Bulletin of the Real Estate and Construction Practice (Issue 4, 2019)

EVENTS

1. Moskomstroyinvest issues compliance opinions for pre-existing equity participation agreements without escrow accounts
Resolution 480 of the Government of the Russian Federation of 22 April 2019 requires that real estate developers must use escrow accounts when raising funds from shareholders under equity participation agreements. (See the third item in the "Pending Legislation" section of our Real Estate and Construction Bulletin No. 2, 2019.) Moskomstroyinvest has begun to issue compliance opinions for apartment buildings and other real estate projects that were begun under the old rules. At present, over 120 such opinions have already been issued in Moscow, and Moskomstroyinvest has received over 300 applications for compliance opinions. The first to receive them were large development companies, such as Ingrad, PIK Group, and the Capital Group. (https://stroi.mos.ru/news/zastroishchiki-smoghut-postroit-8-2-mln-kv-mietrov-zhil-ia-biez-eskrou-schietov) 

2. More than 3,800 escrow accounts opened for investors in real estate developments
From 1 July 2019, as a general rule, real estate developers will be required to use escrow accounts to raise funds from citizen investors. Currently, the Central Bank of the Russian Federation reports that more than 3,800 such escrow accounts have already been opened with seven banks. In addition, Sberbank has already opened more than three thousand escrow accounts for transactions totaling more than 300 billion rubles. (https://realty.ria.ru/20190701/1556072550.html, https://realty.ria.ru/20190701/1556074278.html).

3. Construction resumes on four of Moscow’s long-delayed building projects: Akadem Palace, Tsaritsyno, Terletsky Park, and Sky House
The resumption of main construction work on the Akadem Palace Residential Complex will be possible due to the appointment of JSC Mosotdelstroy No.1 as the prime contractor. It should be noted that no construction work has been carried out at this facility since July 2014. In order to resume construction, it is necessary to conduct a technical inspection of the residential complex. It also might be necessary to make changes to the design documentation, based on the results of the technical inspection. (https://www.mos.ru/news/item/57114073/)

In addition, Mosotdelstroy No.1 will complete the construction of two more residential complexes, Tsaritsyno and Terletsky Park, in connection with the bankruptcy of the previous developers (JSC Moscow Combine of Hleboproducts, and JSC Globinvestroy). The rights to these works in progress, as well as to the land plots, have been transferred to Moseotdelstroy No.1. (https://realty.interfax.ru/ru/news/articles/106614/, https://realty.interfax.ru/ru/news/articles/106913/)
One of the largest Russian developers, Capital Group, is responsible for the completion of the construction of the Sky House Residential Complex. Work on this construction site was halted in 2018 due to the bankruptcy of the developer Oltair LLC. (https://www.vedomosti.ru/realty/news/2019/06/28/805311-capital-group-dostroit-dolgostroi-tsentre-moskvi).

4. LSR Group decreases its stake in the ZiL redevelopment project
The LSR Group has divested its 50% stake in the share capital of Razvitie LLC, which in 2015 acquired the right to develop the southern part of the territory of the former Likhachev Plant (ZiL). JSC Leader-Invest is now the sole owner of Razvitie LLC. This transaction was necessary for LSR use the funds from the sale of its stake in Razvitie to expand its development portfolio in Moscow, including new projects. LSR still remains one of the largest participants in redevelopment of the ZiL property, notwithstanding the above-mentioned transaction. (https://www.lsrgroup.ru/pressroom/novosti/2019/gruppa-lsr-izmenyaet-obem-uchastiya-v-redevelopmente-zila.html).

