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 corporate real estate market trends; real estate investment structures, including REITs; legislation; title and public registers of title; confidential information; state guarantee of title; tenure; sale of real estate; seller's liability; due diligence; warranties; cost; taxes and mitigation, including VAT and stamp duty/transfer tax; climate change targets; third party outsourcing; restrictions on foreign ownership or occupation; finance; leases; planning law and consents; and proposals for reform.

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

This Q&A is part of the PLC multi-jurisdictional guide to corporate real estate law. For a full list of jurisdictional Q&As visit www.practicallaw.com/realestate-mjg.

Vitaly Mozharowski and Maksim Popov Goltsblat BLP LLP
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?

The national economy

The main trends in the real estate market in the last 12 months have included:

  • A more positive mood in the marketplace as economic activity becomes more stable. The vast majority of market players describe the market as showing stable and confident growth and recovery from the recession.

  • The market for warehouse premises is in deficit and is the most attractive in Europe for professional investors in this area. The rate of unoccupied logistics property is steady at less than 1%. It is typical for more than half of future warehousing to be let out to tenants before any visible building work has began.

  • Retail property has seen an impressive growth. This market sector is stable and retail operator expansion can be seen in virtually every populated area of Russia. Despite the rapid growth of this sector and the growing competition from online trade, per capita retail space is still low compared with Eastern Europe. There is also a growing trend for the development of entertainment complexes within big shopping centres and this looks likely to increase.

  • The office real estate market is a more complex market sector, demonstrating slow growth outside Moscow and St Petersburg. This market is tending to break down into smaller sections in terms of quality: good premises are still in short supply with associated rent remaining consistently high. The cloud technology era is also affecting the market, with developers striving for an optimal balance of office, hospitality and apartments in new projects.

  • Specialised investors are also particularly interested in entertainment theme parks, airports, the health industry and the manufacturing of auto parts and medicines.

  • Moscow is demonstrating consistency in relation to its strategic priorities. The main focus is on public transport, roads, utility and social infrastructure, hotels and the development of new areas. It is very rare for new building permits to be issued in the city’s historical centre. The cadastral re-evaluation of Moscow land has driven land prices, rentals and land tax upwards. In response to this, the Mayor’s Office now permits selling city land to private owners, at least as far as plots outside the Garden Ring are concerned. However the increase in land prices has vastly reduced the number of buyers.

Legislative changes

In 2012, there were changes in legislation that actually raised the cost of privatising public "brownfield" sites for owners of real estate located on them. In the most attractive regions, including Moscow, privatisation now costs 100% of the cadastral value. This is against a previous maximum of 45%, but some regions have retained the opportunity to reduce these prices.

The development of New Moscow, an adjacent area attached to the capital two years ago, is mainly focused on building up the transport infrastructure (roads, railways and the Metro). As a result, the Mayor’s Office has lobbied for amendments to the legislation that would simplify and substantially speed up the mandatory procedures for withdrawing land for public needs. In an attempt to get as much land as possible moving, the authorities are discussing similar amendments for land that is not used at all or is used other than for its designated purpose. In any case, land seizure is subject to adequate monetary compensation.

The Mayor's Office wanted to guarantee that land transactions within New Moscow would come under the control of traditional Moscow. They successfully lobbied for a law granting it the right of first refusal, when what was previously farm land before attaching to the city is sold.

The anticipated large reform of the Civil Code has to-date resulted in only small modifications, which came into effect on 1 March 2013. These have slightly simplified and harmonised the approach to recording titles to property in the Realty Register. Large-scale conceptual amendments to the Civil Code are still being debated in the Federal Parliament. Once, and if, these are adopted, they will inevitably also affect:

  • Real estate and development regulation.

  • Rights to land plots for construction.

  • The construction permission process.

  • The rights to real estate facilities under construction.

Court Precedents

The Supreme Commercial Court has been far more active than the legislature in its efforts to interpret laws in a more modern and business-friendly manner. The most significant recent rulings have confirmed the legality of the sale and lease of future property, that is, property to be constructed or acquired by the seller/ landlord in the future, as well as the lease of parts of land plots. Prior to these rulings this was not legally permitted. It is assumed that the associated paperwork and enforcement of such agreement will now be simplified.

Recently, the Supreme Court also issued a ruling on actio negatoria (actions to deny), to try and bring local practices in line with those of the developed European jurisdictions. One more recent ruling concerns the application of the public order condition for recognising and enforcing foreign court rulings.

