Commercial real estate in Russian Federation: overview

A Q&A guide to corporate real estate law in the Russian Federation.

The Q&A gives a high level overview of the corporate real estate market ; real estate investment structures, including REITs; title; tenure; sale of real estate; seller's liability; due diligence; warranties; real estate tax and mitigation, including VAT and stamp duty/transfer tax; climate change targets; restrictions on foreign ownership; real estate finance; commercial leases; and planning law.

To compare answers across jurisdictions, visit the Corporate Real Estate Country Q&A tool

This table is part of the global guide to corporate real estate. For a full list of jurisdictional Q&As visit www.practicallaw.com/realestate-guide.

Contents

The corporate real estate market

1. What have been the main trends in the real estate market in your jurisdiction over the last 12 months? What have been the most significant deals?

As the result of sanctions imposed by the US and EU on Russia's banking sector, there is practically no debt financing available for new developments, refinancing or acquisitions.

Retail and commercial leasing have been impacted by the sharp devaluation of the national currency against the US dollar and Euro. There are high vacancy rates in newly built retail and commercial properties.

The most significant deals included acquisitions of several established income generating class A office properties by institutional investors and investors already holding substantial portfolios.

There has been substantial development of sports infrastructure in preparation for the World Cup 2018 scheduled to take place in Russia.

 

Real estate investment

2. What structures do investors typically use for real estate investment in your jurisdiction and what are the main advantages and disadvantages of each (for example, flexibility and tax transparency)?

Until recently, foreign and major domestic players preferred to invest in Russian real estate through special purpose companies incorporated in Cyprus or The Netherlands, because of favourable tax treaties between Russia and these countries, greater flexibility of disposal, and the ability to use foreign (mostly English) law to govern contractual arrangements between multiple investors. Recent changes in the tax legislation in Russia make these investment structures less attractive from a tax standpoint, but other benefits of these types of holding remain.

Many local players and some Russian banks try to raise funds from mid-size and small investors through closed end investment funds (known as ZPIF), which are analogous to real estate investment trusts. These funds are regulated under Russian law, and allow fund managers to raise and lock up funds for the time needed to develop commercial property.

 
3. What are the main sources of finance and types of investors for real estate investment in your jurisdiction? Does your government encourage overseas investment into real estate in your jurisdiction, for example through real estate investment legislation?

The main sources of finance for real estate investment in Russia are large Russian state owned banks (such as Sberbank and VTB) and large Russian private banks owned by foreign banks (such as UniCredit and Raiffeisen) for debt financing.

The main real estate investors in Russia are:

  • High net worth nationals and foreign citizens.

  • Foreign institutional investors (such as pension funds).

  • Foreign private real estate investment funds.

  • Foreign sovereign funds.

Restrictions on foreign ownership or occupation

4. Are there restrictions on foreign ownership or occupation of real estate (including foreign ownership of shares in companies holding real estate)? Are there restrictions on foreign guarantees or security for ownership or occupation and on lending for the purchase of real estate?

In general anyone, including foreign legal entities or private individuals, can own a building or facility in Russia without any discriminatory restrictions. However, this may change if the Russian Parliament passes a pending draft bill on the acquisition of immovable property by foreign nationals and companies (Draft Foreign Acquisition Bill), which may result in restrictions on foreign ownership of real property.

Under the Draft Foreign Acquisition Bill, all acquisitions of real property (including leases) located in Russia will be subject to review and approval by a special government agency. If it is enacted into law, the Draft Foreign Acquisition Bill may impose additional restrictions on foreign ownership of real property, including leasehold interests.

 

Title to real estate

5. What constitutes real estate in your jurisdiction? Is land and any buildings on it (owned by the same entity) registered together in the same title, or do they have separate titles set out in different registers?

Real estate includes:

  • Land plots.

  • Subsoil parts.

  • Objects closely connected with land (buildings, premises, constructions, developments under construction, and so on).

  • Aircraft, ships and space objects.

Land plots and buildings are registered separately and in different titles in the same register, and can be owned by different persons.

 
6. How is title to real estate evidenced? What is the name of the public register of title and the authorities responsible for managing it? Is electronic access and electronic conveyancing available?

