Russian Federation: Russian Federation Legislation on Real Estate: Review of Amendments

Last Updated: 11 October 2005

Article by Natalia Wilke

At the end of 2004, the Russian Federation State Duma adopted a complex of new regulatory acts in the sphere of real estate legislation, which, consequently, has been significantly changed and supplemented. Due to the large number and varying goals of the introduced amendments, only the most important thereof are reviewed further down.

I. Funding Real Estate Construction

Mortgage as a Method for Securing Funding

The most significant changes aimed at improving the legal mechanisms for funding real estate have been made to legislation on mortgage.

Until recently, it was extremely difficult and, in a number of cases, impossible to use mortgage as a method for ensuring the return of a loan or credit funds attracted for the implementation of construction projects. The main reasons for this situation were the unclear definition of the legal status of an object being constructed and the impossibility to put this object under a mortgage that would also cover the object following the completion of construction works. Furthermore, the conclusion and state registration of a mortgage agreement for an unfinished construction object were also connected with a large number of practical difficulties.

As a result, when financing an investment project at the construction stage, the investor had no possibility to however fix in an agreement that the borrower undertakes to secure, upon the completion of construction works, the return of the credit by mortgage of the constructed building.

Pursuant to the new version of the Federal Law "On Mortgage (Real Estate Pledge)," No. 102-FZ (hereinafter the "Law On Mortgage"), the land plot or the right to lease the land plot on which a building has been or is being constructed while using credit funds or a specific purpose credit is considered as pledged as of the state registration of the borrower’s ownership right to the constructed building or building being constructed or as of the moment when the registration body receives notice from the pledger and the pledgee on the conclusion of the credit (loan) agreement (Point 1 of Article 64.2 of the Law On Mortgage). However, unless the mortgage agreement provides otherwise, in case of mortgaging a land plot the charge also covers the pledger’s building or structure situated or being constructed on the land plot (Point 1 of Article 64 of the new version of the Law On Mortgage).1

Therefore, pursuant to the new legislative provisions, as of the submission to a registration body of the notice on the conclusion of the credit agreement, the land plot (or the right to lease the land plot) and the building being constructed thereon become mortgaged in favor of the creditor by operation of law, i.e. without concluding a separate mortgage agreement. Upon completion of the construction works, in addition to the borrower’s ownership right to the constructed building, the encumbrance on the building in the form of mortgage thereon in favor of the creditor is registered.

Due to the foregoing, it is necessary to consider the new court practice regarding mortgage which concludes that if the subject of mortgage is an unfinished construction object, then the mortgage remains in force after the completion of the construction works and the constructed building (structure) becomes the subject thereof. Furthermore, rules of current legislation on mortgage do not require that, in order for a mortgage agreement to remain in force, amendments related to the description of the subject of the mortgage and the valuation thereof be made to the mortgage agreement and registered.2

Another significant amendment made to the Law On Mortgage is the abolition of the requirement for notarization of mortgage agreements, credit agreements, and other agreements containing obligations secured by mortgage.3 This facilitation of the procedure for executing mortgage agreements will reduce expenses of the parties and save their time.

Share Participation Construction

The subject of share participation construction agreements (also referred to as investment agreements or agreements for share participation funding) which have been concluded until recently was the funding provided by share participants (co-investors) for the construction of a real estate object, which entailed the commencement of the share participants’ (co-investors’) rights to demand that respective parts of the constructed real estate object be granted thereto after the completion of the construction works. However, no legal regulation of such relations existed up to the end of 2004.

The Federal Law "On Participation in Share Participation Construction of Blocks of Apartments and Other Real Estate Objects and on Amending Certain Legislative Acts of the Russian Federation," No. 214-FZ adopted on 30 December 2004, (hereinafter the "Law On Share Participation Construction"), establishes the main rules for attracting funding from investors for construction purposes and the rights of such investors to constructed real estate objects. This law comes into force on 1 April 2005.