5. DOM.RF to launch a project finance aggregator
DOM.RF operates in the implementation of national housing policy in Russia. The company's activities include facilitating mortgage loan financing, the provision of state-owned land plots for residential construction projects, financing of developers, contribution to the growth of the institutional rental housing market, and monitoring of the housing market.
DOM.RF plans in the near future to start a financing design aggregator by which builders can send a package of documents for express-analysis simultaneously by multiple banks and receive preliminary financing terms and conditions from them. In addition to this aggregator, the DOM.RF plans to launch a service, by the end of 2019, which will assess the risks of housing construction projects. (https://дом.рф/media/news/dom-rf-zapustit-servis-po-otsenke-riskov-proektov-zhilishchnogo-stroitelstva-i-agregator-proektnogo-finansirovaniya/).

6. Changes in cadastral procedures to take effect in September 2019
On 16 September 2019, Federal Law No. 150-FZ dated 17 June 2019 will come into force. It amends Federal Law No. 221-FZ of 24 July 2007, On Cadastral Activity, as well as Federal Law No. 218-FZ of 13 July 2015, On State Registration of Real Estate.
The list of land plots for which comprehensive cadastral procedures are not required has been expanded, to include, in particular, land plots that are the subject of an agreement for integrated land development for the construction of standard housing.

Another innovation in this law is the specification of complex cadastral procedures for some real estate objects, such as land plots occupied by public facilities or apartment buildings, and forest lands.

7. Determining the fees for public easements
On 4 June 2019, the Ministry of Economic Development of the Russian Federation approved methodological recommendations for determining the amount of payments for public easements on land plots that are owned not only by the public but also by private individuals. Clause 2 of these guidelines introduces the concept of "public easement fee," which means the difference between the market value of a land plot before the establishment of public easement and the market value after the establishment of this easement. In addition, these recommendations envisage what exactly should be taken into account when determining the fee for public easement (e.g. the permitted use of a land plot, limitations or encumbrances on the rights to a land plot, the degree of encumbrance of a land plot by a public easement), as well as the specifics of fee determination.

8. Unified register of “problem objects”
The official website of DOM.RF has published a unified register of “problem objects” in accordance with Federal Law No. 214-FZ of 30 September 2004. The register contains information about 802 developers, of which 453 are currently subject to bankruptcy proceedings. It also lists 274 developers that have violated the terms for the completion of construction for more than six months, as well as 91 developers that have violated the transfer terms for objects of shared construction for more than six months. In all, the unified register of problem objects contains 188,732 apartments in 77 regions. (https://realty.ria.ru/20190701/1556079421.html).

JUDICIAL PRACTICE

1. The ownership right to the real estate included in a privatization plan or a transfer act arises not from the moment of making a corresponding entry in the Unified State Register of Legal Entities, but from the moment of state registration in the Unified State Register of Legal Entities of a business entity created by transformation of a unitary enterprise.

The Supreme Court of the Russian Federation explained that this is because the privatization of state or municipal property involves a different effective date for the emergence of rights to real estate (clause 2 of Article 8.1 of the Civil Code, para. 2 of Article 217 of the Civil Code). Transformation of a unitary enterprise into a joint-stock company is one of the ways to privatize state property (subclause 1 of clause 1 of Article 13 of Federal Law No. 178-FZ of 21 December 2001).

2. The technical stage of reclamation of disturbed lands is always mandatory, regardless of the economic significance of that stage of reclamation.
In this connection, when determining the amount of compensation for losses in the form of the costs of restoration of soil quality of a contaminated land plot, it is necessary to take into account not only the costs associated with the biological stage of reclamation, but also the costs associated with the technical stage of reclamation. The Supreme Court of the Russian Federation cited Resolution No. 800 of the Government of the Russian Federation, of 7 October 2018, as well as State Standard No. 1521 of the USSR, of 30 March 1983, Nature Protection – Land - General Requirements for Land Reclamation. (Supreme Court of the Russian Federation, No. 306-ES18-23424, 6 June 2019).

