11. Real estate and construction

General

Real estate and construction matters in Russia are governed by a complex body of laws and regulations. Key legislation in this respect includes:
· The Civil Code;
· The Land Code;
· The Town Planning Code;
· The Forest Code;
· The Water Code;
· The Law on Mortgage;
· The Law on State Registration.
Real estate includes land plots, subsoil plots and everything that is firmly connected with land (i.e. objects that cannot be moved without incommensurate detriment to their purpose, including buildings, structures and incomplete construction facilities).

Rights to real estate

Russian law provides for two basic types of rights to immovable property:
· The ownership right; and
· The right of lease.

Public and private ownership rights

Real estate (including land plots) in the Russian Federation may be owned publicly or privately. In relation to land, we would like to outline a number of local specificities.
Public land ownership
Publicly-owned land means that the land is owned by the State (i.e. the Russian Federation or a region) or a municipality. Historically, substantial areas of land in Russia (particularly in the City of Moscow, which has regional rather than municipal status) have been, and remain, state-owned.
Public land plots may be privatised, subject to a number of statutory restrictions. For example, land plots falling within specially protected nature conservation areas (such as national parks) or areas required for defence (such as military aerodromes) may only be publicly-owned.
Private land ownership
Any legal entity or individual may own private land in the Russian Federation, subject to certain restrictions which regulate the legal status of the land plot.
Foreign nationals and legal entities enjoy the same rights to land plots as Russian individuals and legal entities. However, in respect of the ownership of land, foreign investors may not own:
· Land in certain border territories or other territories specifically designated in the Land Code or federal laws (such as, for instance, land located within the boundaries of sea ports); or
· Agricultural land. This rule also applies to Russian companies with a foreign participation of more than 50% in their charter capital; foreign investors may only lease agricultural land.
Easements
An easement (or servitude) may be established over a land plot which is owned by a third party. This grants the land user a variety of rights (including the right to build linear facilities such as cable lines and pole lines). The easement may be public or private.
The Land Code provides for a specific legal regime for public easements established in connection with the construction of linear objects (e.g. for the placement of utility infrastructure facilities, the storage of construction supplies, siting roads and railways into tunnels).
Under Russian law, it is possible to enter into an easement agreement not only with the owner of the land, but also with its legal holder (a tenant, a land user enjoying the right of free use, etc.).

