Real Estate Law

Both the Constitution of the Russian Federation and the Civil Code of the Russian Federation uphold the right to own private property. The Land Code of October 2001, and other legislation adopted as a follow-up to the Land Code, represent significant measures ensuring that this policy becomes a reality.

At the present time, land is still treated separately from buildings under Russian law.

Under current Russian law, investors have choices in terms of using, leasing, and owning property. In addition, Russia's recent economic growth has introduced new opportunities for investors interested in participating in the Russian real estate market. It is important to understand, however, that there are, for the moment, different regulations for land and for buildings.

Ownership of Land

The general principles of land ownership are set forth in the Constitution of the Russian Federation. Article 9 of the Constitution establishes the principle of private ownership of land but does not, however, stipulate the procedure for the transfer of land (which had historically been owned by the state) into private ownership.

The Land Code of October 2001 represented a significant reform, particularly because of the federal sanctions and encouragement that it gives to the creation of private ownership rights in land. Although fundamental terms and procedures of land use are determined in the Land Code, it provides that other federal laws will have to be adopted. The Land Code has limited applicability to agricultural land, as it is expressly provided that the circulation of such land is the subject of a separate federal law.

The possession, use, and disposal of land plots designated for agricultural use are regulated by the Federal Law No. 101-FZ On Circulation of Agricultural Lands of 24 July 2002 (the Circulation Law). Agricultural land plots may be held by right of ownership, perpetual (indefinite) use, lifelong inheritable possession, or free fixed-term use, and such plots may also be leased. Ownership of land plots in state or municipal ownership is to be awarded to individuals and legal entities, as a rule, through bidding by tender or auction. Such bidding may also be held during such land plots' lease when they are claimed by two or more potential lessees - the organization of such tenders or auctions being described in Article 38 of the Land Code. However, an important exception to this general rule exists until 1 January 2008: owners of existing buildings, facilities or structures located on land owned by a third party now enjoy the pre-emptive right to purchase or lease the land plot beneath such buildings.

Although there is no express provision permitting land ownership by foreigners, the Land Code may clearly be interpreted as allowing such ownership, except in cases where it is specifically prohibited. The rights to acquire land ownership rights under existing buildings or for construction are equally applicable to foreigners, subject to the following restrictions set out in the Land Code:

• The relevant rights must always be paid for and can never be granted free of charge; and
• Foreigners are specifically prohibited from owning land plots in border areas (a list of which is to be drawn up by the President), or in other special territories of the Russian Federation pursuant to other federal laws.
• Additionally, the President may establish a list of types of buildings and other structures to which pre-emptive buy-out or lease rights to land plots for foreigners may not apply. Pending the preparation of the Presidential list, the border restrictions apply to all border areas. Foreigners are also prohibited from owning agricultural land. The Circulation Law further specifies the rights to agricultural land that may be granted to foreign nationals and foreign legal entities (and stateless persons): those in this category may only lease agricultural land plots. This restriction on foreign legal entities also extends to Russian legal entities in which the equity participation of foreign nationals, foreign legal entities, and/or stateless persons exceeds 50%. Pursuant to recent amendments to the Federal Law On Mortgages (Real Property Pledges), it may now be possible for foreigners to mortgage certain categories of agricultural land. Mortgage rights do not, however, automatically entail ownership rights.

Under the Land Code, the rights to land now consist of ownership (by the state, municipalities, private individuals, and legal entities), perpetual or indefinite use, free fixed-term use, lease, lifelong inheritable possession, and easements. In the future, new rights of perpetual or indefinite use may only be granted to state and municipal institutions, federal treasury-owned enterprises, and state and local authorities.

The Land Code sets out detailed procedures for acquiring rights over federally or municipally owned land which is intended for new construction. In particular, the Land Code distinguishes two scenarios. Under the first, a land plot must first have been "prepared" for sale or lease: its boundaries defined, a cadastral number (a special number assigned to land plots indicating their area, location, type category, etc.) assigned, and technical conditions for connection to utilities determined. In such cases, the Land Code provides either for acquisition of land directly into private ownership, or for lease.

The second scenario for the allocation of land for construction purposes is to be used when a new project will require a thorough investigation of ecological, sanitary, architectural and other issues, and a specific request for land rights from an investor. This may also involve the investigation of public opinion regarding construction in the area. The land will be given to legal entities and individuals on lease only. For construction of religious buildings and structures, religious organizations are granted with free-fixed term use for the period of such construction. Of particular interest to owners of existing buildings and structures is the option to privatize or to obtain land lease rights over the land plots on which their buildings are located when such land plots are owned by the state or a municipality. Owners of existing buildings, facilities or structures located on land owned by a third party now enjoy the pre-emptive right to purchase or lease the land plot beneath such buildings until 1 January 2008.