A new concept that the courts are starting to apply is the piercing of the corporate veil. They are now more cautious when considering cases of a bona fide purchaser who participates through offshore structures. Failure to disclose the ultimate beneficial owners can be treated as an abuse of law and not subject to court protection. This development seems to be in line with the increased global pressure on the use of offshore jurisdictions.

Finally, 2012 also saw the introduction of positive court practices, including reimbursing the judicial costs of the successful party. This is quite a new trend, which is expected to make market players take greater responsibility in their activities, avoid abusing the law and strive to settle disputes as far as possible, without going to court.

 

Real estate investment

2. How is real estate investment carried out in your jurisdiction and what structures do investors use?

Common structures

The most commonly used structures for real estate investment are property companies constituted as special purpose vehicles (SPVs), equity acquisitions and direct investment in development projects.

The concept of shared construction, which was introduced ten years ago, has not become common, at least not in the corporate property sector. This concept provides investors with a high level of statutory security and is a modification of a co-investment agreement commonly used in the recent past. However, it differs from the co-investment agreement because it:

  • Is heavily regulated.

  • Is subject to recording in the Realty Registry.

  • involves considerably more formal requirements and reporting to supervisory authorities by developers concerned.

REITs

Real estate investment trusts (REITs) are available on the market, but are not commonly used. They became even less popular after they became subject to property tax in 2010.

Institutional investors

During the last 18 months, investment in real estate has transferred from global institutional investors to local banks, local investors and end users.

Institutional and private investors share the corporate real estate market with a ratio of about 3:7.

Private investors

Private investors are generally more active than institutional investors in the following real estate markets:

  • Residential.

  • Leisure (hotels).

  • Industrial.

  • Retail.

  • Theme parks.

  • Infrastructure.

 

Real estate legislation

3. What is the main real estate legislation that applies in your jurisdiction?

Real estate legislation is formed from a system of standardised laws which regulate different subject areas (civil, land, and town planning), including the following federal laws:

  • Constitution of 1993.

  • Civil Code 1994, as later amended.

  • Land Code 2001, as later amended.

  • Town Planning Code 2004.

  • Federal Law On State Registration of Real Estate Rights and Transactions of 21 July 1997.

  • Federal Law of 24 July 2007 (No. 221-FZ) On Real Property Cadastre.

In addition, land law and privatisation law belong to the joint jurisdiction of the Russian Federation and the regions. Therefore, regional land legislation must also be carefully taken in consideration when dealing with regional projects. This chapter does not cover specific regional laws and focuses on federal regulation only.

 

Title to real estate

Title and registers

4. 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?

The following constitutes real estate:

  • Land parcels or plots.

  • Buildings/premises.

  • Facilities on the land, for example:

    • pipelines;

    • electricity and communication cables;

    • railways and roads.

  • Developments under construction (in certain circumstances).

  • Subsoil sectors.

  • Sea vessels.

  • Aircraft.

  • Spacecraft.

Title to buildings/premises and land (even when owned together) is always registered separately in the Realty Registry (see box, Real estate organisations).

Evidencing title

5. How is title to real estate evidenced?

The Federal Service for State Registration, Cadastre and Cartography manages the Realty Register, which to a certain extent, is publicly available (see Question 7). The registry issues certificates of title which evidence title to real estate. The Realty Register contains legal information on titles and other real estate rights. In 2010 the State Supreme Court declared that relying solely on the Realty Registry records does not create the status of a bona fide purchaser. The title entries recorded in it require thorough professional legal due diligence of the property covering more than three years (the general statute of limitations) before the transaction, to minimise risk (see Question 8).

The Realty Register was only established in 1998 and does not contain exhaustive information on all Russian real estate. Titles to real estate that appeared before 1998 are formally valid and enforceable without registration in the Realty Register. However, title must be registered before entering into a transaction concerning the real estate.

Information in the public register

6. What are the main information and documents registered in the public register of title?

Information in the Realty Register includes:

  • A brief description of the real estate.

  • Details of titleholders.

  • Existing and terminated titles.

  • Transactions subject to mandatory registration.

  • Property encumbrances and limitations, such as:

    • leases;

    • mortgages;

    • easements;

    • reservation for state needs;

    • disputes and claims;

    • contracts;

    • acts and resolutions issued by the authorities;

    • court rulings.

  • Other information, such as:

    • acquisition of the property for state or municipal needs;

    • unauthorised re-constructions.

The Real Property Cadastre is a separate registry that contains technical information on land and real estate. It should be noted that only half of the land plots registered with the Real Property Cadastre have accurately described (with precise coordinates) borders. The Federal Government is taking measures to improve this.

Protection from disclosure

7. Can confidential information or documents be protected from disclosure in the public register of title?

Only limited information concerning the following is publicly available:

  • The property.

