Germany shared insights into insolvency laws in different jurisdictions and the legal treatment of insolvent contractors in different countries. All the panellists came to the common conclusion that contracts with contractors and other parties to the construction process should be drafted with the utmost care and that it is imperative to strategically set out all the necessary safeguards to protect the parties’ interests in the event of insolvency.
The discussion featured (pictured from left) Georg Scherpf, head of the Arbitration Group in Germany for the international law firm “Clyde & Co,” Åsa Waller, partner at the Swedish law firm “Mannheimer Swartling,” and Stanisław Drozd, partner at one of Poland’s largest law firms “Wardynski & Partners.”
The “Ellex Construction Disputes Forum 2024” also featured two international stars of the real estate sector: one of the most experienced FIDIC experts in the world, Edward Corbett, and FIDIC expert, engineer, and arbitrator Robert Aloys Werth.
E. Corbett
R. A. Werth
Giedrė Aukštuolienė, head of the Dispute Practice Group and partner at “Ellex Valiunas,” who led the event, emphasized the importance of communication skills among specialists in the real estate sector: “It’s all about preparation and communication. For example, Lithuania today is facing a shortage of engineers, and those who are in the market often lack the competencies or experience to ensure proper communication between the client and the contractor, and to resolve issues that arise during contract execution efficiently and in a timely manner. There is indeed room for improvement here, which could contribute to the more effective execution of construction projects and dispute resolution.”
According to her, proper preparation of engineers to act as intermediaries between the contractor and the client should be one of the most important tasks in the sector. “From our side, we see industry-focused events as an opportunity to help solve the biggest challenges. When key industry players can participate alongside world-class experts and look at problems from a broader perspective, beyond the specific project framework, mutual understanding increases, and clear paths for further work are revealed,” said G. Aukštuolienė.
