Shared Construction: New Mandatory Security Instruments and Tighter Government Controls

07.02.2014

Legal Update No. 449, 6 February 2014

Goltsblat BLP advises that on 1 January 2014, amendments came into force to Federal Law No. 214, dated 30 December 2004, "On Shared Construction of Apartment Buildings and Other Properties and on Amendments to Certain Legislative Acts of the Russian Federation". 1 January 2014 was also the effective date of amendments to a number of other federal laws relating to shared construction.

1. Bank surety or developer liability insurance as new mandatory security instruments

Federal Law No. 294-FZ dated 30 December 2012 "On Amendments to Certain Legislative Acts of the Russian Federation", as amended by Federal Laws No. 249-FZ dated 23 July 2013 and No. 420-FZ dated 28 December 2013 (hereinafter the "Federal Law of 30 December 2012") with most of its provisions not taking effect until a year after its publication, i.e., from 1 January 2014, sets additional security requirements for developers.

In addition to a pledge, the developer is now required to provide either of the below instruments as additional security for its obligations to transfer residential premises to a shared construction participant:

(a) bank surety (for a term of at least 2 years from the residential premises transfer date set in the shared construction agreement), or

(b) third party liability insurance, either by (i) participating in a developers' mutual third party liability insurance society or (ii) signing a third party liability insurance contract with an insurance company.

There is now an absolute requirement for the developer to submit a surety contract with a bank or a third party liability insurance contract to the registration authority for state registration of shared construction agreements. Moreover, unless they have such contracts developers will not be able to have their construction permits extended.

Mutual third-party liability insurance for developers should be provided by a mutual insurance society set up by the developers themselves.

The Federal Law of 30 December 2012 sets out mandatory requirements for banks issuing sureties, for insurance companies, for developers' mutual liability insurance societies and for developers acting as founding members of such societies.

2. Tighter government controls

Federal Law No. 414-FZ dated 28 December 2013 "On Amendments to Certain Legislative Acts of the Russian Federation relating to Protection of Rights and Legitimate Interests of Individuals Providing Funds for Constructing Apartment Buildings and/or Other Properties" specifies and broadens the powers of the supervising authority in this sphere.

The supervising authority can now carry out both routine annual and unscheduled inspections of developers, including in response to applications by individuals or simply on the basis of media coverage, including the Internet. It is prohibited to notify a developer in advance of any unscheduled inspection.

The Law entitles the supervising authority to ask the courts to suspend a developer's operations temporarily or to put the developer into liquidation if "the developer has repeatedly or grossly violated the requirements of this Federal Law or of the regulatory acts adopted in pursuance hereof, as well as in other cases listed in federal laws".

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