  • Encumbrances.

  • The name of the registered owner.

Other information can only be disclosed to the:

  • Current owner.

  • Tax authorities.

  • Courts.

  • Law enforcement and regulatory agencies.

Following legislative changes, since 1 October 2013, it will be possible for everyone to obtain, for example, information on tracking the titles chain.

State guarantee of title

8. Is there a state guarantee of title? Is title insurance available? If so, is it commonly used?

State registration of title is the only evidence of registered rights. Registered real estate rights can only be challenged through legal proceedings. However, an entry in the Realty Register is not always a sufficient guarantee of title.

In 2010 the State Supreme Court declared that relying solely on the Realty Registry records does not create the status of a bona fide purchaser (Sec. 38 of the Joint Ruling of the Supreme Court and Supreme Arbitration Court dated 29 April 2010 # 10/22). Careful legal due diligence concerning real estate is highly recommended before any property acquisition. The Realty Register should therefore be treated merely as an information portal. The title entries recorded in it require thorough professional legal due diligence of the property covering at least three years (the general statute of limitations) before the transaction, to minimise risk.

Title insurance exists but is more common in the residential real estate market.

Tenure

9. How can real estate be held (that is, what types of tenure exist)?

Real estate can either be:

  • Publicly owned by the:

    • Federation;

    • regions;

    • municipalities.

    Public ownership of land plots can also be non-delimited, which means that there is no specified owner of the public land. Municipalities, subject to certain exemptions, can generally dispose of non-delimited public lands.

  • Privately owned by individuals and companies. Private property can also belong to two or more persons or companies (common ownership).

Rights that exist in addition to title ownership include:

  • Rights under:

    • leases;

    • easements;

    • mortgages.

  • The right of inheritable possession of a land plot for life (for individuals only) over publicly owned lands. Land plots with these titles are historical possessions and are not currently granted by the state.

  • The right of continuous (indefinite) use of land plots over publicly owned lands. Land plots with these titles are historical possessions and are currently granted only to a limited group of public enterprises and state agencies.

  • The right of economic jurisdiction over property held by state-owned enterprises and organisations. (Generally, the state is the property owner.)

  • The right of operational management held by state-owned enterprises and organisations. (Generally, the state is the property owner.)

 

Sale of real estate

Main stages and documents

10. What are the main stages and documents in the sale of real estate?

Marketing

Corporate real estate is usually marketed by:

  • Owners.

  • Professional real estate agents.

Commercial negotiation

Commercial negotiations take place between the parties to a potential transaction, which usually involve lawyers and agents.

Pre-contractual arrangements

A letter of intent or memorandum of understanding is generally executed to begin with. For a development under construction, a preliminary sale agreement, lease or other agreement is signed. On fulfilment of the conditions precedent stipulated in these documents, a sale (or lease) contract is executed.

Sale contract

The parties or their representatives execute the sale contract in simple written form as one document. Notarisation of a sale contract is not compulsory and only takes place if both parties agree. The notary's fee is negotiable and varies between 0.5% and 1.5% of the transaction price. The parties agree who pays the notary fee. Notarisation of corporate real estate sale contracts is very rare in practice.

When legally binding

A sale contract generally becomes legally binding on execution by the parties. The following documents must be registered in the Realty Register to become legally binding:

  • Long-term leases (longer than one year).

  • Mortgages.

  • Easements.

  • Shared construction contracts.

Registration

Conveyance of ownership title through a sale contract must be registered in the Realty Registry to be enforceable. There is no time limit on when registration must take place.

When title transfers

Title transfers when the relevant entry is made in the Realty Register. This generally takes up to 30 days following submission of the application for registration.

Seller's liability to the buyer

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

Seller's obligations

The seller should disclose to a buyer everything he knows about the property's:

  • Defects.

  • Encumbrances.

  • Limitations, such as:

    • power or underground infrastructure protection zones;

    • sanitary protection zones of neighbouring facilities;

    • water protection zones;

    • development limitations imposed by, for example, airfields, roads and historical heritage protected buildings or places.

Buyer's options

The buyer accepts the property "as is", unless the seller fails to disclose issues that he had actual knowledge of. In this case, the buyer can claim:

  • A proportionate purchase price reduction.

  • That the property is replaced (if possible).

  • Remedy of the defects in the property within a reasonable time at the seller's cost (if possible).

  • Compensation for the buyer's expenditure arising from work to remove the defects.

  • Termination of the sale deal, followed by mutual restitution. This involves putting the parties back in the situation they would have been in if the transaction had not been entered into.