Title to real estate (land plots, buildings, premises, constructions and objects under construction) is evidenced by a certificate of title (issued at the time of registration of a new owner's interest in real estate) and extracts (after the initial registration of title) from the Unified State Register of Rights to Immovable Property and Transactions (Real Estate Register).

The Real Estate Register is managed by the Federal Service for State Registration, Cadastre and Cartography.

Electronic access is available at https://rosreestr.ru but the results are not always reliable. Electronic conveyancing is not yet available.

 
7. What are the main information and documents registered in the public register of title? Can confidential information or documents be protected from disclosure in the public register of title?

The following information is available to third parties in the Real estate Register:

  • A brief description of the property including its address, area and permitted use.

  • Details of titleholders.

  • Registered encumbrances and limitations on use.

  • Registered disputes and claims.

  • Registered rights of third parties.

Certain confidential information about the property can only be disclosed to the titleholders and a limited group of persons authorised by law.

 
8. Is there a state guarantee of title? Is the authority that manages the public register liable to pay compensation for any errors it makes in relation to title registration? Is title insurance available and is it commonly used?

There is no state guarantee of title. Information on the titleholder contained in the Real Estate Register is evidence of registered title, but it cannot be relied on absolutely. This is because:

  • Information on title transfer is not immediately entered into the register on a transfer of title.

  • Titles to real estate that appeared before 1998 are formally valid without registration in the register.

  • Professional legal due diligence of the property is often required.

  • Errors by registering authorities may occur.

Where there are errors in title registration the responsible state body may be held liable and forced to pay compensation.

Title insurance is available, but is not commonly used.

 
9. How can real estate be held (that is, what types of tenure and other main ownership rights exist over land)?

Real estate can be publicly owned (by the Russian Federation, regions or municipal government bodies) and privately owned (by individuals or legal entities). The other main ownership rights include:

  • Leasehold interest.

  • Easements (servitudes).

  • The right to use land plots free of charge.

 

Sale of real estate

Preliminary agreements

10. What types of preliminary agreements are typically used in the sale of real estate? Are they legally binding?

Preliminary sale and purchase agreement

Preliminary agreements are legally binding under Russian law.

Under a preliminary agreement, the parties agree to enter into a sale and purchase agreement (SPA) on the terms and conditions stipulated under the preliminary agreement. A preliminary agreement should contain provisions that allow for determination of the subject and other material conditions of the SPA.

A preliminary agreement provides for a term within which the SPA should be executed by the parties. If no term is specified, the SPA should be executed within one year from the execution date of the preliminary agreement.

If a party fails to execute the SPA, the other party has the right to apply to court to force the other party to enter into the SPA.

SPA of future real estate

Preliminary agreements were widely used before 2011, as Russian courts believed that only registered owners of real property could sign SPA or leases. In 2011, the Supreme Arbitration Court clarified that a seller/landlord need not necessarily be the registered owner of real property when signing an SPA or lease. For example, a seller can assume an obligation to purchase real property from a third party, register its title and only then sell the property to the buyer. The Court confirmed that this kind of contract should be enforceable. However, the transfer of title to the buyer under a "forward sale" contract, will only be registered after the seller itself becomes the registered owner of the property.

Agreement on share participation in construction

Developers that raise funds to construct residential properties can only do so through agreements on share participation in construction with private investors.

Russian legislation provides certain protection to investors in this case. These share participation agreements are subject to registration by the state, so the developer cannot sell the same property to another buyer. Also, an investor's claim against the developer is secured by a statutory mortgage created over the developer's title (leasehold interest) in the land plot. The developer's failure to deliver the real property on time triggers substantial statutory penalties, calculated on the entire sum of the invested funds.

Memorandum of understanding and letters of intent

They are generally not recognised by Russian law as binding contracts, unless they contain language that would result in them being read as a preliminary agreement or forward sale contract.

Sale contract

11. Briefly outline the typical main provisions of a corporate real estate sale contract and main real estate provisions of a typical share purchase agreement.

Material terms of an SPA of real property

Subject of the SPA. Details of the real property that sufficiently identify the property without any doubt must be included. Most real estate in Russia is assigned with a unique cadastral number, which is sufficient to identify the property. However, if real property has not been assigned a cadastral number, the property can be defined using other data, including the address, area, and location of the real property in a particular land plot.

