Maksim Popov for AEB: Changes in land rental procedures – implications for business

12.01.2016

Since the early days of the Russian land reform, lease rights to a state or municipal land plot have been widespread as assets entitling the leaseholder to implement an investment project. There are a number of important factors behind this, i.e.:

  • The legislation has treated leasing as the pre-eminent method for managing public land, with sale and purchase be¬ing possible only in a very limited number of cases. A typical example is Moscow, where, until the end of the last decade, it was virtually prohibited to sell land plots even when expressly permitted by federal legislation.
  • The procedure for leasing out land plots was fairly simple and not subject to much regulation. Whether or not a land plot lease could be concluded depended largely on how good the relations were with the authorities.
  • Generally, there was no limit on the length of land leases, so long term leases, including for 49 years, could be concluded for building and then operating real estate projects. Moreover, the legislation secured the pre-emptive right to enter into a new lease.
  • It was a long time before the federal authorities finally ap¬proved the Land Plot Permitted Use Classifier. In the absence of land use and development rules, this meant that local authorities could include overly broad wordings in land plot leases, such as “for constructing an administrative and office, production and warehousing or shopping and entertainment centre”. Even if the recipient of the lease was not satisfied with how the permitted use was expressed, the wording could easily be amended by decision of the local authority.
  • Nor was it difficult to make lease assignments (i.e., lease SPAs). In many cases, assignments were even permitted without the landlords’ consent, provided the landlord was no¬tified.
  • Finally, public land rental rates were, as a rule, relatively low and the administrative liability for not using a land plot fairly lenient. All this meant that leased land plots could be held in abeyance for a buyer for a long time.

Consequently, there has always been an abundance of leased public land plots on the market, and the options considered by companies intending to implement an investment project quite frequently included not only the outright purchase of a publicly or privately owned land plot, but also the acquisition of the rights and obligations under a public land lease agreement.

On the other hand, over the last few years, there has been a clear tendency for public land plot lease rights to be divested of the features of an investment asset. This is a result of both legislative developments and court practice. Below we describe the most visible signs of this trend:

One of the first “alarm bells” was most certainly rung by Resolution No. 1756/13, dated 25 June 2013 of the Prae¬sidium of the Supreme Commercial Court of the Russian Federation, which substantially limits the ability to alter the type of permitted use of a public land plot for property construction purposes. The court is of the opinion that, in practice, the actual purpose of altering the type of permit¬ted use of a land plot from the operation of one facility to the construction of another is to circumvent the proce¬dures set forth in the legislation for allocating land plots for property construction, including competitive bidding for previously created land plots registered in the state real estate cadastre.

Then Federal Law No. 171-FL, dated 13 June 2014 “On Amend¬ments to the Russian Land Code and Certain Legislative Acts of the Russian Federation” (hereinafter “Law No. 171-FL”) was enacted, which mostly came into effect on 1 March 2015. Its two major developments are as follows:

Firstly, maximum lease terms were established for con¬structing or reconstructing buildings or structures. If a land plot is allocated without competitive bidding, the lease is concluded for 3 to 10 years, as the tenant wishes. The term of an auction-based lease is currently 1.5–9 years, with any pre-emptive right to renew the lease without competitive bidding being precluded. In a limited number of cases, this right is replaced by the ability to conclude a new lease for the land plot without competitive bidding. In any case, the term is far less than the previous 49-year leases, so you will no longer be able to “hold on to” an undeveloped land plot for long.

Secondly, in line with the position taken by the Supreme Com¬mercial Court of the Russian Federation, it has been clearly legislated that no changes to the permitted use of a land plot may be made in a publicly-owned land plot lease conclud¬ed by bidding (or if a bid is recognised as not having taken place). Even though the law does not expressly ban a change to the type of permitted use of a land plot leased out without competitive bidding, such a ban is obviously implied, since the very possibility of a land plot being leased without competitive bidding depends on the objectives specified in the law.

Then, in late 2014, the Land Plot Permitted Use Classifier, as approved by the Russian Ministry for Economic Development, took effect. This document is designed to limit the powers of local authorities to take decisions on setting land plot alloca¬tion objectives.

In March 2015, amendments were made to the Russian Code of Administrative Offences. These introduced considerably more stringent liability for failure to use a land plot intended for residential or other construction purposes. So now, in¬stead of symbolic fines, companies face having to pay from 3 to 5% of the land plot cadastral value but no less that RUR 400,000 (part 3, article 8.8 of the Code of Administrative Of¬fences). Given the constantly growing cadastral value of land plots, if a land plot is not developed but put on hold for a long time in anticipation of a buyer, this might now entail very significant financial losses or, in the worst case scenario, even forfeiture of the land plot.

Finally, since 1 June 2015, the new version of article 448 of the Civil Code of the Russian Federation has brought into question the very possibility of assigning lease rights to pub¬licly-owned land plots. The article stipulates that if, by law, leases may only be concluded through competitive bidding, winners may not assign their rights or novate the debt under the obligations arising from the lease. As we know, pursu¬ant to Law No. 171-FL, dated 1 March 2015, land plots for building commercially attractive real estate projects are to be allocated specifically by bidding, so the rights and obligations under leases concluded on this basis may not be assigned to third parties. On the other hand, clause 9, article 22 of the Land Code of the Russian Federation remains in effect, allow¬ing any long term lease for public land to be assigned. The conflict between the two codes will evidently be eliminated by judicial practice.

Summarising all these trends, we can say that federal leg¬islation and relevant court practice are currently designed to divest the lease rights to public land plots of their invest¬ment features. The lease of such land plots has a specific purpose and is individual in nature at this stage. In other words, leases are exclusively intended to ensure that the construction of the facility they specify is completed in due time by the land plot recipient. Should all these trends ma¬terialise, there would be a gradual but considerable drop in the number of transactions involving public land lease rights. Presumably, there would also be a proportionate rise in the number of acquisitions of corporate land tenants (“share deals”) and of more complex structures involving the termination of an existing lease, followed by the inves¬tor acquiring the land plot from the authorities in the usual manner.

http://www.aebrus.ru/upload/iblock/946/aeb-rem_17.12.2015.pdf  (p.25)

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