If the property seriously violates real estate quality requirements, the buyer can refuse to fulfil the sale contract and demand the return of the purchase price. Serious violations include the discovery of:

  • Irreparable defects.

  • Defects that cannot be corrected without unreasonable expenditure of time and/or money.

  • Defects that appear repeatedly or reappear after correction.

  • Other serious defects.

The buyer can require the seller to be joined to court proceedings, if a third party sues the buyer and demands the transfer of the property to that third party, on grounds that arose before the sale contract was concluded. Failure by the buyer to involve the seller in litigation releases the seller from liability to the buyer, provided the seller can prove that if it had taken part in the case, it could have prevented the property being transferred from the buyer to the third party.

Seller's options

If the seller gives full disclosure and the buyer fails or refuses to accept the property, the seller can:

  • Demand that the buyer accepts the property.

  • Withdraw from the agreement.

Due diligence

12. What real estate due diligence is typically carried out before an acquisition?

Due diligence usually takes place after signing a letter of intent or a non-disclosure agreement. Real estate due diligence usually involves examination of:

  • The title of the seller and its validity.

  • Background issues, such as transactions, privatisation, disputes and permits.

  • Encumbrances and limitations.

  • Infrastructure and the supply of utilities.

  • Other legal risks.

In addition to a review of the Realty Register, it is also advisable to check the status of real estate with the:

  • Real Property Cadastre, which contains technical data and a description of the real property, such as information relating to:

    • permitted use or zoning;

    • boundaries description;

    • site dimensions;

    • infrastructure that crosses or affects the land plot;

    • limitation zones (see Question 11, Seller's obligations).

  • Technical Inventory Bureau, which contains technical data and information on buildings and facilities such as their:

    • dimensions;

    • size;

    • height;

    • location on the site;

    • infrastructure.

    The Bureau is currently in the process of merging into the Real Property Cadastre (see above).

  • City or town development plan (if any) (see Question 40).

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?

The seller typically guarantees to the buyer that:

  • The real estate is free of third party rights that the buyer does not know about.

  • The real estate has not been seized or pledged as security.

  • There are no limitations, encumbrances, disputes, or current court claims relating to usage rights.

  • All corporate approvals and procedures are observed.

  • All obligations of the previous property owners have been properly fulfilled and the requirements of anti-trust legislation (if applicable) have been adhered to.

  • Public utility contracts have been entered into and are in effect, which enable the use of the property for the designated purpose.

Inheriting liability

14. Can an owner or occupier inherit liability for matters relating to the real estate even if they occurred before it bought or occupied it?

An owner or occupier is not generally liable for pre-ownership or pre-occupation matters (for example, environmental matters), provided he can prove that they occurred before his ownership or occupation.

An occupier is not generally liable under a lease if liability occurred before he occupied the property. The party breaching the lease generally remains liable for the breach, even if an owner or occupier subsequently changes, unless the lease states otherwise.

Retention of liability after disposal

15. Does a seller or occupier retain any liabilities relating to the real estate after it has disposed of it?

The seller has liabilities in relation to the information it discloses to the buyer before sale (see Question 11).

These rules also apply to environmental liability, provided the new owner can prove that contamination took place before the property was transferred to the new owner.

Seller and buyer costs

16. What costs are usually paid by the buyer? What costs are usually paid by the seller?

Buyer's costs

The Realty Register charges a state registration fee of about RUB15,000 to register a title conveyance of every item of real estate. The buyer generally pays this fee (though the parties can decide otherwise).

The buyer's costs include the fees of his:

  • Agent.

  • Surveyor.

  • Legal adviser.

Seller's costs

The seller's costs include the fees of his:

  • Broker.

  • Surveyor.

  • Legal adviser.

 

Real estate taxes and mitigation

17. Is value added tax (VAT) (or equivalent) payable on the sale or purchase of real estate?

Transactions involving the sale of corporate real estate are generally subject to VAT at the rate of 18%. VAT and the purchase price are payable by the buyer to the seller, who transfers the VAT to the state.

The sale of land plots is exempt from VAT.

 
18. Is stamp duty/transfer tax (or equivalent) payable on the sale or purchase and who pays?

No stamp duty or transfer tax is payable on the sale and purchase of real estate.

The Realty Registry registration fee does not depend on deal value and is about RUB15,000 for each item of real estate.

Notarisation of sale contracts is not compulsory (see Question 10, Sale contract).