Price. If the SPA does not include the purchase price for the real property, the SPA is deemed not to have been concluded.

Specific provision for residential property. An SPA of residential property should also contain a list of persons that retain rights to use the premises after the property has been sold to a third party.

Other typical main provisions. These include:

  • Payment arrangements. If payment of the purchase price occurs after the registration of title in the name of the buyer (sale on credit), the SPA should provide for additional material terms such as method, terms and amounts of payment. Unless otherwise provided by the SPA, if property is sold "on credit", the property is deemed mortgaged in favour of the seller until the buyer fully pays the purchase price.

  • Obligations related to the property transfer. The seller is obliged to transfer the real property to the buyer and the buyer is obliged to accept the transfer of property from the seller.

Main real estate provisions of a typical share purchase agreement

A share purchase agreement does not generally contain any provisions related to the liability of the seller for defects in real property owned by the target company. Also, such agreements do not provide for the right of the seller to transfer the property, since the buyer acquires the shares of the company and not the real property directly.

However, such agreements typically provide for seller's warranties (see Question 13) with respect to the real property owned by the target company. In certain cases, the buyer insists on indemnification from the seller for specific risks related to the real property.

Due diligence

12. What real estate due diligence is typically carried out before an acquisition and what key areas does it cover? Which documents are typically reviewed? Which specialist advisers are usually involved and which reports do they typically produce?

For the purchase of property the following examinations are usually carried out:

  • Legal due diligence.

  • Construction due diligence.

  • Environmental due diligence.

  • In certain cases, limited financial due diligence is recommended (for example, when commercial property is being acquired).

Legal due diligence includes examination of the following:

  • Title to the property and grounds for the acquisition of title (title certificates, and extract from the Real Estate Register).

  • History of the property. All previous transactions with the property and formation of the property (cadastral passport, sale and purchase agreements, and acts of state authorities on the provision of the land plot).

  • Category and permitted use of the property and city planning limitations.

  • Construction documents (land plot development plan, construction permits, commissioning acts, and construction contracts with the general contractor).

  • Utility agreements and property management agreements.

  • Insurance agreements.

  • Court cases related to the property.

  • Encumbrances over the property, including leases, mortgages, and easements.

  • Limited corporate due diligence of the seller to confirm its authority to own the property and dispose of the property:

    • charter of the seller;

    • extract from the Unified State Register of Legal Entities;

    • corporate approvals related to the property; and

    • copy of the employment agreement with the general director.

Sellers' warranties

13. What real estate warranties are typically given by a seller to a buyer in the sale of corporate real estate and what areas do they cover? What are the main limitations on warranties, for example are they typically qualified by disclosure?

Concept of warranties

Until recently Russian legislation did not recognise the concept of contractual warranties and liability for breach of warranties. However, parties often included such warranties into an SPA and provided specific liability for breaches of warranties.

The latest amendments to the Civil Code (effective as of 1 June 2015) incorporate the concept of warranties and provide that, if warranties provided by a party are untrue, that party is liable to compensate the other party on its request for damages caused by the untruthfulness of warranties, or pay a penalty stipulated under the SPA. In addition, the party relying on warranties can unilaterally terminate the SPA unless the agreement provides otherwise.

Typical real estate warranties

These include:

  • The seller is the registered sole owner of the real property.

  • The property is not encumbered in any way.

  • There are no pending court proceedings with respect to the property and the company's right to it.

  • The condition of the property does not require immediate repair works.

  • The company has not entered into any agreements that enable third parties to claim the transfer of title to the property.

  • All corporate approvals with respect to the acquisition and disposal of the property have been obtained by the seller.

  • No overdue monetary or liability claim related to the property.

  • All permits, approvals and other consents of government authorities have been received for the construction/repair of the property (if applicable).

  • The property is not subject to expropriation or any other seizure.

Liability

14. Does a seller have any statutory or other liability to the buyer in a disposal of real estate?

Statutory liability

Failure to transfer. If the seller fails to transfer the real property to the buyer, the buyer has a statutory right to:

  • Unilaterally terminate the SPA.

  • Request the transfer of the property through a court order.

  • Claim compensation of damages.

