The Moscow Arbirtazh Court has prohibited a tenant from challenging the non-market cadastral value of a land plot

The cadastral value of lands is crucial because it is the basis for calculating land tax and rent for state-owned and municipal-owned property. Authorities establish the cadastral value of lands through mass land appraisals, and land value often is high in comparison to the market price. As a result, arbitrazh court cases regarding the cadastral value of land plots are frequent. Furthermore, in various regions of Russia, court practices on this issue differ radically.

In Moscow, the cadastral value of land increased significantly in 2012 and 2013 due to the Moscow Government Regulation “On the approval of the results of state cadastral valuation of land in the City of Moscow” and mass reassessments. The resulting increases in the tax burden and rental payments caused a wave of court litigations between owners and tenants, who contested the cadastral value.

There are two ways of resolving the situation: an application to the Commission on the Settlement of Disputes or a judicial challenge of the cadastral value. In most cases, the Commission rejects such applications, and when a case appears in the courts, the local authority sets a new cadastral value, making the court case moot. Refunding overpayments, calculated on the basis of lower rates, also is possible. In the Moscow region, land tenants have faced an additional obstacle when challenging cadastral values. The Federal Arbitrazh Court of the Moscow District refused to hear the first case regarding a tenant’s right to challenge the cadastral value, indicating that the tenant did not have the right to dispose of the land, which made him ineligible to appear before the court with a claim that the cadastral value of the land should equal the market price.

In case No. A40-59687/2013, “Souz,” a tenant of a medium-size land plot in Moscow, argued that the overstated cadastral value of the land, in comparison to the market price, was unjustified, and “Souz” demanded that the cadastral value equal the market price. The plaintiff's arguments were based on the fact that the price the state set resulted in an unjustified overstatement of rental payments, the amount of which is determined by a percentage of the cadastral value of land plot. Therefore, the plaintiff claimed to have an unjustifiably high lease payment. In support of its claims, “Souz” presented an appraiser’s report.

The court of first instance disagreed with the plaintiff’s arguments and left the price of the State Real Estate Cadastre intact, claiming that the tenant was not entitled to sue. In a decision dated 25 October 2013, the Moscow Arbitrazh Court stated: “The applicant can protect his tenancy rights only by remedies which do not interfere with exclusive rights of ownership, for example, the right of disposal (sale).” Then, the court concluded that only the owner, who is conferred with the right to dispose, has the right to establish a market price as a cadastral value.

The appellate court upheld the decision of the Moscow Arbitrazh Court, based on the results of a new mass evaluation of property, but in its comments, the court upheld a the tenant’s right to challenge the state’s cadastral valuation of land. The judges referred to Article 24.19 of the “Federal Law on Valuation Activities” that allows challenges before an Arbitrazh Court or a special commission in cases that affect the rights and obligations of individuals. The Ninth Arbitrazh Court of Appeal stated: “The rights and duties of the plaintiff are linked directly to the cadastral value of the leased land. The decision of the court of the first instance is subject to change since the owner is entitled to challenge the determination of cadastral value but the tenant is not.”

The Federal Arbitrazh Court of the Moscow District examined an appeal that “Souz” lodged on 26 June. The expectation was that the court would overturn the decision since the court practice in similar cases had required equality in the cadastral and market values. The plaintiff requested the establishment of a cadastral value equal to the market price, arguing that not having the right to challenge the price of land is a violation of a tenant’s rights and is not distinguishable from violations of the rights of a land owner who pays a land tax. The defense insisted on a reversal of the appellate judgment since the appellate court had concluded wrongly that the rights and obligations of the tenant were directly linked to the cadastral value of the leased land. “According to the Civil Code, a tenant has an obligation to pay rent,” he explained. He further stated that “in addition, Article 65 of the Land Code states expressly that the amount of rent is an essential condition of the lease of a land plot. Thus, the plaintiff, who entered into the lease agreement, agreed with contract price and its determination.” The plaintiff disagreed, asserting that the change in cadastral value is not a disposal of a land plot and that the legal fate of a land plot does not change. The court of cassation sided with the authorities. The three judges decided to revoke the ruling of the appellate court and to uphold the decision of the Moscow Arbitrazh Court.

Jurisdictions have different ways of resolving questions about a tenant’s right to challenge the state cadastral valuation when it requires him to pay what he believes is an overestimated rent. For example, the courts of the Rostov and Krasnodar regions see no difference between an owner and a long-term tenant when it comes to the question of whether the cadastral value should equal the market price. Good court practices related to the applications of tenants challenging the cadastral value of land are apparent in a number of cases: Nos. A53-6495/2014, A53-6497/2014, A32-3631/2013, and A32-39111/2013.

Such judicial practices exist in other federal arbitrazh districts at the cassation level: the Federal Arbitrazh Court of the Ural District from the 27 June 2014, case No. A47-6448/2013; the Federal Arbitrazh Court of the Volga District from 24 June 2014, case No. A72 -11870/2013; and the Federal Arbitrazh Court of the Volga-Vyatka District from 19 June 2014, case No. A82-9984/2013. The courts in these cases decided that the tenant had a legitimate interest in the establishment of the cadastral value of the land that was equal to the actual market value.

Based on such contradictions in court practice, observers might expect the “Souz” case to go before the Supreme Arbitrazh Court of the Russian Federation, but that is unlikely to happen since the court is to be abolished soon.

The Russian government’s bill on amendments to the “Federal Law on Appraisal Activity,” which would prohibit regional authorities from revising the cadastral value more than once every three years and once every two years, in the case of federal cities, may represent an important stage in the development of lease relationships. Furthermore, there is a proposal for a “retrospective” approach to cadastral evaluation: if an entity or a natural person successfully challenges a valuation, the new price will apply retroactively to the beginning of the year. The bill already has passed its second reading. The text of draft law No. 421531-6, “On Amending the Federal Law on Valuation Activities in the Russian Federation,” is an effort to improve the procedures for state cadastral valuation. It can be found here.