Real estate transactions

Sale and purchase transactions
Cadastral and state registration
A publicly- or privately-owned land plot may be bought and sold provided that (i) it has undergone all cadastral registration formalities; and (ii) the title to the land plot has undergone state registration (save for non-delineated public lands that municipal authorities, or, in the case of Moscow and Saint Petersburg, regional authorities, can dispose of without state registration).
Both procedures require the submission of certain documents to the state registration authority (i.e. the Federal Service for State Registration, Cadastre and Cartography) or its regional/local departments (“Rosreestr”) (the “Registrar”). Documents can be submitted to the Registrar’s offices in any region of the Russian Federation regardless of the immovable property’s location.
There is one main information resource for cadastral registration and state registration of rights to immovable property, namely the Unified State Register of Immovable Property (the “State Register”) maintained by the Registrar in electronic form. The State Register contains information on both immovable property and the rights thereto. In particular, it includes: (i) a register of immovable property; (ii) a register of rights to, liens on and encumbrances over immovable property; (iii) a register of boundaries (e.g. the boundaries of the regions of the Russian Federation and municipalities, boundaries of use-restricted zones, territorial zones and other special territories); and (iv) registration files, cadastral maps and document journals.
Rights to buildings and structures in Russia are not effective until they are registered in the State Register. Such state registration is the only confirmation of the existence of the ownership right. Only a court decision may overrule state registration.
The main document confirming both state cadastral registration and state registration of rights to immovable property is an extract from the State Register.
Buildings on land plots
The Land Code prohibits the transfer of land without the buildings and structures standing on it. Ownership rights to a building may only be transferred together with the rights (be it ownership or lease rights) to the land plot underlying this building. In exceptional cases, title to parts of a building may be transferred separately from the land if it is impossible to separate the respective part of the land plot, or if there is a restriction on the acquisition of this land plot.
The Civil Code provides for a procedure to determine how the owner of a building uses another person’s land plot where this building is located. For example, such owner, in case it does not have the right to use the land plot by law or by an agreement concluded with the owner of the land plot, is entitled to use the relevant land plot to the extent necessary to ensure access to its building.
Owners of buildings located on a land plot other than their own also generally enjoy a pre-emptive right to purchase the land plot, or a preferential right to lease it. If a land plot is in state or municipal ownership, owners of buildings generally have exclusive rights to privatise the land plot.
Privatisation
If buildings, structures or industrial facilities are being privatised, the underlying land must also be privatised at the same time.
A building owner has pre-emptive rights to obtain ownership or lease rights to a publicly-owned land plot on which the owner’s building stands.
In case of ownership, the buyout price is determined by the authority owning the land. In any event, the price of such land plot must not exceed its cadastral value or any other price if so established by applicable law (except for cases when the land plot is to be sold through an auction).
Sale and purchase agreement
General
Certain conditions of a real estate sale-purchase transaction are deemed material and must be clearly determined in a sale and purchase agreement, such as the subject matter (i.e. the land plot or building/structure/premises) and the price. In addition, parties to an agreement are entitled to set out their own list of supplemental contractual provisions that they consider to be material to the transaction. The material contractual conditions must be recorded and reflected in the State Register.
If a sale and purchase agreement does not provide the material terms and conditions, it is deemed not to have been concluded. This means that (i) the purchaser does not acquire the ownership right to the land plot or real estate; and (ii) the land plot or real estate must be vacated and returned to its owner in its original state and the sale price returned to the purchaser. These consequences arise only if a court declares the sale and purchase agreement as not having been concluded.
Purchase of future property
Sale and purchase agreements in relation to future property are also considered valid, but the buyer’s title to the property only arises after its commissioning and the subsequent registration of the seller’s title.
Allocation of land for construction
Where the main type of permitted use is construction, publicly-owned land may only be granted on lease, unless exceptions apply.
Registration of transfer of title
The transfer of ownership title to real estate must be registered in the State Register. The sale and purchase agreement itself does not have to be registered but merely submitted and examined as part of the registration process.
As a general rule, after seven working days from the application date, the ownership title to the real estate can be state registered.
The ownership title to immovable property is deemed to legally exist on the date of state registration.
Any person acting in good faith may rely on any record made in the State Register. Where a person incurs losses as a result of illegal or incorrect data having been entered into the State Register due to a fault of the Registrar, that person is entitled to claim compensation from the federal budget.
If parties to a sale and purchase agreement choose to conclude it before a notary (they are not obliged to do so unless the transaction relates to shares in a co-owned property), the notary must check the validity of the transaction and also deals with registration formalities with the Registrar unless the parties have agreed otherwise. In this case, the state registration of the real estate rights takes three working days (or one working day if the documents are submitted by the notary in electronic form).
It is possible to submit an application and the documents required for the state registration of rights in electronic form, through special e-services of the Registrar.
Any person may request general information about real estate (such as the owner or registered encumbrances) in the form of an extract from the State Register in paper or electronic format. However, personal data, information relating to the content of the documents based on which the title has been created, and the properties owned by a certain individual or legal entity, may only be requested by the owner of the relevant property or a notary.
Although, it is generally required to register most of the existing encumbrances, certain types of encumbrances (protective zones of cable lines and gas transmission lines, sanitary protection zones, etc.) are still not always recorded in the State Register. For this reason, it is highly advisable not only to review the documents kept by the Registrar (e.g. the extracts from the State Register), but also to conduct onsite investigations and legal due diligence of the land plot and any properties located on it.