Sub-standard quality. The seller must transfer the real property to the buyer so that it complies with the quality and other characteristics agreed by the parties in the contract. If the seller fails to meet its obligation, the buyer has a contractual right to:

  • Claim for a proportionate decrease of the purchase price.

  • Demand the seller rectifies the defects at its own expense within a reasonable time period.

  • Claim compensation of the buyer's expenses incurred to remedy the defects.

If the defects are substantial (that is, they cannot be rectified entirely or without considerable monetary and time expense, occur repeatedly, continue to reappear after rectification, or there are other serious defects) the buyer has a right to unilaterally terminate the agreement and claim repayment of the purchase price.

Transfer of property encumbered by third party rights. The seller must transfer the property free from third party rights unless the buyer agrees otherwise. In case of the seller's breach, the buyer has the statutory right to either:

  • Claim for a decrease of the purchase price.

  • Unilaterally terminate the agreement.

Seizure of property on existing grounds. If the property is seized from the buyer on legal grounds that existed before entry into the SPA, the seller must compensate the buyer for damages if the seller cannot prove that the buyer knew or should have known about these grounds.

Contractual liability

Under Russian law, the buyer and seller can agree contractual liability for breach of specific provisions of the SPA.

 
15. Briefly outline the environmental legislation and potential liability for a buyer in a purchase of real estate. Is it common to carry out environmental surveys and searches and to obtain environmental insurance? How is environmental liability typically dealt with in the sale contract?

Generally, environmental law compliance issues arise with respect to industrial property. The main legislation includes:

  • Federal Law 7-FZ on Environmental Protection.

  • Federal Law 96-FZ on Protection of Atmosphere Air.

  • Federal Law 116-FZ on Industrial Safety of Hazardous Industrial Objects.

  • Federal Law 89-FZ on Production and Consumption Waste.

  • Federal Law 52-FZ on Sanitary and Epidemiological Welfare of Citizens.

Liability for breach of environmental laws is also provided under Federal Law 195-FZ Code of the Russian Federation on Administrative Violations. Liability varies depending on the nature and consequences of the breach, from RUB25,000 to RUB500,000, and suspension of the offending company's activities for up to 90 days.

Generally the buyer is not liable for breaches of environmental laws that occurred before the acquisition of the property. However, if the breach continues after the purchase the buyer can also be liable (for example, if construction of the property violated sanitary requirements, the construction can be challenged after execution of the SPA).

Therefore, it is advisable to perform environmental due diligence to assess possible risks and provide contractual protection for the buyer under the SPA.

The parties can agree that the seller will bear all liability for environmental violations arising before the transfer of the property.

 
16. Can an owner or occupier inherit liability for other matters relating to the real estate even if they occurred before it bought or occupied it? Can a seller or occupier retain any other liability relating to the real estate after it has disposed of it?

As a general rule the owner or the occupier does not inherit liability for a breach committed by the previous owner/occupier. In practice however, it may not be possible to determine who committed the breach. In this case, the current owner or occupier can be liable, unless it proves that the previous owner/occupier should be held liable instead.

The seller can be liable for its own actions after the disposal of the property.

Completion arrangements

17. What are the typical arrangements and main documents required for completion of the sale? When does title transfer and what are the formal legal requirements to execute the sale documents, transfer the real estate and register the change of title? Is notarisation required?

After the parties have signed the SPA, they must register the transfer of title to the property to the new owner with the registration authorities. The registration authorities normally register property transfers within ten business days of receipt of a properly documented application. However in practice, registration may take longer depending on the complexity of the transaction and on the registration authorities' workload.

To register the transfer of title, the parties must provide:

  • Application for registration.

  • Confirmation of payment of state duty.

  • Documents confirming the authority of the applicants (for example, power of attorney and corporate documents).

  • SPA or other documents according to which the transfer of title took place.

  • Corporate approvals or consent of a party's spouse (if applicable).

The property is transferred to the buyer before or after state registration of the buyer's title to the property, depending on the arrangements between the parties. The parties must execute an act of transfer and acceptance to confirm the transfer of property. The property is at the seller's risk until the act of transfer and acceptance is signed, at which point the risk passes to the buyer.

The parties can notarise the SPA but this is not obligatory. In practice, SPAs of real property are rarely notarised, because of the additional cost and time involved. Also, notaries often insist on using their form of SPA or will require amendments to the terms of SPAs.

