This country-specific Q&A provides an overview to real estate laws and regulations that may occur in Russia.
It will cover the most pertinent issues including ownership structures, restrictions, transfers, taxes and environmental contamination.
This Q&A is part of the global guide to Real Estate. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/real-estate
- Real Estate Law and ownership is regulated at the Federal level, so applies equally in all Russian regions.
- For historical reasons, a lot of the land is publicly owned.
- Ownership title to land and buildings/ premises is recorded in the Property Registry separately.
- Under certain conditions, ownership of a building is of greater value/ importance than the landlord’s title to the underlying land; expiry of a land lease does not necessarily mean the tenant has to clean up the site. If the land and building owners fail to come to an agreement, in a deadlock situation to be resolved by the court in favour of one or the other, the key differentiator, as a general rule, if which is of greater value: the land plot or the building.
- Owners of recorded buildings enjoy exclusive rights to either lease or purchase the public land plot on which those buildings are located without a tender. Expiry of a lease means only that either the lease needs to be extended for a new term or the land needs to be privatised by the building owner.
How is ownership of real estate proved?
Ownership of real estate is recorded in the public Realty Register controlled by the Federal Service for State Registration, Cadastre and Cartography (Rosreestr). Rosreestr generates extracts from the Realty Register officially confirming title to real estate and recorded encumbrances. Although the Registry records are the only proof of title to real estate, in practical terms. relying solely on the Realty Registry records does not create the status of a bona fide purchaser. To minimise any risks, the title entries recorded in the Registry require thorough, professional, legal due diligence of the property, sometimes even beyond the three year general statute of limitations.
Are there any restrictions on who can own real estate?
Generally, foreign owners have the same scope of rights, guarantees and security as local companies and individuals. Even so, the following restrictions apply to foreigners:
- They cannot own land plots adjacent to national borders (lease is possible). The precise list of territories affected by this restriction was adopted back in 2011.
- They cannot own agricultural land plots (lease is possible). This restriction also applies to Russian companies where foreigners control more than 50% of the authorised capital.
- They cannot acquire control over businesses operating in industries of strategic importance for national defence and security, e.g., military and nuclear, telecoms and aerospace, etc., without prior consent from the Federal Government Commission.
Some types of land may not be privately owned by virtue of statute, irrespective of nationality, e.g., lands that are officially recorded as forests or specially protected natural areas, common use areas in cities, such as streets, squares, etc.
What types of proprietary interests in real estate can be created?
Real estate may either be:
- Privately owned by individuals and companies. Private property may also belong to two or more owners (common ownership).
- Publicly owned by the:
- Russian Federation;
Public ownership of land plots may also be non-delimited, which means that there is no specified owner of the public land. Municipalities may generally dispose of non-delimited public lands. Certain specifics of dealing with non-delimited public land may be established at the regional level, so the rules may vary from region to region.
Other titles to real estate
Rights that exist in addition to ownership include:
- The right of perpetual (indefinite) use of land plots (perpetual): applies to publicly owned lands. This title is a historical land possession that, if the title holder so wishes, may be converted into ownership or lease. Nowadays, this title is granted only to a limited group of public enterprises and state agencies.
- The right of economic jurisdiction over property (perpetual) held by state-owned enterprises and organisations (generally, the state is the property owner.)
- The right of operational management (perpetual) held by state-owned enterprises and organisations (generally, the state is the property owner.)
- The right of inheritable possession of a land plot for life (for individuals only) over publicly owned lands. Land plots with this title are historical possessions and are not currently granted by the state.
Leases are not treated as an in rem interest but as encumbrances of real estate and, as a general rule, they follow the property they encumber, irrespective of change of ownership, mortgage, etc. of the property. Leases are a common instrument in all segments of commercial real estate: offices, logistics, retail, industrial, as well as with respect to land.
A typical lease term is up to 49 years for land and 5 – 25 years for buildings and premises.
Is ownership of real estate and the buildings on it separate?
Ownership of land plots and that of buildings on them are recorded in the Realty Registry separately.
If a land plot and a building located on it are owned by the same owner, they may not be sold separately, i.e., the land plot may not be sold without the building and vice versa.
For historical reasons, it is quite common for the owner of a land plot (usually the state) and the owner of a building on it to be two different owners. In such situations, if the building is sold, a new building owner simultaneously acquires the same right to use the relevant (part of the) land plot occupied by and surrounding the building on the same terms and conditions as the seller (previous owner). Consequently, the right to the land actually follows ownership of the building located on that land.
