Legal Highlights: The Russian commercial real estate market. Recent legislative changes worth taking a look at. Svetlana Savina and Dmitry Maltsev for The Moscow Times

08.09.2016

Way back in 2015, considerable changes in civil and land legislation promised to have an extensive impact on the real estate market by simplifying transactions and making it possible to govern them by Russian law (instead of English law, often chosen for its flexibility and mechanisms unknown to its Russian counterpart), as well as improving the transparency of public land acquisitions for construction purposes. Another wave of legislative amendments in June 2016 further improved legal procedures and made the real estate market more transparent and streamlined for both new development projects and transactions with completed properties and investments.

In this article, we assess the first practical results of the 2015 legislative modifications and outline the effect the latest legislative changes might have on the market.

Civil Legislation Reform

A major reform of civil legislation was announced in 2012. Most of the changes were introduced by June 2015, so we are now in a position to observe how they are working in practice.  

It may be argued that Russian contract law has become more familiar with English law concepts, which were widely used on the market during the last decade. The most important changes included introduction of warranties and indemnities into Russian contract law. In the current version of the Civil Code, these are called “assurance of facts” and “indemnification of material losses,” respectively.  

Assurance of facts is given by a party in order to give guarantees to the other party (of quality, title, good standing, etc.). Breach of such assurances empowers the injured party to claim damages and penalties and, in certain cases, to terminate the agreement. Under an indemnification clause, one party undertakes to indemnify the other party against claims from third parties. The Supreme Court has already provided certain explanations on using these tools in line with market practice.

A number of other changes have already been tested in practice. For instance, independent guarantees, similar to English law corporate guarantees, have come into use. However, another 2015 innovation in Russian legislation, escrow accounts, is still not the same, in practice, as those to which we are accustomed in foreign jurisdictions. Actual use of the new rules for notarization, shareholders’ agreements, issue of powers of attorney, their term and recall, and some other changes are only now taking shape. So far, investors have only noticed that the paperwork has increased somewhat but we can rely on positive ramifications in the future, such as better transparency and fewer causes for dispute. In our view, it will take another three to five years for court practice to catch up and to give us a clear view of how the new provisions work in practice. 

Changes to the Land, City-Planning and Construction Legislation

Fairly recently, on March 1, 2015, several land legislation amendments came into effect, including ones governing allocation of public land plots. In June 2016, again, a handful of federal laws was enacted that broadly change the land and urban development legislation and alter certain provisions on construction and requirements on construction participants.

One of the innovations is the concept of comprehensive territory development, which should allow more productive use to be made of sites not used for their intended purpose or whose continuing use is infeasible, such as industrial zones. A comprehensive territory development contract with a developer may be initiated by a local body by auction or by the holder of the rights to the land plot within such a zone without an auction. Notably, the developer concluding such a contract will be able to obtain approved territory development plans and draft boundary surveys more rapidly and without public hearings and will be entitled to obtain land plots for developing infrastructure facilities without going through a tender process. A simplified procedure has been introduced for compulsory purchase of land plots whenever territory development plans provide for infrastructure facilities to be sited on them (after compulsory purchase, such land plots may be handed over to the developer without any bidding process). The changes come into effect in 2017 and many developers that are willing to develop whole territories expect numerous new opportunities to open up thanks to this new instrument.

 

Another innovation is the new status of the Land Plot Development Plan (GPZU), which is an essential document for obtaining a construction permit. Currently, it is a territory development document, but its status will change to make it essentially a reference statement containing information on construction parameters fixed in other town planning documents.

 

The very construction process is to change. Re-usable design documentation and modified design documentation, i.e., where changes do not affect safety, come in as early as  September 1, 2016. No additional expert review is required for using such documentation (subject to the statutory conditions). A Unified State Register of Expert Review Opinions on design documents is expected to be launched. New rules are being introduced for estimating the cost in urban development operations and the federal public register of costing standards.

A considerable number of changes relate to self-regulation in construction. With few exceptions, membership in a self-regulating organization is now obligatory for technical customers, while their functions are now determined more clearly. It will be impossible to shuffle on to the technical customer the developer’s obligation to pay compensation for any damage caused by the development; the developer will, however, be entitled to have recourse to the technical customer if the latter caused the damage. The status of and requirements on persons entitled to carry out an engineering survey, as well as construction, reconstruction and major overhaul, have been determined, including instances when self-regulatory organization membership is a requirement. After July 1, 2017, current certificates of admission will no longer be valid. In addition, requirements are introduced on individual professionals with special status: the project chief engineer who arranges engineering survey, the project chief engineer who arranges for construction and the project chief architect.

 

Other important changes are coming along with respect to the powers of government and local authorities to dispose of land, plus further deferment is granted with respect to adverse consequences of Moscow having no Land Use and Development Rules (such as a ban on the issuing of construction permits), i.e., the zoning document that was to be enacted by July 1, 2016, as per the previous version of the law. The new deadline is July 1, 2017.

What else?

Other changes are also in store. A Unified State Register of Real Estate will be launched to combine details on property attributes (the Real Estate Cadastre) and registered rights thereto, as well as certain transactions (Register of Real Estate Rights). Currently, two different registers are in place: the State Real Estate Cadastre (the Cadastre) and the Unified State Register of Real Estate Rights and Transactions (the Realty Register). Even so, the dual system of cadastral registration and rights registration will persist and the Unified State Register of Real Estate will not be merely the sum total of the two registers co-existing today. Looking forward, the Unified State Register of Real Estate might cover some other important information (e.g., about territorial zones, specially protected natural areas, shorelines, etc.), making such information more accessible, and thus gaining considerable practical importance.

New rules are also being introduced with respect to shared construction of apartment blocks (requirements on developers, a new model for raising funds by depositing them in escrow accounts, broader opportunities for using the funds raised). Though designed to provide better legal protection for individuals investing in shared construction, the law contains provisions both protecting the rights of investors and advancing the interests of developers and banks.

Other changes include altered concession legislation and parking lots becoming a separate real estate asset (which should be appraised by owners of multifunctional business centers and office buildings).

Prospects

As we can see, the recent changes are largely based on market and court practice developed over the previous decade. As a result of that evolutionary approach, the new regulations do not seem to have any negative effect on the market and are viewed as a positive sign by most market players

There is a clear tendency to give more contractual freedom to the parties, in conjunction with stricter and more transparent regulation of land development and construction rules. At the same time, the dollar-to-ruble rate is also of benefit to foreign investors. Investors may appreciate that it is now possible to create a Russian joint venture based on a Russian shareholders’ agreement. We are already seeing a rise in the number of Russian law transactions related to sale and purchase of immovable assets and, owing to continuing de-offshorization, one might anticipate that this option will become increasingly popular.

All these factors provide grounds for believing that future developers and investors will find themselves in a comfortable environment, which will boost the Russian real estate market.

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