 

Real estate tax

18. Is stamp duty/transfer tax (or equivalent) payable on the purchase of real estate? Who pays, what are the rates and are there any exemptions? Does it apply to the transfer of shares in a company holding real estate and at what rate?

There is no stamp duty or transfer tax payable on the purchase of real estate.

State duty of RUB22,000 is payable by the buyer on the registration of transfer of title to the real property.

 
19. Are any methods commonly used to mitigate real estate tax liability on acquisitions of large real estate portfolios? What is the general approach of the tax authorities in your jurisdiction to such schemes?

Real property is subject to property tax, payable by legal entities only. There is no reliable method to avoid or mitigate this tax liability. The property tax rate is established by regional authorities but cannot be higher than 2.2%. Currently in Moscow and most major regions, the tax rate is 2.2%. The taxable base is the average annual net book value, calculated as the value of the property based on statutory financial accounts less statutory depreciation of the property. The taxable base includes all real property owned by the buyer, other than land plots.

However for some properties, including business centres and immovable property owned by foreign legal entities that do not have a taxable presence in Russia, the taxable base is determined on the cadastral value of the property. If the owner of the property disagrees with the cadastral value of the property calculated by state-appointed appraisers, it can ask a court to lower the valuation, based on an alternative assessment of the property's market value.

 
20. Is value added tax (VAT) (or equivalent) payable on the sale or purchase of real estate? Who pays? What are the rates? Are there any exemptions?

VAT is charged on the sale of real property. The current VAT rate is 18%.

The purchase price paid by the buyer includes VAT, which the seller must pay to the state.

VAT does not apply to the:

  • Sale and lease of residential properties.

  • Sale of land.

  • Sale of shares in companies holding title to real property.

 
21. Are municipal taxes paid on the occupation of business premises? Are there any exemptions?

Municipal taxes are payable on the occupation of business premises.

Property tax (see Question 19) is a municipal tax.

 

Climate change issues

22. Are there targets or incentives to reduce greenhouse gas emissions from buildings in your jurisdiction? Is there legislation requiring buildings to meet certain minimum energy efficiency criteria?

The Energy Saving Law (Federal Law 261-FZ dated 23 November 2009) (as amended) was adopted in 2009. The key aspects of this law relating to the energy efficiency of real estate are:

  • Subject to certain exceptions, buildings must comply with energy efficiency requirements established by the relevant Russian authorities.

  • These energy efficiency requirements should include targets on energy consumption and requirements for architectural, technological, engineering and construction decisions.

  • Buildings which do not comply with energy efficiency requirements or are not equipped with devices measuring energy consumption cannot be commissioned by the state.

 
23. Are provisions relating to the energy efficiency of buildings commonly included in contracts for the sale of real estate or in leases (for example, green leases)?

Provisions relating to the energy efficiency of buildings are rarely included in contracts for the sale of real estate or in leases.

 

Real estate finance

Secured lending involving real estate

24. Briefly outline the typical security package required by lenders in relation to real estate lending. How are the most common forms of security interest relating to real estate created and perfected (that is, made valid and enforceable)?

In most cases, property finance is secured by a mortgage. As a registered charge on property, it gives the lender power to foreclose on the property in the event of default under a loan. A mortgage agreement must be signed between the parties. For the mortgage to be valid and enforceable, the mortgage must be registered with the state registration authority. State duty for registration of the mortgage of RUB4,000 is payable.

Other forms of security interest commonly used in property finance include:

  • Pledge over rental income.

  • Pledge over bank accounts.

  • Pledge over shares (or participatory interest).

  • Sponsor guaranty (or suretyship).

 
25. What other real estate related measures do lenders typically take to protect themselves against default by the borrower?

Lenders typically protect themselves against default by the borrower by including:

  • Conditions precedent in the loan agreement, providing that the loan can be extended to the borrower only after the creation and perfection of the relevant security interest.

  • Provisions in the loan agreement, providing that the market value of the pledged or mortgaged property cannot be less than the outstanding amount of the loan multiplied by a co-efficient agreed between the parties.

  • Provisions in the mortgage agreement providing for the borrower's obligation to insure the mortgaged property.