3. Immovable property, as well as the land plot formed for the operation of existing immovable property may be used in accordance with the actual type of permitted use, even if it is not provided for by amended town planning regulations.
The Supreme Court of the Russian Federation held that this is possible when the use of such immovable property does not create a threat to human life or health, the environment, or cultural heritage, citing Part 8 of Article 36 of the Urban Planning Code of the Russian Federation. (Supreme Court of the Russian Federation, No. 301-KG18-25680, 3 June 2019).

4. A lease agreement for a non-residential building may be terminated prematurely in the event of the lessor's failure to perform the obligation of capital repair, regardless of the tenant's right to carry out reconstruction (Paragraph 1 of Article 616 of the Civil Code).

The Judicial Chamber on Economic Disputes of the Supreme Court explained that under the legal definition of the concept of "reconstruction," as contained in Paragraph 14 of Article 1 of the Civil Code, the right of a lessee to carry out reconstruction should not extend to become an obligation to make major repairs, such as the replacement of roofing, repair of facades, and changes to engineering systems. (Supreme Court of the Russian Federation, No. 305-ES18-11964, 21 May 2019).

5. The information contained in the Unified State Register does not have priority over the information in the State Forestry Register when the land plot, the rights to which arose after 1 January 2016, is attributed to another category of land, in the absence of evidence of transfer of the land to another category.
The Judicial Chamber on Economic Disputes of the Supreme Court of the Russian Federation noted that cadastral procedures where the forest management was carried out should not be completed without taking into account the forest inventory documentation. (Supreme Court of the Russian Federation, No. 307-ES19-2293, 13 June 2019).

6. The amount of rent for a land plot that is limited in circulation and is publicly owned, on which the real estate object is located, must not exceed the amount of land tax calculated for a land plot located in the same municipality and used for similar purposes, and which is not limited in circulation.
The Supreme Court cited Paragraph 8 of the Basic Principles for Determining the Rent for Lease of Land Plots Owned by the State or a Municipality. (Supreme Court of the Russian Federation, No. 305-ES19-4399, 24 June 2019).

7. An additional agreement to change a term for the transfer of a real estate object to a shareholder, signed after the developer violates that term, is not a basis for releasing the developer from the obligation to pay a penalty for the violation.
The Supreme Court held that the penalty may run from the completion date of the construction, as stipulated by the agreement, to the date of the conclusion of the agreement that changes the term. This is due to the fact that the agreement change the transfer terms changes the obligations of the parties only for the future (citing Paragraph 3 of Article 6 of Federal Law No. 214-FZ of 30 December 2004 and Paragraph 3 of Article 453 of the Civil Code). Therefore, the agreement is not a basis to exempt the developer from liability for breach of the obligation. (Supreme Court of the Russian Federation, No. 41-KG19-12, 14 May 2019).

PENDING LEGISLATION

Bill No. 728232-7, On the Protection of the Interests of Citizens from Real Estate Frauds.

The bill, which was introduced by deputies of the State Duma of the Russian Federation, proposes amendments to the Federal Law No. 218-FZ of 13 July 2015, On State Registration of Real Estate. The purpose of the bill is to protect citizens from new fraudulent actions to acquire other people's real estate, carried out with the help of an electronic signature key that was obtained illegally.

The authors of this draft law propose to establish that the submission of an electronic application for alienation of a real estate object (i.e., a transfer or other termination of rights to the real estate object) will be permitted by an individual, as well as by his or her legal representative, only when there is a special record in the Unified State Register authorizing such an electronic submission. In the absence of such an entry, the application will be returned to the applicant without being considered. It is assumed that when submitting an application to the Unified State Register, individuals should be aware of the consequences of submitting an application in electronic form with the use of an enhanced qualified electronic signature. This draft law is currently under consideration by the State Duma.

Draft law on the possibility of withdrawing a land plot for violation of fire safety requirements.