Leases

Land leases
The following persons may (subject to certain restrictions) lease a land plot: (i) Russian and foreign individuals; and (ii) Russian and foreign legal entities.
In practice, in the case of lease of public land, the land lease agreement will contain general provisions dictated by the landlord. As such provisions come from legal acts adopted by the relevant municipal or state body, there is little scope for negotiating any amendments. The conclusion of the lease will also generally presuppose a tender process (subject to certain exceptions).
A lease agreement in respect of a privately-owned land plot may include any provisions provided they do not contradict the mandatory requirements of Russian law.
Material conditions of the lease, such as the subject matter (i.e. the land plot itself) and amount of the rent, must be clearly determined in the lease agreement.
If a lease agreement does not meet the above requirements, it is deemed not to have been concluded. If this occurs, the land plot must be vacated and returned to its owner, and any rent already paid to the landlord must be returned to the tenant save for the amounts due from the tenant for actual use of the land plot.
Term
Russian legislation does not impose any general limit on the term of a lease of a privately-owned land plot.
The maximum lease period for a publicly-owned land plot is 49 years. In addition, certain limits exist on leases of specific types of land. For example, the maximum permitted term for a lease of agricultural land or forest land is also 49 years. The maximum permitted term for a lease of coastal land is 20 years.
The Land Code sets maximum terms for more than 20 types of leases in respect of publicly-owned land plots. For example, a lease agreement for a land plot required for the construction of buildings and structures may be concluded for a term of three to ten years, a lease agreement of a land plot on which an incomplete construction facility is located – for a term of up to three years so as to complete the construction of such facility.
Any lease agreement concluded for a term exceeding one year is subject to registration in the State Register. In the absence of the state registration, the lease agreement is deemed binding upon its parties, but remains unenforceable against third parties (i.e. anyone except the tenant and the landlord). In such cases, the tenant forfeits its preferential right to renew the lease agreement. In the event of a sale, a new owner of the land plot may claim termination of such long-term lease agreement which has not been duly registered.
The Civil Code provides that, where a lease agreement does not specify the lease term, then it is deemed concluded for an indefinite term. In such cases, the lease may be terminated simply by either party serving a termination notice to the other party at least three months before the intended date of termination.
Upon expiry of the lease, a tenant has a preferential right to conclude a lease of the same land plot for a new term by operation of law. However, the lease agreement may expressly exclude this preferential right.
If the tenant continues to use the land plot after the expiry of the lease term and the landlord does not object, the lease will be considered to be renewed on the same conditions for an indefinite term and may be terminated at any time by either party serving a termination notice three months in advance.
The abovementioned preferential right of the tenant is excluded by law for publicly-owned land plots leased for the construction of buildings and structures.
Sublease and Assignment
It is generally permitted (subject to certain restrictions) to sublease, assign, mortgage or contribute lease rights to a land plot to the charter capital of a company. Unless otherwise provided for in the land lease agreement, sublease, assignment and mortgage agreements may be entered into without the landlord’s consent (but subject to a subsequent notification by the tenant). In any event, there is a number of circumstances when the tenant’s right to sublease or mortgage a land plot, or assign lease rights, may not be waived or restricted (e.g. in case of lease of public land for more than five years).
Termination
The Civil Code grants both a landlord and a tenant the right to terminate the lease unilaterally, either in the limited number of circumstances stipulated by the Civil Code (via court procedure) or as expressly agreed in the lease agreement itself. In the latter case, both in-court and out-of-court procedures may be used.
The Land Code stipulates additional circumstances in which a landlord may terminate a lease. These include, among others, use of the land in a way that is inconsistent with its category and permitted use, and appropriation by the state.
In relation to state or municipal land, the Land Code also grants a landlord the specific ground for early termination of a lease concluded for a term of more than five years. If a tenant commits a material breach of the terms and conditions of such lease agreement, the landlord may apply for a court order enabling it to unilaterally terminate the lease early.
Commercial leases of buildings, structures and premises
Long-term lease (the “LTL”)
An LTL is a lease agreement which lasts for one year and more. An LTL is considered as fully enforceable against third parties only upon state registration in the State Register. Either party to the LTL can apply to the Registrar and submit the LTL for registration. During the registration procedure, the Registrar will examine the validity of the LTL. Material conditions of any lease should, therefore, be clearly determined, including the subject matter of the LTL (i.e. building, premises or structure) and the amount of rent or the rent calculation method.
Short-term lease (the “STL”)
An STL is a lease agreement executed for a period of less than one year (usually 11 months or 364 days). As the term of an STL is less than one year, it does not require state registration. It, therefore, only needs the signatures of the parties to be binding and effective.
Lease for future property
It is possible to lease out a future property, i.e. a building or facility under construction, or a building, facility or land plot an ownership title to which has not been registered yet.
Lease agreements for future property are considered valid, but the tenant’s lease rights to the property only arise after completion of the construction and the subsequent registration of the landlord’s title over it.