Pursuant to the Law On Share Participation Construction, developers, i.e. parties attracting funding for construction purposes, may be legal entities or individual entrepreneurs that hold construction permits and either own or have the rights to lease land plots.

Under a share participation construction agreement (hereinafter "agreement"), the developer undertakes to have a real estate object constructed by using its own means and (or) engaging other parties and to transfer, following the receipt of the permit to put this object into operation, the respective part of the object to the share participant (hereinafter "share participant") that paid the amount established by the agreement.

An agreement must be concluded in writing and is subject to state registration. The essential conditions of an agreement must, in particular, include (1) information on the part of the object to be transferred to the share participant, which part is determined on the basis of the design documents, (2) the deadline for the developer to transfer the object of the share participation construction to the share participant, and (3) the price under the agreement, i.e. the amount to be paid by the share participant in accordance with the agreement, and the payment procedure.

A developer’s fulfillment of its obligations under a share participation construction agreement is secured by pledge (mortgage) prescribed by law in the following manner:

  • as of the state registration of the agreement, the land plot owned by the developer, or the right to lease the land plot, as well as the real estate object being constructed thereon are considered to have been pledged to the share participants;
  • as of the state registration of the ownership right held by the developer to the unfinished construction object, the object is considered to have been pledged to the share participants;
  • during the state registration of the ownership right held by the developer to the premises comprising the real estate object which was being constructed with funding from share participants, the mentioned premises are considered to have been pledged to the share participants.

Upon completion of construction works and putting the building into operation, the developer is entitled to have the ownership right registered in respect of the part of the constructed real estate object which has been paid for thereby. The basis for the state registration of a share participant’s ownership right is the permit to put the building into operation (to be provided by the developer on one occasion only) and the transfer act signed by the developer and the share participant.

II. "Residential Package"

Amendments made by a number of laws included in the so-called "residential package" are aimed at formation of the market for affordable residential premises. Similar to the amendments reviewed in Section I above, they primarily cover private persons’ acquisitions of completed residential premises or those being constructed by using the mortgage or share participation construction schemes.

Crediting by Mortgage

Amendments to the Law On Mortgage made within the framework of the "residential package" are aimed at the development of mortgage crediting for residential construction and the solidification of protection for the rights of creditors.

One of the significant amendments covers foreclosure on mortgaged residential premises. Until recently, foreclosure on residential premises was prohibited if such premises were the only place suitable for the permanent residence of the debtor and his/her family. This significantly reduced the value of mortgage as a method for funding residential premises being used and, consequently, such mortgage was applied quite rarely. This prohibition on foreclosure on residential premises is now abolished.4 In addition, the turnover of residential real estate was impeded by an earlier effective legislative provision which stated that in case of transfer of the ownership right to any residential premises the new owner was not entitled to demand that the members of the former owner’s family be evicted. Pursuant to the new version of Point 2 of Article 292 of the Civil Code, transfer of the ownership right to a residential house or apartment to another party serves as the basis for terminating the right of the members of the former owner’s family to use the residential premises.5

A new provision has been introduced regarding the possibility to insure a borrower’s risks in case the funds from realization of a pledged apartment are insufficient. In this case, an agreement may be concluded for insuring the risk associated with a borrower’s liability for non-fulfillment or undue fulfillment of the obligation to repay a credit for an amount of 20% of the value of the pledged object.6 This provision is primarily aimed at reducing risks associated with the granting of mortgage credits to private persons.

Granting Land Plots for Constructing Residential Premises

The Russian Federation Land Code has been supplemented with Articles 30.1 and 30.2, which establish a simplified procedure for granting state- or municipally-owned land plots for constructing residential premises and the particularities of granting such land plots for complex land development in order to construct residential premises.7

These introductions will, no doubt, promote the further development of individual residential premises construction and the development and use of new areas for increasing the volume of complex construction of residential premises.