The Ministry of Economic Development of the Russian Federation, pursuant to Paragraph 3e of the Decree of the President of the Russian Federation, No. 198 of 26 April 2019, drafted legislation to amend several Federal laws, including the Land Code of the Russian Federation.
Under the proposed law, when there is a failure to eliminate violations of fire safety requirements within a prescribed period, the land may be seizure from the owners, along with an involuntary termination of rights of permanent (indefinite) use, lifetime inherited possession, free use, and to lease the land to another. This rule would not apply when the land plot is the subject of a mortgage, as well as in cases when bankruptcy proceedings are initiated against the owner of the land plot.

It should be noted that in case of a withdrawal of a land plot that is owned privately, it would be sold through a public auction, and its initial price would be the market value determined in accordance with the procedure established by the Federal Law On Valuation Activities in the Russian Federation. Money received from such a sale would be paid to the former owner of the land plot, less any money spent on the organization of public auctions and on cadastral proceedings.

Bill No. 719774-7, On the Extension of the “Dacha Amnesty” until 1 March 2020

The State Duma currently is considering another draft law to extend the "dacha amnesty," which has been developed by the Government of the Russian Federation, in addition to Bills Nos. 707989-7 and 644440-7. (See the fifth item in the Pending Legislation section of our Real Estate and Construction Newsletter No. 3, 2019).
The authors of the bill propose to extend the possibility of registration of rights to residential buildings, as well residential houses located on land plots provided for horticulture or cottage industry, in a simplified manner until 1 March 2020. There would be no requirement for notification of the planned construction, reconstruction, or completion of construction or reconstruction of the above facilities. It should be noted that the registration of rights to these facilities in a simplified manner is carried out regardless of the territorial zones in which these facilities are located.

Bill No. 673020-7, On the Provision of Cultural Heritage Sites to Federal Authorities

The bill proposes to expand the exhaustive list of entities to which an object of cultural heritage in state ownership may be provided for free use. In accordance with this draft law, the federal authorities will be provided, for free use, objects of cultural heritage that are owned by the state and included in the register. On 27 June 2019, the State Duma passed this bill on the third reading.

Amendments to Resolution No. 480 of the Government of the Russian Federation, 4 April 2019

The Ministry of Construction of the Russian Federation proposes to set 1 October 2019 as the last day when developers will be able to apply for an opinion on the degree of readiness of the object in order to continue the construction of facilities with the involvement of shareholders under equity participation agreements without using escrow accounts. It should be noted that from 1 July 2019 to 1 October 2019 the developers will be able to continue construction, but without attracting funds from the shareholders. This will allow them to bring the construction to at least 30% completion by the deadline.

Proposed legislation to prohibit the sale of data from the Unified State Register

A draft law, developed by the Ministry of Economic Development and Trade of the Russian Federation, proposes to establish administrative penalties for the unauthorized provision of data from the Unified State Register to third parties, including for payment, as well as for the creation and use of websites that are used in the distribution of such data. Officials, as well as individuals and legal entities, would be subject to fines for this administrative offense. In addition, repeated violators could have their commercial activities administratively suspended for up to 90 days.

Draft Order of the Ministry of Economic Development of the Russian Federation to increase the amount of payment for the provision of information from the Unified State Register

The fee for providing information from the Unified State Register will be increased.
For example, legal entities will have to pay from 2,250,000 rubles (for information about not more than 50,000 real estate objects) to 3,000,000 rubles (for information about not more than 100,000 real estate objects) for viewing the information contained in the Unified State Register during the year. Individuals will have to pay from 1,125,000 to 1,500,000 rubles for these same services. The fees for electronic documents containing Register data will range from 21,750,000 to 29,000,000 rubles for legal entities and from 10,875,000 to 14,500,000 rubles for individuals.

One of the objectives of this draft order is to combat the resale of information from the Unified State Register. The increase in the fee is due to the need to update the fee, which has not changed for several years.
In addition, the proposed changes are due to the large number of sites that provide information from the Unified State Register to third parties, acting as intermediaries. This initiative is likely to be driven by fiscal objectives, as the full payment for this information will now be payable to the federal budget.