Mortgages

Creating a mortgage
Both ownership and lease rights to land and buildings may be mortgaged; there are no restrictions against this in either the Land Code or the Civil Code. Rights to buildings and parts of buildings may also be mortgaged.
The terms and conditions of mortgages are governed by the Law on Mortgage, which requires mortgages over the completed buildings and the underlying land plot be granted simultaneously.
A security interest over a land plot or other property is generally created by the parties entering into an express mortgage agreement. However, a mortgage may arise by operation of law (for example, a bank giving a loan to buy a property will become a mortgagee until the sale price is repaid in full).
A mortgage agreement must be drafted as a single contract and signed by both parties who may choose to do so before a notary. Any mortgage agreement except for a mortgage over the lease rights under non-registerable STLs must be further submitted to the Registrar. Mortgages as encumbrances over real estate need to be state registered based on a mortgage agreement.
The Law on State Registration sets out the time period within which the Registrar must complete the registration formalities. For a mortgage of a land plot and non-residential property under a notarised agreement, the time period is three working days from the date of submission of the application to the Registrar (or one working day if the documents are submitted in electronic form) or five working days if the set of documents is submitted through a special multifunctional centre. For mortgages of land plots and non-residential property under a simple agreement, the time period is seven working days (if the application is made directly to the Registrar) or nine working days (if the application is made via a multifunctional centre).
Enforcing a mortgage
If a significant breach of a secured obligation occurs, the mortgagee may enforce the mortgage. There are two methods of enforcement: (i) through the courts; or (ii) through an out-of-court enforcement procedure (provided that the possibility of the out-of-court procedure is prescribed for in the mortgage agreement or a separate agreement between the mortgagee and the mortgagor).
Russian legislation provides for the following options when the mortgagee is enforcing the mortgage:
· Appropriation of the mortgaged property by the mortgagee or sale of the mortgaged property by the mortgagee to a third party; or
· Sale at an auction.
In a number of cases, the use of the out-of-court enforcement procedure is prohibited (for instance: if the first and second ranking mortgages provide for different types of enforcement procedures or if the mortgage secures different obligations in favour of co-mortgagees).

Planning and construction issues

Different land categories and types of permitted use are assigned to land plots in order to optimise their utilisation.
Land categories
Land in Russia is divided into seven land categories (each with a designated prescribed use):
· Agricultural land;
· Land of settlement;
· Industrial land (for the purposes of industry, energy production, transport, communication, television, radio broadcasting, cosmic activities, defence and other special purposes);
· Land containing specially protected areas and objects (e.g. nature parks);
· Forest land;
· Land near water; and
· Reserved land.
Specific regulations may apply, depending on the land category. For example, when agricultural land is being sold, Russian regions enjoy pre-emptive rights of purchase, as do municipal authorities, in the situations provided for by the relevant regional legislation. As mentioned above, foreign investors (including companies and individuals) are not allowed to own agricultural land, but may only obtain lease rights. Agricultural land that is not used in accordance with its designated prescribed use may be expropriated from its owner under a court decision.
Essentially, the most suitable categories for development and commercial construction are industrial land and land of settlement. It is possible to build warehouses, commercial buildings and production facilities on the land plots within these categories provided that the type of the land’s permitted use allows it.
Permitted use of land
Each land category has different conditions for the use of land, and the Land Code requires that each plot be used only in accordance with the applicable category and established type of permitted use.
A type of permitted use of a land plot may only be determined in strict compliance with the classifier of types of permitted land use which provides for an exhaustive list of the types of permitted use.
The main type of permitted use of a land plot is deemed to be selected in relation to such a land plot from the date of entering information about the corresponding type of permitted use in the State Register.
Change of land category and permitted use
Land category
It is possible to change the category of a particular land plot. For example, regional authorities may change a land plot’s category from “agricultural” to “industrial” (e.g. for the allocation of a warehouse complex) subject to a number of obligatory procedures. A land plot may be assigned to the category of land of settlement only when it is annexed to the territory of a certain settlement (included in the borders of that settlement).
Changing the category of forest land or land near water is more complicated (as it involves federal authorities) and is strictly regulated. Legislation provides an exhaustive list of circumstances allowing a change of category in these cases.
Permitted use
The owner of a land plot may change the type of permitted use at its own discretion according to the adopted town planning documentation (general plan of the settlement and rules of land use and development).
Town planning framework
The Town Planning Code stipulates that each urban settlement must adopt its town planning documents, including: (i) regional and municipal territory planning documents that establish the boundaries of various development zones in large territories; (ii) city general plans that set out the boundaries of various functional development zones within individual urban settlements; and (iii) rules for land use and development that establish territorial zoning and describe in detail what may be done in each territorial zone of each urban settlement. The town planning documents establish territorial and functional zoning of the settlement territories and indicate existing town planning limitations, such as “red lines” and protection zones. Construction planned for any new development must comply with the prescribed town planning limitations and zoning. For example, the construction of a large shopping mall in a recreational zone would not be permitted.
Another important document in respect of a particular land plot is the land plot development plan (“GPZU”). This document contains all information on the land plot which is relevant for construction: the type of permitted use, boundaries, minimum offsets from the boundaries, technical conditions for connection to engineering communications, etc. The land plot development plan is one of the mandatory documents that must be submitted in order to obtain the construction permit.