 
19. Are any methods commonly used to mitigate real estate tax liability on acquisitions of large real estate portfolios?

A corporate acquisition is commonly used to mitigate tax liability. The sale of the shares of an SPV that owns real estate is VAT exempt. The capital gain derived from the sale of the SPV shares is not subject to corporate income tax provided that the seller has been holding the SPV shares for more than five years (this rule only applies to shares purchased after 1 January 2011).

However, the Russian courts may apply the doctrine of business purpose, which in certain cases minimises the mitigation of real estate tax liability using corporate acquisitions.

 

Holding business premises

Climate change targets

20. Are there targets 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 was adopted in 2010. However, there are not many provisions specific to corporate real estate. The key matters relating to corporate real estate are:

  • According to Russian law minimum energy efficiency criteria should be introduced by the Ministry of Regional Development, but this has not happened yet. Once these criteria are introduced, all newly constructed facilities (including corporate real estate) as well as reconstructed facilities must comply with them. These criteria should include targets on electricity consumption, heating consumption, water consumption (including cold and hot water) and ventilation volumes.

  • These minimum energy efficiency criteria will also introduce requirements applicable to architectural, technological, engineering and construction solutions, which may impact energy efficiency. These requirements will have to be reflected in facilities' project designs, prepared after the requirements enter into force.

Russian law is as yet silent on the reduction of greenhouse gas emissions from buildings.

Third party outsourcing

21. Is it common for companies to manage their real estate portfolios and their accommodation needs by using third parties through outsourcing transactions?

Owners of office premises, warehouse facilities and hotels generally employ professional companies or use outsourcing arrangements for property management. However, industrial properties are generally managed by owners themselves.

For real estate disposals, outsourcing consultants are usually involved, such as:

  • Agents.

  • Auditors.

  • Lawyers.

  • Civil engineers.

  • Environmental experts.

  • Independent appraisers.

Restrictions on foreign ownership or occupation

22. Are there restrictions on foreign ownership or occupation of real estate, or on foreign guarantees or security for ownership or occupation?

Generally, foreign nationals have the same scope of rights, guarantees and security as local companies and individuals. The following federal law restrictions apply to foreign nationals:

  • They do not have the right to own land plots alongside national borders. The exact list of the territories affected by this restriction was adopted by the President of Russia in January 2011. They are however able to lease land plots alongside national borders.

  • They cannot own agricultural land plots. This restriction also applies to Russian companies in which over 50% of the authorised capital belongs to foreigners. They are however able to lease agricultural land plots.

  • They cannot conclude transactions establishing control over businesses of strategic importance for national defence and security, for example military and nuclear, telecoms, aerospace businesses and legal monopolies, without the prior consent of the federal government.

Issues on change of control

23. Does change of control of a company affect its holdings of real estate?

Changes in the ownership of a company generally do not affect the holdings of real estate, unless foreign ownership is involved (see Question 22). Change of control of a company is often used to acquire effective control over real estate. However, in this situation, the buyer acquires not only the company's assets but also its liabilities.

Compulsory purchases

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

Legislation provides an exhaustive list of cases where ownership rights can be terminated without the owner's consent. For example, a land plot with real estate on it can be seized for public needs, including:

  • Allocation of facilities of federal or regional:

    • transport;

    • railways;

    • information and communication.

  • Fulfilment of international treaties.

Property can be seized from the owner based on a court resolution for state or municipal needs, under specific procedural requirements.

In these cases, the purchase price is the market price estimated by an independent appraiser.

In recent years, a few federal laws have been adopted under which procedures for compulsory purchase of land plots for specific national projects are far more simple than those set out under general legislative provisions. An example is the federal law on the expansion and development of "New Moscow" and the preparation for the holding of the 2018 Fifa World Cup.

Municipal taxes

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

Legislation does not impose any specific municipal tax on the occupation of business premises.

A regional property tax (that does not apply to land plots) is fixed by regions. It cannot exceed 2.2% of the property's book value.

Land plots are subject to land tax established by the municipal authorities. The tax rate cannot exceed 1.5% of the land plot's cadastral value, which in turn is established by the regional authorities.

 

Real estate finance

26. How are acquisitions of large real estate portfolios or companies holding real estate generally financed?

Acquisition of large real estate portfolios or companies holding real estate is generally financed by:

  • Syndicated lending.

  • Initial public offerings (IPOs).

  • Secondary public offerings (SPOs).

 
27. How is real estate commonly used to raise finance?

Secured lending

Secured lending is commonly used to finance business by bankers and institutional investors.

Sale and leasebacks

Sale and leasebacks are mainly used in the market for warehouses and retail property. The tax authorities have created negative case law concerning the tax consequences of using these structures, which has made them unpopular. This particularly applies where there appears to be no evident business purpose for the deal.