Ownership of Buildings

Current Russian legislation permits both Russian and foreign nationals and legal entities to own buildings. In general, the rules relating to the use, disposal, and sale of buildings are set forth in the Civil Code, which guarantees the freedom to sell, rent, and carry out other transactions with buildings. The process of the acquisition of buildings through privatization is also less complicated. In general, provided that the building in question was recorded on the balance sheet of a state enterprise at the time when it was privatized, the successor company has the right to own the building.

The authority in charge of the state registration of rights to real estate must issue an ownership certificate certifying the right of ownership of buildings and structures. In accordance with the Civil Code, rights to real estate arise after the state registration of such rights (except in the case where such rights have been obtained prior to the adoption of Federal Law No. 122-FZ On State Registration of Real Property Rights and Real Property Transactions of 21 July 1997, as amended (the Registration Law). In this case, the owner is not obliged to state register the rights unless it wishes to enter into any transaction related to the real estate object. Obtaining the relevant certificate is a fairly straightforward, although sometimes lengthy, process, as long as the private company seeking to obtain such certificate can clearly demonstrate that the buildings in question were purchased or privatized in accordance with the prescribed procedures. Before an ownership certificate is issued, the local real estate inventory body, which is called in many regions of Russia the Bureau of Technical Inventory ("BTI"), must carry out a detailed assessment of the building and produce an updated BTI "technical passport" in respect of it.

Leases

Foreign legal entities and individuals may be granted leases to either land or buildings. Such leases on state or municipally owned property are usually based on a standard local form. Although the Civil Code does not stipulate a statutory maximum length of time, the current practice is that such lease terms rarely exceed 49 years.

The level of rent payments for the majority of land leases granted by the state or municipalities is set by a general local decree.

Whether the lease concerns land or a building, the Land Code and Civil Code both provide a lessee with certain basic rights. When the property is transferred, it must be in the condition stipulated by the lease. Thereafter, unless the lease specifies otherwise, the lessor is liable for the repair of defects of the premises. If the lessor fails to carry out the necessary repairs, the lessee's options include compensation and the right to terminate the lease. A lessee that properly fulfills its obligations under the lease has a priority right of renewal at the end of the term. The renewal rights of a lessee under a land lease are to be treated in conjunction with the pre-emptive rights to purchase or lease the land plot that are granted to the owners of the existing buildings and structures.

Significantly, the provisions of the Civil Code, in so far as they apply to land leases, are supplemented by the Land Code in a number of areas. In particular, the Land Code sets forth a series of modified rights for land lessees. Their applicability will in part depend upon the precise drafting of a lease. For example, the presumption under Article 615 of the Civil Code that a lessee needs a lessor's consent to sublease, has been reversed for lessees of land. Of particular significance is the provision that lessees of state or municipally owned land under a lease with a term exceeding five years now have a free right to assign their rights, subject only to the delivery of a notice to the lessor. In other land leases, this rule will also apply (in contrast to the provisions for prior consent under Article 615(2) of the Civil Code). A notable improvement is also made in conveyancing procedures, with the new provision that the assignee of a land lease does not need to enter into a new land lease.

Both the lessor and the lessee may terminate the lease contract, but only with a court order. The Civil Code also suggests that the lease contract may provide for other termination opportunities. Additional protection is given to the lessees of residential premises. The Land Code contains new provisions that deal with the termination of land leases in conjunction with a court order. Presently the following will also constitute grounds for termination:

• Misuse of the land plot (a more stringent test than that under Article 619 of the Civil Code, which requires either substantial or repeated violations);
• Use of the land plot that results in a decline in fertility of agricultural land or, important for industrial users, a material deterioration in the environmental situation;
• Failure to correct a range of other intentional environmental violations of applicable land use regulations; and
• Failure to use the land plot for its designated purpose for a period in excess of three years.

Most leases must be state-registered to be valid, the only exception being leases of buildings, premises, and land plots for a period of less than one year.

State Registration of Rights to Immovable Property

As discussed above, the right to real estate arises only from its state registration, except for leases of less than one year. Current Russian legislation contains a specific procedure for the registration and identification of rights (title) to immovable property. In many cases, such registration is a prerequisite for the validity and enforceability of transactions involving immovable property.

