Bulgaria implemented a land policy which aimed to give back user-rights to individual owners and to privatize the physical assets of the collective farms. The restitution of ownership rights has led to land fragmentation in ownership and use. The aim of this paper is to demonstrate the role of the institutions in achieving sustainable use of the fragmented land in Bulgaria. New institutional economics was employed in order to elucidate the processes leading to land fragmentation and the case study approach was applied. The main argument in the article is that fragmented ownership generates high costs of searching for the owners as well as high costs of contracting. Therefore, the informal institutions dominate among landowners and land users. The level of the social capital is different in the different actor groups: landowners, land users and local authorities. The findings led us to the conclusion that local informal contracts reduce the costs of contracting even when low-trust/commutation environment occurs among the different groups of actors. At the same time the informal contracts among different groups of actors ease the problems related to land fragmentation, which in its turn leads to more sustainable land use.