 
28. What are the most common forms of security granted over real estate to raise finance? How are they created and perfected (that is, made valid and enforceable)?

The most common form of security granted over real estate to raise finance is a property mortgage. A property mortgage must be signed by the parties and registered in the Realty Registry to be valid and enforceable.

 
29. Is real estate securitisation common in your jurisdiction?

Mortgage-backed securitisations 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?

The lease provisions of privately owned corporate real estate are generally freely negotiable.

However, specific rules and limitations apply to publicly owned (state and municipal) property (see Question 33).

 
31. What are the formal legal requirements to execute a lease?

A lease must be in writing and signed by both parties. Depending on the particular situation, execution of a lease may also require:

  • Corporate approval by the landlord's shareholders as a large scale transaction.

  • Prior approval of a mortgage holder, in case of mortgaged property.

  • Recording of the lease with the Realty Registry (for leases longer than one year).

Rent levels and reviews

32. How are rent levels usually reviewed and are there restrictions on this? Is VAT (or equivalent) payable on rent?

Rent

Rent payments are generally divided into the following three components:

  • Base rent price, that is, the landlord's remuneration.

  • Operating expenses (OPEX), such as:

    • management;

    • lift maintenance;

    • cleaning of public areas;

    • visitor reception services.

  • Payment for utilities consumed by the tenant including electricity, water and gas.

There are no restrictions on corporate real estate property rent levels. Rent review frequency is fixed in the lease but cannot be more often than once a year.

Base rent rates and OPEX are usually established in US dollars per square metre per annum and are payable quarterly, in Russian roubles.

VAT

Rent payments under leases are subject to VAT at 18%. Under specific conditions, rentals for office premises leased by representative offices of foreign companies may be VAT exempt.

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 length of the lease term for private commercial real estate is not limited, and generally varies from five to 15 years. There is a statutory maximum lease term of 49 years for farm land. In practice, this 49 year term is the maximum for all publicly-owned land

If contractually agreed, on expiry of the lease term (and having properly fulfilled its obligations), the tenant has the pre-emptive right over others to conclude a lease for a new term. The tenant must provide the landlord with written notice of its intention to sign a new lease within the period indicated in the lease, or if no period is indicated, within a reasonable time before the lease's expiry.

However, if at the end of the lease term, the property owner decides to no longer lease out the property, the pre-emptive right of the tenant does not apply. If the landlord refuses to sign a lease for a new term with the tenant on these grounds, but within one year of expiry of the lease, signs a lease with another tenant, the original tenant can claim in court either:

  • Assignment of the executed lease agreement to itself.

  • Compensation for the damage incurred.

Restrictions on disposal

34. What restrictions typically apply to the disposal of the lease by the tenant?

With the landlord's prior consent, the tenant can generally:

  • Sublet the property to a subtenant (liability to the landlord under the lease remains with the tenant). The duration of a sublease cannot exceed the duration of the head lease.

  • Assign the lease to a new tenant (liability to the landlord under the lease passes over to the new tenant).

  • Pledge lease rights as collateral, and contribute them to a company's authorised capital.

The property owner is free to sell or mortgage the leased property without the tenant's consent. The sale or mortgage of the leased property does not negatively affect the tenant, that is, the lease remains unchanged.

Use of premises within a corporate group

35. Can tenants usually share their business premises with companies in the same corporate group?

Sharing premises is common and is generally arranged through a sublease, that is, a tenant subleases part of the leased premises to other companies in the same corporate group. A sublease requires the landlord's prior consent unless consent to sublet to companies in the same corporate group has been granted in the lease. Because these inter-company subleases are generally a pure formality, premises are sublet on the same terms and conditions as the head lease. Although the terms are negotiable, to avoid potential negative tax implications, the rent payable under the sublease is generally no less than the head lease rent.

Repair and insurance responsibilities

36. Who is usually responsible for keeping the leased premises in good repair?

Unless agreed otherwise the owner or landlord carries out extensive or major repairs to the leased property at its own expense. The landlord must:

  • Maintain the property in working order.

  • Carry out ongoing repairs at its own expense.

  • Cover expenses related to the upkeep of the property.

The tenant is responsible for minor refurbishments and the fitting-out of the premises, unless agreed otherwise.

 
37. Who is usually responsible for insuring the leased premises?

Insurance is not mandatory for leased premises. However, at its own expense and in its own interests, the landlord or owner insures the property against damage or destruction. At its own expense, the tenant can insure his personal property at the leased real estate. In addition, the landlord often insists that the tenant takes out third-party civil liability insurance in connection with the use of the leased property.