 
26. Can lenders incur environmental liability? What measures do lenders typically take to manage potential environmental liability?

Normally, lenders do not incur environmental liability for the acts or omissions of the borrower or third parties.

 
27. Briefly outline the main remedies for lenders in relation to the secured real estate if the borrower defaults on the loan. What is the effect of the borrower's insolvency on the lender's remedies?

If the borrower defaults on a loan secured by a mortgage, the lender can enforce the mortgage and sell the real estate over which the mortgage is registered.

If the borrower becomes insolvent, the claims secured by the mortgage will have priority over non-secured claims. However, only 70% or 80% of the proceeds received from the sale of the mortgaged property can be distributed to the secured lender. The remaining proceeds must be used by the insolvency officer to satisfy the claims of other creditors.

 
28. Briefly outline key additional issues for lenders in relation to construction and development projects.

Taking security over property under construction presents certain issues.

Russian law requires the mortgaged property to be precisely described. This is difficult to do with property which is not yet fully constructed.

If the developer's interest in the land plot terminates, the developer may also forfeit the construction permit.

If the construction permit expires before completion of the construction, an extension of the construction permit may not be granted.

Other real estate financing techniques

29. Are other real estate finance techniques commonly used in your jurisdiction? For example, real estate securitisation and sale and leasebacks.

Other real estate finance techniques (such as real estate securitisation) are recognised by law. However, they are not commonly used due to the undeveloped local securities market.

 

Real estate leases

Negotiation and execution of leases

30. Are contractual lease provisions regulated or freely negotiable? Which legislation applies?

Commercial lease terms are generally freely negotiable. However, there are several statutory provisions that cannot be changed by contract.

If the property (land plots or premises) belongs to state or municipal bodies, the tenant's ability to negotiate lease terms is usually limited. These leases are awarded through competitive bidding procedures involving auctions or tenders.

Each lease should contain at least two key provisions: identification of the leased property and the rent amount.

Russian federal and local real property laws are primarily based on the:

  • Civil Code.

  • Land Code.

  • Federal Law On State Registration of Rights to and Transactions with Real Property.

  • Local town planning legislation of each particular city or community.

 
31. What are the formal legal requirements to execute a lease? Does the lease have to be executed by certain parties or as a deed? How do the formalities differ for a company, partnership and for individuals?

A lease must be executed in writing in the form of an agreement and signed by both landlord and tenant. Signing a lease with multiple participants on the landlord or tenant side is permissible.

The same rules apply to leases of real estate properties by companies, partnerships or individuals. In some instances a commercial or non-commercial entity can be required to obtain corporate approvals or consent of a mortgagor if the property is mortgaged.

The concept of deed does not exist in Russian law.

Rent payments

32. How are rent levels usually reviewed and are there restrictions on this? Is stamp duty and VAT (or equivalent) payable on rent? Is a rent security deposit required and does it have to be managed in a certain way?

Rent is the value agreed between the landlord and the tenant, and is based on the average market rent. The parties can review the rent level subject to the parties' mutual consent but no more than once a year.

Rental rates for private land are not restricted by legislation. However, if the land is owned by the state or a municipality, the rates are unilaterally determined by the state or municipality, generally on the basis of the cadastral value of the land. Rent payments under many leases for state and municipal land plots tend to increase substantially following the increase of the cadastral value of urban land.

Stamp duty is payable when a long-term lease (exceeding one year) is registered with the state registration authority. Rent payments are subject to VAT of 18%. Depending on the tax regime of a particular entity, the rent payment may be VAT exempt.

Security deposits are permissible and are common in Russia. The amount of a rent deposit is freely agreed by the parties, and can vary from one to 12 months' rent.

Length of term and security of occupation

33. Is there a typical length of lease term and are there restrictions on it? Do tenants of business premises have security of occupation or rights to renew the lease at the end of the contractual lease term?

The duration of a commercial lease term is not limited under Russian law. Leases of land plots from the state authorities are limited to 49 years. A lease of real property, including land, for a term of one year or more (a long-term lease) must be registered with the Real Estate Register. A real property lease for a term of less than one year (a short-term lease) is not required to be registered.

The Civil Code provides that, if not agreed otherwise, when the lease expires the tenant has a pre-emptive right to enter a new land lease on the terms and conditions agreed between both parties to the lease.