Residential Code

Until recently, relations associated with residential premises were governed by the RSFSR Residential Code of 1983, the majority of the provisions of which have ceased to conform to the altered economic and social conditions. Various rules of Residential Law were also contained in a large number of additional regulatory acts passed at different times and levels (varying from instructions to federal laws).

The new Residential Code,8 which came into force on 1 March 2005, has been developed in conformity with the rules of the Russian Federation Constitution and the Civil Code, and in consideration of other federal laws, and supersedes the earlier effective RSFSR Residential Code.

For the first time, the Residential Code provides for special chapters which govern the procedure for converting residential premises into non-residential premises, rebuilding and re-planning the layouts of residential premises, as well as issues connected with the formation of partnerships of owners of residential premises and the methods for managing blocks of apartments.

Share Participation Construction

As is generally known, one of the most widespread methods for funding residential premises being constructed has been and continues to be the attraction of funds from private persons (share participation construction). As mentioned above, legal relations of this nature which commenced between a construction company and individuals were not regulated by law. Consequently, as a rule, construction companies drafted their own standard forms of share participation construction agreements and imposed on share participants conditions which significantly encroached upon their rights.

In addition to regulation of general legal issues connected with relations between a developer and a share participant, the new Law "On Share Participation Construction" establishes a number of provisions aimed at the protection of interests of individuals who enter into agreements for their own needs not connected with the performance of entrepreneurial activities. Currently, such agreements are subject to legislation on the protection of consumers’ rights. Furthermore, provisions on civil and administrative liability of developers in case of non-fulfillment of obligations under share participation construction agreements have been established.

III. Civil Issues Connected with the Turnover of Real Estate

Finally, a number of new legislative provisions have been introduced in order to eliminate legal ambiguities impeding the turnover of real estate.

Unfinished Construction

Until recently, the legal status of unfinished construction objects remained undetermined. They were not unambiguously classified as real estate and the registration of the ownership rights to these objects was also quite impeded. The Civil Code now expressly classifies unfinished construction objects as "real estate" (the new version of Point 1 of Article 130), and provisions on the registration of ownership rights to these objects have been inserted into the Federal Law "On State Registration of Rights to Real Estate and Transactions Therewith," No. 122-FZ dated 21 July 1997, (hereinafter the "Law ‘On Registration of Rights to Real Estate’") (the new version of Point 2 of Article 25).

Protection for Bona Fide Purchasers

The following amendments cover the protection of bona fide purchasers of real estate.

Pursuant to the amendments made to Article 223 of the Russian Federation Civil Code, rights of bona fide purchasers, in particular those who buy real estate, are reinforced.9 Real estate is recognized as owned by a bona fide purchaser as of the state registration, with the exception of cases prescribed by law in which the owner is entitled to reclaim the real estate from the bona fide purchaser. Previously, situations could occur in which the registration of the ownership rights of the bona fide purchaser may be invalidated, although the real estate could not be repossessed from the purchaser. Therefore, the bona fide purchaser was compelled to wait until the acquisitive limitation (fifteen years) lapsed before the purchaser could once again dispose of his/her real estate in dispute. This ambiguity has now been eliminated.

Registration of Rights to Real Estate

The amendments connected with the registration of rights to real estate are aimed at the reinforcement of protection of legal interests of participants of the real estate market.

In particular, Article 31 (Responsibility During the State Registration of Rights to Real Estate and Transactions Therewith) of the Law "On Registration of Rights to Real Estate" has been amended. Pursuant to the earlier effective version of this Article, registration bodies were not responsible for undue performance of such duties as, for example, receipt of documents, their registration and legal analysis, verification of the legality of transactions, and determination of the absence of discrepancies between claimed rights and those already registered. Consequently, all risks associated with the mentioned activities of registration bodies were borne by the participants of the turnover of real estate. It is now fixed by law that the bodies performing the state registration of real estate are responsible for the timely, complete, and accurate performance of their duties, the completeness and authenticity of provided information on registered rights to real estate and transactions therewith, as well as for unreasonable refusal or evasion to perform the state registration of rights. Furthermore, any damage inflicted on individuals or legal entities as a result of undue fulfillment of the above-mentioned obligations will be fully compensated from the Russian Federation treasury.