Grounds for termination

38. On what grounds can the landlord usually terminate the lease? Can the tenant terminate the lease in certain circumstances?

Landlord

Unless agreed otherwise a court can prematurely terminate the lease on the landlord's demand when the tenant:

  • Uses the property in serious violation or commits repeated violations of:

    • the lease;

    • the intended use of the premises.

  • Causes serious deterioration of the property's condition.

  • Fails, more than twice in consecutive months, to pay rent within the time stated in the lease.

Tenant

Unless agreed otherwise a court can prematurely terminate a lease on the tenant's demand when:

  • The landlord:

    • fails to place the property at the tenant's disposal;

    • creates obstacles to the use of the property under the terms of the lease or the intended use of the property.

  • The leased property has inherent defects that both:

    • impede the use of the property and were not revealed to the tenant by the landlord at the time of signing of the lease;

    • were previously unknown to the tenant and were unable to be uncovered at the time of inspection of the premises and verification of its good working order.

  • The landlord fails to carry out extensive repairs to the rented property in the time established by the lease, or if there is no contractually agreed time frame, within a reasonable time.

  • Due to circumstances beyond the control of the tenant, the property turns out to be in a condition unfit for use.

The parties can contractually agree other conditions under which the lease can be terminated prematurely. This includes a tenant's right to early unilateral termination of a lease without grounds, by giving written notice to the landlord. Depending on the parties agreement early termination of a lease can take place either in court or out of court (by written notification).

Tenant's insolvency

39. What is the effect of the tenant's insolvency under general contract terms and insolvency legislation?

There are no special rules in the legislation about the consequences of the tenant's insolvency (except liquidation). Liquidation of a tenant is a statutory ground for early termination of the lease. Depending on the parties' agreement a tenant's insolvency can be a ground for early termination of the lease. The landlord's financial interests may be partially protected by:

  • A security deposit retained by the landlord.

  • A contractually agreed right to prematurely terminate the lease without a court order, for delayed payment of rent due to the tenant's insolvency.

 

Planning law

40. What authorities regulate planning control and which legislation applies?

Various government authorities are responsible for the enforcement of town planning regulations, including the:

  • Federal Ministry for Regional Development.

  • Federal Supervisory Service for Nature Protection.

  • Federal Supervisory Service for Consumer Protection and Human Welfare.

  • Federal Ministry for Regional Development.

The municipalities have considerable town-planning powers.

The Federal Town Planning Code specifies the following elements of a planning or zoning activity:

  • Territorial planning. This defines the function and location of public buildings and facilities on territorial planning charts.

  • Zoning for urban development, that is, the zoning of territories of municipalities to determine territorial zones and create town planning regulations.

  • The layout of territories, that is, separating elements of the planned structure, such as blocks, micro-districts and other elements to establish the boundaries of land plots, on which extensive construction projects and infrastructure are intended to be built.

  • The design, construction and reconstruction of real estate, from engineering surveys to the commissioning or operation permit.

Since 1 January 2013 the Federal Town Planning Code also regulates the operation of buildings and facilities.

 
41. What planning consents are required and for which types of development?

To begin development, a developer must obtain a town-planning plan for the land plot to develop the design (see Question 42).

Before starting construction works, a building permit must generally be obtained from the municipal authorities.

The operation of a building requires an operating permit, which is generally issued by a municipality. An operation permit is required, among other things, to record title to the constructed building in the Realty Register.

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

Initial consents

To begin development, a developer must obtain a town-planning plan for the land plot to develop the design (this is different from a building permit or operating permit (see Question 41). The town-planning plan is subject to approval from local architecture and urban development authorities.

Third party rights

Third parties that are negatively affected can:

  • Object to the state and municipal supervisory authorities.

  • Begin court proceedings.

Public inquiries

Public hearings take place in the early stages of town planning, during urban development zoning and the laying out of territories (see Question 40). Public hearings are not required for the design process under the town-planning legislation. However during development of the design documentation, an assessment is made of the environmental impact and, as a rule, public hearings are needed within the scope of this.

Initial decision

It generally takes about two to six months to:

  • Conduct engineering surveys.

  • Establish the technical conditions necessary to connect to public utilities and infrastructure.

  • Obtain the town-planning plan for a land plot.

  • Obtain a decision and authorisation from the relevant state authorities (for instance, due to location close to an airfield, or a historical site).

The design is produced based on these surveys, technical conditions and the town-planning plan. A building permit is issued shortly after the design successfully passes expert examination (that is, appraisal and assessment). Since April 2012 non-state examination of design documentation can be used for obtaining building permit as well.

