The property regime in Russia

Introduction

The Russian Constitution of 1993 proclaims a right to hold land in private ownership. This is supported by the Civil Code of 1996, but Chapter 17 of the Civil Code, which was intended to establish a framework for transactions in land, was not brought into effect until 29 October 2001 when the new Land Code of the Russian Federation came into force.

On 29 October 2001 Russia passed a federal law overturning one of the remaining legacies of the USSR: state ownership of land. The new Land Code at long last permits private ownership of commercial land and, together with Chapter 17 of the Civil Code that now came into effect, governs transactions in land.

In general, foreign individuals and companies are allowed to buy and sell commercial land except in certain border and other designated areas. Agricultural land is dealt with in a law on agricultural land dated 24 July 2002. Perhaps the greatest practical significance of the Land Code is that it applies to the whole of the Russian Federation and the existing patchwork of regional land legislation is to be amended to bring it into line with this federal law. The Land Code has therefore removed the many discrepancies and inconsistencies that have appeared between regional and federal land law in the last few years as certain regions had forged ahead with their own land law reform programmes.

Land

Article 9 of the Constitution provides that land and other natural resources may be held in private, state, municipal or other forms of ownership.

The Land Code divides land into seven categories on the basis of a designated use. These are as follows:

• Agricultural land;
• Settlement land;
• Industrial land: land of industries, energy, transport, communications, radio-broadcasting, television, information technology, space activity support, lands of defence and safety and other special purposes’ lands;
• Land of specially protected areas and objects (e.g. nature parks);
• Forestry land;
• Water fund land; and
• Reserve land (land which is owned by the State, is not used for commercial purposes, and which can be transferred to any of the other categories – in effect, a miscellaneous grouping).

It is important, therefore, for a potential purchaser to check the prescribed use of any land before buying it. The prescribed use should be stated in all title documents, any agreement for use of the land and all registration documents. Each category has different conditions for usage and the Land Code requires that each plot of land is used and exploited only in accordance with the category in which it is designated. So, for example, it will not be permissible to build a factory on agricultural land. It should be noted, however, that in such a situation an application can be made to the relevant State authority to have the prescribed use of a particular plot of land changed. The change of the designated use of a land plot may be performed only by the state authorities and this is subject to the fulfilment of certain formalities and the proper documentation of the rezoning. The rezoning of land plots is governed by the Land Code of the Russian Federation and the federal law on rezoning of land plots of 21 December 2004, where the permitted cases of conversion and the procedure for the rezoning of land plots are detailed.

Many of the "subjects" of the Federation (namely the 89 regions and cities), had their own local laws governing land and some of these had permitted commercial land ownership for some time. The Land Code requires all regional land legislation to be brought into line with the provisions of the Land Code itself.

As a general rule, the Land Code only applies to transactions occurring after its enactment. Pre-existing ownership rights, which are now inconsistent with the provisions of the Land Code, however, have to be re-registered. For example, a permanent right to use of land should have been re-registered as a lease or the right of ownership to the land should have been purchased prior to 1 January 2006. Religious organisations can re-register their permanent right to use of land as a free and limited right to use of land prior to 1 January 2008. Only state and municipal institutions, federal state-owned enterprises, governmental and local government bodies do not need to re-register their permanent rights to use of the land plots. Individuals or legal entities whose permanent right to use of the land plot has not been re-registered are not entitled to dispose of their land plots after the above-indicated date. Similarly, where a building (or other item of immovable property such as a rig or a bridge) has been acquired, the land underneath that structure, or the land which is necessary for its use, and which had previously been granted as a permanent right of use should be re-registered as a lease or the land acquired outright.

Unless and until land plots to which an earlier registered right of permanent use is attached are re-registered, further dealings with that land will not be permitted. In particular, it should be noted that it is no longer permissible for a permanent right to use land to be contributed to the charter capital of a company.

It is a general principle of the Land Code that foreign individuals and legal entities are to have the same rights to land as local residents. Despite this, there are certain restrictions applicable to foreigners. A foreign national, for example, may not own land located in border and other special territories. A list of such land plots is still to be approved by the President of the Russian Federation. Some restrictions for foreigners exist in relation to agricultural land. Those are described below in more detail. The Land Code also provides that further restrictions may be imposed on foreigners leasing land but no additional restrictions have yet been enacted.

In some instances described in the Land Code, and in the regional land legislation, residents may be entitled to receive land free from the State. Foreigners, on the other hand, may only acquire land for valuable consideration.

Lease of Land

Land may be leased by companies and individuals whether Russian or foreign. In practice, leases are generally granted for a maximum term of 49 years and a lessee usually has a preferential right to renew the lease on expiry. The exact terms and conditions of a lease agreement will depend on negotiations between the lesser and lessee, but every lease should conform with the detailed requirements set out in the Civil Code and the Land Code.

A lessee has a priority over any subsequent lease of the same plot and, on the sale of the land, a priority right to its purchase. Leasehold rights may themselves be sub-let, assigned, sold or contributed to the charter capital of another entity. Unless otherwise provided for by the lease agreement, the aforementioned transactions can be entered into without the consent of (but after notification to) the lessor.

Any change to the terms of the lease agreement requires the consent of both parties. Early termination by the lessor of a lease agreement with a term of five or more years will require a court order. An application for such an order can only be made where there has been a material breach of the terms of the lease agreement by the lessee.

