Sirota & Mosgo: Principles of the Russian Immovable Property Law

Immovable (or Real) Property Law has only recently been developed as a functional area of Russian Civil Law. For many decades – from 1917 until 1991 – immovable property (or real estate) transactions were substantially restricted because of the Soviet State exclusive land property right. During this period, immovable property transactions under Civil Law served only as auxiliary instruments in reference to sovereign administrative acts.

Dr. Oleg Mosgo and Svetlana Makarova of Sirota & Mosgo on the general principles of Russian real property law:

Enactment of the law “Fundamentals of Civil Legislation of the USSR and of Union Republics” in 1991 became the starting point of a profound reform of Russia’s Immovable Property Law that is today still far from complete. Thus, this transitional nature is a characteristic feature of the Russian Immovable Property Law. However, despite of the constantly changing and still fluctuating legal framework, as well as of the negative effects of the recent financial crisis, Russia’s immovable property market is developing quite dynamically.

Legal Framework

Russian Immovable Property Law’s essential fundamentals are set forth in the Constitution of the Russian Federation of 1993. Constitutional provisions laid out the main principles of Russian Immovable Property Law (for instance, the inviolability of private property), as well as its fundamental structures, such as allocation of legislative functions between federal, regional and local authorities in regulating immovable property matters. In view of this allocation, the legal status of immovable property in Russia is formalized by the legal acts of three legislative levels: federal, regional and local. However, the most important provisions governing immovable property matters can be found in the following federal laws of the Russian Federation:

  • Civil Code (1994 – 2001);
  • Tax Code (1998 – 2000);
  • Land Code (2001);
  • Urban Development Code (2004);
  • Federal Law “On the State Registration of Immovable Property Rights and Immovable Property Transactions” (1997);
  • Federal Law “On the State Immovable Property Cadastre” (2007).

Immovable Objects

Primarily under Russian Immovable Property Law, an “immovable object” is an object that cannot be moved from its location without causing an unreasonable detriment to it making its further usage in accordance with its main specific function impossible. Such objects are:

  • Land plots;
  • Buildings;
  • Accommodations.

Besides that, legally the following objects requiring state registration are qualified as immovable objects: aircrafts, sea crafts, inland vessels and space ships.

One of the distinctive features of the currently effective Russian Immovable Property Law is that a land plot and a building constructed on it are always treated as separate legal objects. This regulation often has the consequence that a land plot and a corresponding building on it have different legal statuses and different owners. Basically, under the Russian law the property right to a building is predominant: it creates certain legal rights regarding the relevant land plot: right of use, preemptive purchase right or lease right. However, in some cases, due to political or de facto reasons, immovable property rights to a land plot cannot be acquired at all.

Besides that, it should always be taken into account that immovable property objects in Russia can be subject to different types of public law encumbrances and restrictions. As to buildings, they operate under certain restrictions introduced by municipal planning laws and administrative construction regulations, as well as restrictions that protect historical monuments, environmental law provisions, USPH rules, fire safety and industrial safety rules. Restrictions regarding land plots are based on the land cover classification. The category of a land plot determines its legal status and its possible commercial utilization. The existing categories of land plots are as follows:

  • Farm land;
  • Residential land;
  • Industrial land, power facilities land and other specific land plots;
  • Land plots of territories and objects subject to special protection;
  • Forestry fund land;
  • Water fund land;
  • Reserve fund land.

Transferring of a land plot from one category to another is allowed; however it is subject to certain conditions set by law. The most cumbersome requirements and restrictions apply when transferring to other categories of land plots of the farm category and of the category territories and objects subject to special protection.

Immovable Property Rights

Russian Immovable Property Law provides for the following immovable property rights:

  • Title (or property right);
  • Tenant right;
  • Right of way and passage;
  • Life tenure of a land plot that can be passed only by succession;
  • Perpetual right of use of a land plot, which does not entitle its holder to transfer the land plot;
  • Legal right of use of a land plot or a part of the land plot by the owner of a building constructed on them;

Immovable Property Register

All immovable property transactions become enforceable just after their registration in the State Immovable Property Register. Besides that, all immovable property rights – both rights in rem (proprietary rights), as well as rights in obligatio (obligations) – require state registration. The only exception from this regulation is lease contracts for a period of less than one year. The distinctive feature of the State Immovable Property Register is that the information recorded in it is not finally decisive in case of a dispute. The record in the Russian State Immovable Property Register creates just a presumption of title in the name of the person to whom it was registered; however, the effectual holder of good and valid title can always vindicate the object or get his or her property right established by court. Technical and descriptive information (the total area, the number of floors etc.) is recorded in the State Immovable Property Cadastre. Both the Register and the Cadastre are maintained by the Federal Service for State Registration, Cadastral Records and Cartography.

Acquisition of Immovable Property Rights, Immovable Property Transactions

Legally different procedures are established for acquiring immovable property rights from public sector entities and from private entities or individuals.

Basically acquisition of immovable property rights from public sector entities can be effected by means of an announcement of a competitive tender, which is a rather complicated and long process. A few possible exclusions from this rule occur just in the following situations:

  • Awarding of lease rights to a land plot, subject to a mandatory agreement upon the location of the object to be constructed, which usually is connected with the concurrent conclusion of an investment treaty;
  • Acquisition of rights to a land plot by the owner of the building constructed on it by application of his exclusive legal right to lease or privatization of the corresponding land plot;
  • Assignment of a lease rights under lease agreement with a validity of at least 5 years, which basically does not require the consent of the lessor.

Acquisition of immovable property rights from private entities and individual persons can be effected by concluding standard legal transactions (sale, lease etc.). However, in practice, a series of preliminary actions are done in order to provide necessary protection for the interests of the corresponding investor. These actions include as a prima facie verification of the immovable object and of the title to that object (Due Diligence), which focuses on the following aspects:

  • Legal title to the immovable object;
  • Legal accuracy of the vendor’s acquisition of legal title;
  • Co-relationship between the title to the land plot and the title to the building, as well as possible conflicts;
  • Applicable civil encumbrances and/or the reasons for such encumbrances;
  • Public law rights of enjoyment, public restrictions and encumbrances;
  • Legal accuracy of the documents, formal conditions for the transaction, and the authority of persons and bodies;

After the Due Diligence check, the structure of the forthcoming transaction can be decided. In practice, the following two schemes are used:

  • Direct Acquisition (or Asset Deal): concluding of a sale agreement or lease agreement with regard to Immovable object;
  • Indirect Acquisition (or Share Deal): concluding of a sale agreement regarding shares of a company owing the immovable object.

Both of the above methods have its advantages and disadvantages. Asset Deal has a simple structure, allows establishment of contractual guarantees by means of the description of the qualities of the immovable object and minimizes direct risks associated with latent liabilities. Opposed to Asset Deals Share Deals involve less tax charges. This scheme allows also acquisition of all rights and obligations under existing agreements as well as acquisition of licenses connected with the immovable object. On the other hand, Share Deals require profound Due Diligence checks of the immovable property object as well as of the respective company.

Implementing of integral immovable property projects is usually effected by means of combinations of immovable property transactions. A typical combination of transactions during the initial construction of the building on the land (“Greenfield”) includes acquisition of land rights (usually a short-term lease), acquisition of title to the new building, and the conclusion of a long-term lease of the land plot or acquiring legal title to it. The scheme of the acquisition of rights to an existing property (“Brownfield”) is less complicated (assuming that only one sale agreement will be concluded). However, this scheme has many risks and potential expenses (e.g. capital repair).

Sirota & Mosgo