Construction

The construction process in Russia involves various key parties:
· A client (“zastroyshchik”) – the entity who wants to build a property for itself or for its subsequent sale or lease;
· A technical customer (“tekhnicheskiy zakazchik”) – a special professional company engaged by the client to supervise and manage the construction of the property;
· A general designer (“generalniy proektirovshchik”) who develops the design documentation;
· A contractor (“podryadchik”) or general contractor (“generalniy podryadchik”) who performs the construction works for the client, either by itself or through subcontractors; and
· Various specialised engineering entities that carry out surveys required for the construction.
The client must have rights to the land plot (ownership or lease) where construction is envisaged.
Since the majority of land in Russia is still state-owned, before commencing any construction project, it is important to assess the issues of the land acquisition and obtaining authorisations and permits required for construction on it from various state authorities.
Acquisition of public land for construction
The Land Code stipulates a specific procedure for making publicly-owned land available to individuals and legal entities for construction purposes. Both Russian and foreign individuals or legal entities interested in obtaining land for construction may apply to the relevant authority for the allocation of a land plot. Any refusal to allocate land may be challenged in court (subject to certain restrictions).
Under the Land Code, there is a two-step approach to the provision of land which involves firstly, the planning of territory use, and secondly, the allocation of the land plot in accordance with the designated use.
As a general rule, where the main type of permitted use is construction, a land plot may only be granted for lease. However, in certain circumstances, land plots may be sold through an auction (e.g. for farming purposes) or without a tendering process.
Under the Land Code, there are more than 40 special grounds under which it is possible to lease a land plot without a tendering process (e.g. where an interested party is a legal entity that is responsible for the construction of power, heat, gas or water supply utilities or for implementation of a major investment project).
An interested party may itself initiate an auction. In this case, it is responsible for carrying out all the preparatory works required for formation of the publicly-owned target land plot.
Construction permits
Any construction activity may only be performed on the basis of authorisations and permits issued by state authorities unless an exception applies. The list of such permits and authorisations may differ depending on the type of property to be constructed.
A construction permit must be obtained prior to the commencement of any construction works. This is a formal document that confirms that the design documentation meets the compulsory requirements of applicable law.
Construction permits are issued only in the following cases: (i) the applicant has valid rights to the land plot; (ii) the applicant has received a positive (state or non-state) expert opinion on the design documentation (if applicable); and (iii) there are no contradictions between the documents on rights to the land plot, the design documentation and the land plot development plan.
A holder of rights to the land plot (acting as the client in the construction process) or a technical customer (engaged by the client and acting as its agent) may obtain a construction permit.
A construction permit contains a number of essential elements such as the time period for the construction works, the area of the constructed property and the name of the client. A valid construction permit is one of the documents required to commission the constructed property.
Commissioning
Property commissioning is the second most significant formal milestone in the construction process. Commissioning may be divided into two stages:
· Acceptance of the works performed by the contractor/subcontractors by the client; and
· Commissioning of the constructed property by the competent authorities.
The first stage is critical in respect of the contractual relationship with the contractor or general contractor. Following the acceptance of the works, a contractor or general contractor is entitled to claim for payment for the works performed (the payment mechanism is usually determined in the construction agreement). The warranty period begins to run from the date of acceptance.
The second stage is crucial for the state registration of the property. During this stage, the state construction supervisory authority examines the compliance of the constructed property with the construction permit, the design documentation and the land plot development plan. If certain parameters (such as the total area, total structural volume, etc.) differ, the commissioning permit will not be issued, and it will be impossible to register the property in the State Register until the revealed deficiencies are fully eliminated.
The state cadastral registration of a newly-built building or structure is based on the application of the authority issuing the commissioning permit which must submit this application to the Registrar within five working days. For the purpose of the state registration of the ownership title to a newly-built building or structure, it is sufficient that a lease agreement for the land occupied by the property be effective as at the commissioning date.
Membership in self-regulatory organisations and licences
Legal entities providing the following construction and design activities must become members of self-regulated organisations (“SROs”) which authorise them to carry out certain activities:
· Designing buildings and structures;
· Constructing, reconstructing and carrying out major repairs of buildings and structures; and
· Engineering and surveying for the purposes of constructing buildings and structures.
With some exceptions, none of the survey, design and construction activities mentioned above are permitted without an SRO membership. Failure to comply with this requirement could result in criminal or administrative liability.
Both Russian and foreign legal entities may be members of an SRO. SRO membership fees depend on the type of activity and may be substantial.
In addition, some construction-related activities are still subject to licensing requirements. Examples of these activities include the installation of firefighting systems or the operation of some industrial facilities classified as posing fire or explosion hazards.