Agricultural Land

A specific law on agricultural land was adopted on 24 July 2002.The Law on Agricultural Land provides that foreign legal entities, foreign individuals and Russian legal entities in which foreigners control more than 50% of the charter capital may not own agricultural land. They are instead only permitted to lease agricultural land and for up to a maximum period of 49 years.

Under the Law on Agricultural Land, in the case of the sale of a land plot designated for agricultural production, the State (or more precisely, the State acting through the authorities of the region where the land plot is located) has the pre-emptive right to purchase such a land plot at the price announced by the seller. Accordingly the seller is obliged to notify the regional authorities of any planned sale of the land plot. If the regional authorities refuse to purchase the land plot or do not respond to the notification within 1 (one) month from the receipt of the notification, the owner can, within 1 (one) year from the receipt of the notification by the regional authorities, sell the land plot at a price not lower than the price indicated in the notification.

Mineral Resources

Ownership of a plot of land will not include ownership rights of the resources situated beneath that land. Such resources remain state property and may be exploited by private companies only in accordance with the provisions of the relevant subsoil legislation and subject to licensing.

Buildings

One of the principles of the Land Code is to keep buildings and the land on which they are situated in the same ownership. The Land Code only allows buildings to be disposed of separately from the land on which they are situated if: (a) it is not possible to separate out the land (for example, a condominium); or (b) the sale and purchase of the land is restricted (army land, border areas, etc.).

Where land is to be sold by a private entity, the owner of any building situated on that land will have priority in acquiring the land. If the owner of the building chooses not to buy the land then the land-owner can sell it to a third party. Where the land is to be sold by the State, however, the owner of any building on that land will have an exclusive right to purchase it: if the building-owner chooses not to so purchase, the State cannot sell the land to anyone else. Thus buildings may be owned by individuals and companies including foreign investors, but the land beneath those structures, if not owned with the building, will remain state (or private) property.

Building Leases

Buildings and parts of a building may also be leased. The terms and conditions of the lease agreement are regulated by the provisions of the Civil Code. These include, for example, general duties imposed on the lessee to pay the rent agreed, to maintain the property in good repair, to pay compensation on alterations for any improvements made, and gives a preferential right to renew the lease. Leases for more than one year must be in writing and must be registered with the relevant authority, which in Moscow is the Moscow Authority of the Federal Registration Service.

Rent payable on real estate leases is subject to VAT at a rate of 18 per cent. An exemption from VAT is provided on lease payments made by the representative offices of companies incorporated in most Western European countries and the United States.

Mortgage

There are no restrictions in the Land Code on the grant of security over land. Article 3 of the Land Code expressly states that this issue is to be regulated by the general civil legislation unless there are specific provisions to the contrary (thus, for example, a pledge cannot be taken over land which cannot itself be owned by foreigners). The Civil Code provides that a land plot can be mortgaged, while Article 22 of the Land Code authorises lease rights to be pledged.

It should be noted that the Land Code does not prescribe any particular requirements as to the form or content of agreements for the mortgage of land, which are regulated, by the Civil Code and the Federal Law On Mortgage (Pledge of Immovable Property) of 16 July 1998. Mortgages must be registered with the appropriate registration authority. Buildings and other real estate may be mortgaged but only together with whatever rights the building owner has to the land beneath the building. Residential houses and apartments can also be subject to mortgage, as can leasehold interests in real property.

In the event of default, a mortgagee may enforce its right to possession of real estate only through court proceedings, except for cases when the Law On Mortgages permits the out-of-court settlement of such claims. This procedure is possible only in case when the mortgagee and the mortgagor reached an agreement, duly certified by a notary, after origination of the grounds for the foreclosure on mortgaged property. In either case, the property that is subject to the mortgage will be sold at a public auction organised either by the court or by specially registered auction companies.

The Law on Mortgage Securities came into force in Autumn 2003. The Law sets out the requirements and conditions for the issue, certification and allocation of mortgage securities and their execution. The Law on Mortgage Securities provides for the further development of the real estate market in Russia.

Dispute Resolution

The Land Code stipulates that disputes involving land are to be settled in court proceedings although, prior to such proceedings commencing, any dispute can be referred to arbitration.

In accordance with the Civil Procedure Code and the Arbitration Procedure Code, disputes concerning immovable property (including land) are within the exclusive competence of the courts of the Russian Federation. In connection with this, Article 64 of the Land Code, which allows a dispute to be referred to arbitration, would appear to be in conflict with the legislation on jurisdiction.

Registration

The ownership and other property rights in immovable property, encumbrances over these rights, their acquisition, transfer and termination should be registered by the relevant local registration authorities of the Federal Registration Service under the Ministry of Justice in accordance with the Law on State Registration of Rights to Immovable Property and Transactions Therewith. Such registration is effective as confirmation of title. Rights that are created or transactions that are completed without registration (other than lease agreements for less than one year) are not valid unless and until they are properly registered. The appropriate authority in Moscow is the Moscow Authority of the Federal Registration Service. The information contained in the State Register is available by third persons for inspection after payment of a fee.

Payments for Real Estate

Payments for real estate in Russia made to Russian individuals or Russian entities, whether lease payments or payments of a purchase price, are subject to Russian currency control and should be made in roubles.

It is not uncommon for the price of many commodities, including land, to be quoted in a foreign currency, usually US dollars. Payment is then made in roubles by reference to the Central Bank rate of exchange applicable for the day of payment.