Disposal

34. What restrictions typically apply to the disposal of the lease by the tenant? Can the tenant assign or sublet the lease with the landlord's consent? Can tenants share their premises with companies in the same group? What is the effect of a legal reorganisation or transfer/sale of the tenant on the lease and on a guarantee of the lease?

The assignment or subletting of lease rights generally requires the landlord's consent, if this is not provided for by the lease. A pledge of a land leasehold right normally requires the landlord's consent. However, a mortgage of a lease of a state-owned or municipally-owned land plot for a period of more than five years typically only requires notification to the landlord, and not its consent.

A sublease cannot be entered into for a term exceeding the term of the head lease. If the head lease terminates, the sublease automatically terminates.

Sharing premises can be structured through a sublease or through joint-tenant arrangements.

Reorganisation or transfer/sale of the tenant does not affect the lease.

 
35. Does a landlord or tenant retain any liability under the lease after the lease is assigned?

All rights and obligations of an assignor are transferred to the assignee from the date of assignment, unless otherwise provided by the parties.

Repair and insurance

36. Who is usually responsible for keeping the leased premises in good repair and for insuring the leased premises? Are there provisions for the ownership of lease improvements?

Under the Civil Code, unless agreed otherwise:

  • Capital repairs are carried out by the landlord, at its own expense.

  • The tenant is responsible for routine maintenance of the property and maintaining the property in good condition.

If repairs are required due to the tenant's fault or negligence, the tenant must restore the property to its condition at the beginning of the lease term, or reimburse the landlord for any rectification expenses.

Insurance depends on the lease terms. Typically, most leases state that the tenant pays the insurance premium and is responsible for property insurance and third party liability insurance.

Landlord's remedies and termination

37. What remedies are available to a landlord for a breach of the lease by the tenant? On what grounds can the landlord usually terminate the lease and what restrictions and procedures apply? What is the effect of the tenant's insolvency under general contract terms and insolvency legislation?

Under the Civil Code, if the tenant breaches the lease, the landlord can terminate the lease in court. Particularly, this may be the case when the tenant:

  • Materially violates the terms and conditions of the lease, including using the property for another purpose than provided for by the lease.

  • Materially damages the property.

  • Fails to make a rental payment when due on more than two successive occasions.

  • Fails to carry out capital repairs if provided for by the lease.

The tenant has the right to terminate the lease if:

  • The landlord prevents the use of or denies the tenant free access to and unimpeded use of the property according to the terms of the lease.

  • The leased property has defects that were not revealed by the landlord at the time of execution of the lease, and were not known to the tenant before entry into the lease and could not be discovered by the tenant at the time the property was inspected and transferred.

  • The landlord fails to make capital repairs to the property.

  • The property or any part of it becomes unfit for use due to circumstances beyond the tenant's control.

Russian law does not provide specific rules relating to the consequences of tenant insolvency. Typically insolvency of the tenant is reserved as a ground for lease termination by the landlord.

 
38. Can the tenant withhold rent payments in certain circumstances, for example for serious damage to the leased premises? Can the tenant terminate the lease in certain circumstances?

As a contractual provision, the parties can agree that the tenant will have a right to withhold rent payments, or independently and at its own expense remedy the violation and deduct all incurred expenses and losses from the next rent payable under the lease, if:

  • The landlord prevents the use of or denies free access to the property.

  • The landlord fails to make repairs to the property.

  • The property is destroyed or confiscated.

If the lease is silent on the tenant's right to withhold rent payments or recover repair costs from the landlord, any withholding of rent payments or reimbursement of repair costs will require court approval.

 

Planning and development controls

39. In what circumstances can local or state authorities purchase business premises compulsorily? Is the purchase price market value?

Russian law provides that private land or buildings can be expropriated for "state or municipal needs". The procedure for expropriation of land for state and municipal needs is in Article 279 of the Civil Code.

The list of cases is not exhaustive, and mainly relates to:

  • Federal energy system facilities and nuclear power plants.

  • Defence facilities.

  • National security facilities.

  • Public utility facilities.

  • Construction of roads.

Currently the owner of expropriated real estate is entitled to one year's advance notice and payment of the full market value and compensation for any other losses suffered. However, in some cases the notification period can be significantly reduced.

