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).
There are some cases when the state registration of title to the land plot can be performed simultaneously with its cadastral registration (e.g. formation of a new land plot, provided certain conditions are met).
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.
Until fairly recently, there were two main information resources for cadastral registration and state registration of rights to immovable property, namely the State Cadastre of Immovable Property and the Unified State Register of Rights to Immovable Property and Transactions therewith. In practice this often resulted in the duplication and inconsistency of records made in these two independent systems. However, since 1 January 2017, these two systems were merged into a new information resource, i.e. 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 (as evidenced by an extract from the State Register) is the only confirmation of the existence of the ownership right. Only a court decision may overrule state registration.
Since 15 July 2016, ownership certificates, which used to be the main confirmation of state registration of the ownership right to immovable property, are no longer issued and fully replaced by extracts from the State Register.
Since 1 January 2017, cadastral extracts also no longer exist. Starting from this date, both state cadastral registration and state registration of rights to immovable property are evidenced by a sole 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.
Owners of buildings located on a land plot other than their own 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.
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
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 considered valid, but the buyer’s title to the property only arises after its commissioning and the subsequent registration of the seller’s title1.
In most cases, investment contracts in Russia are recognised as sale and purchase agreements in relation to future property.
In practice, this means that, when a project is structured around an investment contract, the investor is denied ownership rights if the property is under construction or it is actually completed but the developer has not registered ownership. The reason for this is that legally the real estate does not exist until it is registered. Although according to the current court practice there is no risk that an investment agreement will be considered as not having been concluded, an investor can only compel the developer to transfer the property once the developer has registered its own initial ownership to the property. Thus the investor is not able to register its ownership immediately after commissioning. Until such registration, the only option provided to the investor is to terminate the agreement and/or claim losses. This solution is far from desirable for investors. There are options for investors which can be tailored for each project and require expert contract drafting. These can include securing obligations via pledges, penalties and/or independent (including bank) guarantees and, for substantial real estate finance projects, using corporate mechanisms to take control over the developer.
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 (please see the Acquisition of public land for construction section).
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.
When the applicant is a Russian legal entity, the Registrar is obliged to request its constituent documents directly from the competent authorities as a part of the interagency information exchange system and, therefore, it is not obligatory to submit constituent documents.
The Registrar must immediately notify the individual or entity holding rights over immovable property of the state registration application having been filed in respect of its property. 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. However, rights to property which arose before Federal Law No. 122-FZ “On State Registration of Rights to Immovable Property and Transactions” came into force (in January 1998) are deemed valid even if they are not registered.
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. Since1 February 2019, the notary 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) and the notary is responsible for the validity of the transaction.
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. As this development is still fairly recent, the practice of paper-based registration still continues to be widely used.
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, 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.
Although, since 4 August 2018, it is generally required to register most of the existing encumbrances (please see the Zones with restricted use section), 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 to conduct onsite investigations and legal due diligence of the land plot and any properties located on it, and to review the documents kept by the Registrar (e.g. the extracts from the State Register).
Recent practice of state registration
The Law on State Registration (effective since 1 January 2017) provides for certain changes to the procedure of state registration of real estate. The main goal of these changes is to ensure better protection for state registration applicants, increase the liability of the Registrar and its officers and reduce the related investment risks.
However, despite some positive innovations, certain provisions of the Law on State Registration may adversely affect the real estate market players’ activities. For example, the Registrar now has more grounds to deny the state registration of rights. Formally, the Law on State Registration provides for a single ground for such denial – failure to eliminate reasons preventing the state registration of rights within the period (being for up to three months in most cases) for which the Registrar has suspended the state registration. However, at the same time there are currently 65 grounds allowing the Registrar to suspend the state registration. Quite a number of these grounds are controversial, in particular because an applicant has no control over some of them. As a result of the state registration reform, the number of potential grounds to deny state registration has increased from 30 to 65.
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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.
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 21 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 now be concluded for a term of three to ten years, a lease agreement of a land plot required for integrated urban development – for a term of three to five years. The maximum term of a lease agreement concluded for the purposes of placing linear facilities (e.g. power transmission lines, pipelines, railways, etc.) is 49 years. A 49-year maximum term will also apply to lease agreements to be entered into with owners of buildings located on publicly-owned land plots and to other public land lease agreements unless a specific maximum lease period is expressly provided by the Land Code.
Therefore, the impact of the lease term should be assessed before any material investments are made.
Any lease agreement concluded for a term of one year or more 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 to have been 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. Russian courts usually consider this provision of the Civil Code as a mandatory one. Therefore, courts are likely to strike down clauses providing for the automatic prolongation of a lease. In order to avoid this uncertainty, a lease should contain an undertaking by the parties to enter into a new lease for the same term and on the same conditions.
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 are 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).