According to the Registration Law, transactions involving immovable property (buildings, land, etc.) are also subject to state registration, and become effective and enforceable only upon such registration. The registration process is carried out by the registration authorities in the location of the immovable property. State registration of an immovable property right or an immovable property transaction takes one month. The Registration Law specifies the grounds for refusal or suspension of state registration. Refusal in state registration can be contested only through a court.

The registration authorities maintain the Unified State Register of Rights to and Transactions With Immovable Property (the "Register"), which indicates the history and the current status of the immovable property in question. This Register also records various encumbrances over immovable property, including leases and claims submitted to a court. The registration authorities issue a certificate in a prescribed form that certifies the rights to the immovable property. Information on state-registered transactions with immovable property is also included in the Register. Basic information on the right holder(s) and restrictions (encumbrances) of such rights is open to the public, and can be provided for a fee to any person submitting a written request within five business days after submission of an application to the registration authority.

Land plots are also required to undergo cadastral registration. The procedures and rules for the state cadastral registration of land are outlined in Federal Law No. 28-FZ On the State Land Cadastre, dated 2 January 2000 (the Land Cadastre Law), which came into force in July 2000.The state cadastral registration applies to all land plots located in the Russian Federation, regardless of the form of ownership, the designation, or the authorized use of the land plots. Under the Land Code, only land plots that have state cadastral registration can be the subject matter of a sale-purchase transaction. In practice, this applies to all transactions with land plots.

Classifications of Real Estate

Russian real estate is classified on the basis of its intended use (i.e. either for residential or non-residential purposes).The specific use should be identified in the lease, the certificate of ownership, or the act of permanent use, as well as in the BTI technical documentation.

It should be noted that all real estate construction requires state permits and approvals. The new Town Planning Code of 29 December 2004 as amended on 31 December 2005 (the Town Planning Code), prescribes at the federal level those documents to be prepared for construction, procedures for their approval, and the grounds for refusal of such construction.

Mortgage of Real Estate

Federal Law No. 102-FZ On Mortgage of Real Property of 16 July 1998 (the Mortgage Law), has been amended on many occasions following its coming into effect on 22 July 1998, most recently on 30 December 2004.The Mortgage Law significantly improves the potential of mortgages as an instrument for investments. It is important to note that buildings and structures can only be mortgaged together with the land plots on which such buildings and structures are located.

The concept of a mortgage under Russian law differs from that in common law jurisdictions. In the Russian Federation, a mortgagee cannot automatically acquire rights to the mortgaged property if default occurs under the secured obligation. In most cases, the mortgaged property must be sold at a public auction, with the proceeds then being used for repayment of the debt. There are two types of foreclosure on mortgaged property: judicial and extra-judicial. The parties may also enter into a contract for the transfer of the mortgaged property to the mortgagee to offset the secured obligation. However, such an agreement can be concluded only after the default has occurred under secured obligations.

At present, certification of a mortgage agreement by a Russian notary is no longer required, but state registration is mandatory, and in the absence of such state registration a mortgage agreement is null and void. A mortgage agreement enters into force from the date of its state registration.

According to the Mortgage Law, the following types of property can be subject to a mortgage:

• Land plots (with those exceptions stated in the Mortgage Law);
• Enterprises registered as real estate;
• Buildings, structures, and other immovable property that are used for business activities;
• Residential houses, apartments and parts thereof, consisting of one or several isolated rooms;
• Cottages, garages, and other structures for personal use;
• Aircraft, sea and river vessels; and
• A lessee's interest in leased real estate, which may be the subject of a "leasehold mortgage."

The terms and conditions of a mortgage may restrict the owner's or user's capability to dispose of the property, including its contribution to charter capital and/or lease to third parties. Therefore, confirmation of the absence or existence of a valid mortgage over the property is important. If there is a valid mortgage, the purchase can be effected only with the consent of the mortgagee. Even then, notwithstanding such consent, the mortgage will follow the immovable property unless and until the primary obligation secured by the mortgage is performed and the property is released from it.

The Mortgage Law as amended also introduced changes with respect to the extension of an existing mortgage on a newly constructed building. Currently, according to Article 65 as amended, the existing mortgage of a land plot is automatically extended to cover a building or a structure erected on a land plot by the mortgagor, unless otherwise provided by the mortgage agreement.