Furthermore, residential premises owners that are not entitled to reclaim premises from bona fide purchasers, and bona fide purchasers from whom residential premises have been repossessed will be eligible for lump-sum compensation from the Russian Federation treasury. Such compensation may be paid in cases when no recovery under a writ of execution issued in accordance with a court ruling has been performed within one year due to reasons beyond the mentioned parties’ control. The amount of compensation is calculated on the basis of the amount constituting the actual damage, but nonetheless may not exceed 1 million rubles. These provisions are subject to application provided that the state registration of the bona fide purchaser’s ownership right to the residential premises was performed after 1 January 2005.

The provision on inclusion of information on individuals’ restricted legal capacity or incapacity into the state register10 also serves the interests of participants of transactions with real estate. Court authorities must provide, within three days, a registration body with a copy of a court ruling which entered into force and which restricts an individual’s legal capacity or recognizes an individual to be incapable.

City Planning Code

The new Russian Federation City Planning Code11 entered into force as of its official publication on 30 December 2004 and supersedes the City Planning Code of 1998, certain provisions of which will remain effective until the end of the established transition period (1 July 2006).

Current city planning documents approved earlier are effective to the extent they do not contradict the new City Planning Code. However, a stage-by-stage introduction of requirements for the mandatory existence of basic documents for performing city-planning activities is provided for.

The Code establishes the main notions and principles of legislation on city-planning activities, as well as the relevant powers of state and local authorities. Certain chapters are devoted to issues connected with territorial development, city planning zoning, the layout of territories, architectural and construction design, construction and reconstruction of capital construction objects, and liability for breach of legislation on city-panning activities. The Code regulates the content of documents and the procedure for developing and obtaining approvals for documents at all construction stages and introduces the notion of "a land plot’s city planning layout" – a document which serves as the basis for preparing design documents in order to develop a land plot and contains information on the boundaries of the land plot, its permitted use, and the possible parameters of objects to be constructed thereon.

More detailed information on the new City Planning Code is provided in BEITEN BURKHARDT’s article dated 11 February 2005.

NB: The article "Russian Federation Legislation on Real Estate: Review of Amendments" has been prepared within the framework of publishing a series of analytical reviews devoted to current legislative and court issues in the Russian Federation.

Footnotes:

1. In the version of the Federal Law "On Amending the Federal Law ‘On Mortgage (Real Estate Pledge)’," No. 216-FZ dated 30 December 2004

2. Information Letter of the Presidium of the Russian Federation Supreme Arbitration Court, No. 90 dated 28 January 2005

3. Federal Law "On Amending the Federal Law ‘On Mortgage (Real Estate Pledge)’," No. 216-FZ dated 30 December 2004

4. Federal Law "On Amending Article 446 of the RF Civil Procedural Code," No. 194-FZ dated 29 December 2004

5. Federal Law "On Amending the First Part of the Russian Federation Civil Code," No. 213-FZ dated 30 December 2004

6. Point 4 of Article 30 of the new version of the Federal Law "On Mortgage (Real Estate Pledge)," No. 102-FZ dated 16 July 1998

7. These amendments enter into force on 1 October 2005 (Federal Law "On Introduction of the Russian Federation City Planning Code into Force," No. 191-FZ dated 29 December 2004)

8. The Russian Federation Residential Code, No. 188-FZ dated 29 December 2004

9. Federal Law "On Amending Article 223 of the First Part of the Russian Federation Civil Code and the Federal Law ‘On State Registration of Rights to Real Estate and Transactions Therewith’," No. 217- FZ dated 30 December 2004

10. Federal Law "On State Registration of Rights to Real Estate and Transactions Therewith," No. 196-FZ dated 29 December 2004

11. The Russian Federation City Planning Code, No. 190-FZ dated 29 December 2004

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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