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
Commercial lease sector
The commercial lease market is generally dominated by the private sector of the economy, what results into the legal relationships being heavily influenced by commercial needs, the return on investment and the level of yield.
The commercial lease sector (especially in Moscow, the Moscow Region, Saint Petersburg and other large Russian cities) is also affected by international practice in respect of rent and methods of rent calculation: so-called “net”, “double net” and “triple net” leases. A “triple net” lease (the most common type) is a lease where the tenant is obliged, in addition to the payment of the base rent, to compensate the landlord for all expenses associated with the leased property (including multitenant buildings) such as property taxes, insurance, utilities, and maintenance and operation costs. “Triple net” leases are usually used for long-term lease relations for large malls, business centres and warehouses due to their alleged positive impact on taxes, cash flow and other factors.
Structuring lease arrangements in respect of existing buildings, structures or 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.
An LTL can now be registered simultaneously with state cadastral registration of the leased premises based on their technical plans prepared by a duly qualified cadastral engineer.
The documents for the state registration of an LTL may now be submitted in electronic form.
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.
Structuring lease arrangements in respect of buildings, structures or premises under construction
As in the past it was absolutely impossible to lease future property under Russian law, market players developed the following two- or three-tiered legal structure:
- Preliminary Lease Agreement (the “PLA”);
- STL; and/or
Although now it is legally possible to enter into a lease agreement for future property, market players still widely use this lease structure (or its variations) in their operations.
When a building, or any other property, is under construction, and a potential tenant wishes to “mark out” the building, as well as particular premises within the building, and “fix” the amount of rent, it enters into a PLA with the prospective owner to regulate their pre-registration relationship.
Before the owner’s title to a building and the building itself are registered in the State Register, no lease rights in respect of the building or premises within it arising out of an LTL can be registered. The PLA, in its turn, sets out the parties’ undertaking to enter into the principal lease agreement in future and contains various pre-lease obligations (such as the time period for construction, the tenant’s requirements to fit-out works in the building and/or premises).
In order to be legally valid, the PLA must clearly determine its subject matter, sufficiently describe the property to which it relates, and establish all the material terms and conditions of the principal lease agreement to be entered into (the “Principal Agreement”).
Parties to a PLA should determine a time period within which they are obliged to enter into the Principal Agreement. If no time period is specified, the parties must enter into the Principal Agreement within one year from the date of execution of the PLA. If the parties fail to enter into the Principal Agreement within this time period, the PLA will terminate. However, if the failure to enter into the Principal Agreement was caused by one of the contractual parties, courts may force the defaulting party to enter into the Principal Agreement.
Principal Agreement – STL and LTL
The STL and/or the LTL are executed after the initial state registration of the landlord’s ownership title to the building/premises in the State Register. The STL, if one is signed, remains in effect and is subject to renewal until the LTL is duly state registered and becomes effective.
Lease for future property
It is possible to lease out a future property, e.g. 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.
Lease agreements for future property are becoming more and more popular in practice. The market players use them as an alternative to the two- or three-tiered legal scheme (PLA, STL and/or LTL).
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Real estate transactions and anti-monopoly control
As a general rule, real estate acquisitions and leases (land and/or buildings) are not subject to anti-monopoly control.
However, pre-transaction anti-monopoly control will apply to the acquisition and lease of production assets such as industrial-purpose structures, facilities of communal infrastructure if:
- their assets book value exceeds 20% of the book value of the fixed production and intangible assets of the seller or the landlord; and
- certain worldwide asset value or revenue thresholds of the relevant groups of companies are exceeded (please see the Anti-monopoly issues chapter).
Also, under Federal Law No. 381-FZ “On State Regulation of Trade Activities in the Russian Federation” dated 28 December 2009, food retailers with a market share in a given locality exceeding 25% are prohibited from acquiring or leasing additional outlets in that locality.
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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. Mortgage agreements concluded before 1 July 2014 only come into effect upon registration in the State Register, failing which they are null and void. Mortgage agreements concluded from 1 July 2014 no longer need to be state registered. They therefore come into effect upon signing. However, mortgages as encumbrances over real estate still need to be state registered based on a mortgage agreement.
Since 1 February 2019, the parties to a notarised mortgage agreement have two registration options:
- follow the general rule and let the notary submit a notarised application; or
- expressly agree to the contrary in the mortgage agreement and submit a joint application and a set of necessary documents to the Registrar themselves.
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).
The Law on Mortgage also sets out a procedure for the distribution of the proceeds received as a result of the enforcement of the mortgage. For example, for both the out-of-court and court enforcement procedures, the sale proceeds are distributed subject to the priority of claims between (i) all mortgagees that filed their claims; (ii) other creditors; and (iii) the mortgagor. Priority between the mortgagees who filed their claims would have to be determined on the basis of the entries in the State Register.
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