 
40. What authorities regulate planning control and which legislation applies? Is there specific protection for special categories of buildings such as historic buildings?

Planning and development in Russia is a complex multi-stage process. It involves compliance with many regulatory requirements and obtaining authorisations from a large number of authorities at the federal, regional and local levels.

Planning and development in Russia is primarily governed by the Town Planning Code, Civil Code, Land Code and other federal laws and regulatory acts. Regional legal bodies can adopt laws on planning and development that should comply with the above codes.

Municipal authorities, which have full planning and development powers, can establish special executive bodies on urban planning and architecture in municipal districts, cities and settlements.

Municipal and development planning includes:

  • A development plan of a city or settlement which determines the development of a particular residential area for a period up to 25 years.

  • Zoning rules, which determine the territorial zones with specific town-planning regulations applicable to each defined zone.

Zoning rules define the location, use and protection of various categories of buildings and land plots into zones, which include historic, public and cultural.

 
41. What planning consents are required for building works and the use of a building?

Under Russian law, development projects require the following approvals to be obtained in this order:

  • Approval of town-planning documentation.

  • Approval of pre-design documentation.

  • Approval of the design documentation.

  • Issuance of a construction permit.

In addition to these basic approvals, a developer must have ownership or leasehold rights to the land in order to begin construction.

 
42. What are the main authorisation and consultation procedures in relation to planning consents?

Initial consents

Initial planning consent is evaluated and issued by the competent municipal authority.

The main stages of the development process typically include the following and can take up to six months or more:

  • Obtaining a town-planning plan for the land plot to develop the design documentation.

  • Ensuring that the selected zone is appropriate for the proposed activity.

  • If the zone is not appropriate, initiate a public hearing procedure through municipal authorities to collect the opinions of locals about the change of zoning regulation applicable to a particular territorial zone.

  • Acquiring land rights.

  • Preparing project documentation and obtaining infrastructure/utilities documentation.

  • Obtaining a construction permit.

  • Performing construction works.

  • Obtaining a facility operating permit.

  • Registering title to the new building.

Third party rights and appeals

Any third party affected by a re-zoning can through a court procedure appeal the re-zoning decision of the court.

 

Reform

43. Are there proposals to reform real estate law and are they likely to come into force and, if so, when?

Many changes to real estate law are expected to come into effect in 2015 to 2016. They include:

  • Changes to the system of state registration of rights to real property.

  • Development of the procedure for the expropriation of lands for state and municipal needs.

  • Implementation of the "development right" concept.

  • Changes to the procedure for obtaining rights to land plots by developers.

 

Contributor profiles

Dmitry Kunitsa, Partner

Morgan Lewis

T +7 495 212 2505
F +7 495 212 2400
E dkunitsa@morganlewis.com
W www.morganlewis.com

Professional qualifications. Admitted in the Russian Federation

Areas of practice. Real estate

Recent transactions

  • Advised a Russian development company on the development of a $1.5 billion complex in the City of Moscow.

  • Advised a Russian commercial bank in a complex financing of the sale of real property mortgaged to the bank.

  • Advised a US corporation on acquisition of development rights for construction of an industrial plant.

  • Represented a Europe-based private investment group on a JV for the development of mixed-use commercial property in Sochi.

Languages. English, Russian

Publications. Russian Court Terminates Lease Agreement Using " Adhesion" Doctrine

Ekaterina Tsvetkova, Associate

Morgan Lewis

T +7 495 212 2546
F +7 495 212 2400
E etsvetkova@morganlewis.com
W www.morganlewis.com

Professional qualifications. Admitted in the Russian Federation

Areas of practice. Real estate

Recent transactions

  • Advised the leading cinema operator in Russia on various real estate matters related to construction and management of cinemas.

  • Advised a private investor on matters related to the acquisition of property right to the office premises located in International Moscow Business Centre "Moscow City", and assisted the client with negotiating the property management agreement.

  • Advised a Swiss listed company on a number of real estate transactions, including an investment project in the Moscow Region for the construction of residential property, and assisted in selling the shares in a Russian company involved in the investment project with respect to the office centre in Moscow.

Languages. English, Russian

Publications. Russian Court Terminates Lease Agreement Using "Adhesion" Doctrine.


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