Appeals

An act (or omission) by a state or municipal authority that violates a developer's rights can be appealed through court proceedings.

 

Reform

43. Are there any proposals to reform real estate law in your jurisdiction?

The multitude of conceptual amendments to the Civil Code recently submitted for consideration by the State Duma (the lower chamber of the Federal Parliament) will inevitably also affect the real estate and development sphere. These include significant amendments to rights to land plots for construction, the construction permission process, the rights to real estate facilities under construction and many other novelties. If the legislative process goes ahead as planned, the article here next year will obviously be devoted 90% to the capacious legislative changes.

A substantial reform of the land and town-planning legislation is currently being considered as well. The proposed changes include limiting opportunities to obtain title to public land other than via a public tender. A few exceptions are, however, anticipated: these are allocation of land for social, cultural, etc. facilities by decision of the President or the Federal Government; the owner of a registered facility located on a land plot being able to obtain the title thereto; provision of land to “replace” a land plot withdrawn by the state for public needs, etc.

The lawmakers are discussing the possibility of construction design documents that have passed EU examination being used in Russia without local examination, thus avoiding duplication of the procedure.

There are debates in the governmental and legal community about a new real property tax, which should replace the land tax, individuals' real property tax and corporate property tax. However, this reform is not reasonably expected before 2015.

In 2013 - 2015, the vast majority of municipalities should be covered by territorial planning and zoning rules. Thus, acquisition of lands and permission procedures are expected to become more transparent and less time-consuming.

Finally, further improvement of the Realty Register and the Real Property Cadastre is under way.

 

Real estate organisations

Realty Registry

Main activities. The Federal Service for State Registration, Cadastre and Cartography manages the Realty Register, and is responsible for recording real estate titles.

W www.rosreestr.ru

Real Property Cadastre

Main activities. The Real Property Cadastre agency is responsible for the official collection, maintenance and provision of immovable property information in Russia. Its activities include:

  • Forming and measuring land parcels.

  • Running and maintaining the cadastre.

  • Undertaking cadastral evaluation.

W www.rosreestr.ru


Online resources

W www.pravo.gov.ru

Description. The Official Internet Portal of Legal information constitutes a part of the state legal information system which functioning is ensured by the Federal Security Service. The website contains federal laws, acts of the Chambers of the Federal Assembly, as well as legal acts of the Federal Government, other state authorities, regional laws and municipal legal acts. The language is Russian only. There are no websites in Russia where official English-language translations are available.

W http://english.garant.ru (www.practicallaw.com/9-522-1105)

Description. Link to a commercial service with selected laws translated into English available (unofficial translation).

W http://arbitr.ru (www.practicallaw.com/7-522-1106)

Description. The official site of the Supreme Commercial Court with key rulings and precedents. Partially available also in English and French.



Contributor details

Vitaly Mozharowski, Partner

Goltsblat BLP LLP

T +7 495 287 44 44
F +7 495 287 44 45
E vitaly.mozharowski@gblplaw.com
W www.gblplaw.com

Professional qualifications. Russia, 1997

Areas of practice. Real estate and construction.

Recent transactions

  • Advising Kronospan on the acquisition and development of three land sites in various regions, the construction of a brand new wood-processing plant, land acquisition, spatial planning, incentives, construction, financing and corporate matters.
  • Advising the Government of Moscow on the elaboration of the Heliport network concept, including land and spatial planning and finance and environmental issues.
  • Advising Google with regard to their office lease.
  • Representing Ghelamco and the landlord of a logistics premises in leases to tenants, for example DHL.
  • Advising Saint-Gobain on various legal matters relating to three deposits of mineral resources in the Southern, Volga and Urals regions, the construction of a plant: subsoil licence matters, acquisition of land plots for deposits and plant development, exploration and development of deposits in forests, environmental issues, conversion of forest and farm lands into the appropriate category, litigation on land licence matters, infrastructure construction, legislative work in the Federal Parliament, liaising with the authorities, regulatory issues and public procedures.

Maksim Popov, Associate Director

Goltsblat BLP LLP

T +7 495 287 44 44
F +7 495 287 44 45
E maksim.popov@gblplaw.com
W www.gblplaw.com

Professional qualifications. Russia, 1997

Areas of practice. Real estate and construction.

Recent transactions

  • Providing comprehensive support to TEVA for a greenfield project, the construction of a production facility in Yaroslavl.
  • Advising Mars Inc on the acquisition of land plots accommodating two factories in Russia, land privatisation, and the construction of the engineering infrastructure.
  • Advising Magna on the privatisation of land accommodating industrial production facilities and obtaining a construction permit.

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