What are common ownership structures for ownership of commercial real estate?
Individuals normally own street retail and small size property.
Large size and top quality properties are generally owned by companies. When a Russian corporate vehicle for ownership of real estate is used, it is normally a Russian limited liability company (LLC). International institutional investors commonly use corporate structures with entities incorporated in Cyprus, the British Virgin Islands, Jersey and Guernsey, etc. The key drivers for this solution are obvious: tax advantages, customary system of common law, simple and quick procedures for change of corporate control.
What is the usual legal due diligence process that is undertaken when acquiring commercial real estate?
There is no standardised market form of due diligence report in Russia. Normally, a legal due diligence is performed by the purchaser’s legal counsel. For various reasons, a mere search in the Realty Registry is far from sufficient for obtaining a full and reliable picture of the real estate. As a rule, when a legal due diligence report is produced, the information subject to analysis is both collected from publicly available sources, e.g., the Realty Register, and provided by the sellers in accordance with questionnaires produced by the purchaser’s legal counsel.
The key elements of legal research normally cover:
- Good title to the property;
- The chain of titles to the property;
- Encumbrances and limitations over the property.
- Reservation of land for public needs;
- The land category and permitted use of the property;
- Claims and litigations;
- Compliance with spatial planning regulations;
- Construction regulatory requirements;
- Utility infrastructure and connection to utility networks;
- Free access to public roads;
- Sanitary, infrastructure and other protection zones (industrial facilities, historical legacy, airfields, power lines, high pressure gas pipelines, etc.);
Sometimes sellers arrange for their counsels to produce a vendor due diligence report, the main purpose of which is to give a buyer a general (positive) legal overview of the property concerned. As a rule, a vendor due diligence report is not a substitute for a full buyer’s legal due diligence exercise.
What legal issues (if any) cannot be covered by usual legal due diligence?
The Russian Realty Register was only established in 1998, so does not contain exhaustive information about all Russian real estate. Titles to real estate that appeared prior to 1998 are formally valid and enforceable without being recorded in the Realty Register. Consequently, collection of information on such real estate commonly requires much more effort than simply obtaining an official extract from the Registry.
The Russian Realty Registry is rather young and is still developing and gathering material data. This is why sometimes the Registry does not show material limitations on land and property, e.g., special protection zones established for airfields, underground facilities, national parks, etc. Discovery of such unrecorded limitations and encumbrances requires extra efforts on the part of the buyer’s counsel.
What is the usual process for transfer of commercial real estate?
· Assistance in providing information for legal due diligence.
· Due diligence
· Preparation of a draft Purchase agreement
· No prescribed forms or standard market terms
· Heads of terms are not binding except for temporary exclusivity conditions.
Signing to Closing
· Satisfaction of conditions precedent
· Arrangement of transaction funding
· Satisfaction of conditions precedent
· A purchase contract is executed by the parties’ authorised officers.
· Notarisation is not mandatory, although possible if the parties so agree; in practice, this happens very rarely.
· No prescribed form of transfer document.
· Satisfaction of conditions precedent
· Payment of purchase price
· Ownership title transfer recorded in the Realty Registry
· Satisfaction of conditions subsequent (in any)
· Assistance to the buyer with transfer of the leasehold over public land (if applicable) and utilities supply (if required)
· Satisfaction of conditions subsequent (in any).
· Formalising lease rights to public land (if any)
· Formalising utilities supply (if required)
· Notices to tenants (if any)
· Recording of title transfer with the Realty Register normally takes 15 – 30 days.
· The Realty Registry charges a nominal fee of approx. USD 300 per property for recording title transfer.
Is it common for commercial real estate transfers to be effected by way of share transfer as well as asset transfer?
Both share transfer and asset transfer are commonly used in Russia for real estate transfers.
Share transfer is normally used for top quality commercial property and by international institutional investors. Share transfer is also commonly used for transferring construction in progress or development projects because of pending permits that would otherwise require re-issue in the event of a formal change of project owner, i.e., of an asset transfer.
It is common to use asset transfer for small and medium-sized real estate.
Although a share deal is rather simple and quick compared to an asset transfer, it has an obvious downside: the buyer acquires both the assets and potentially unknown liabilities and claims (tax, regulatory, environmental, etc.).
On the sale of interests in land does the benefit of any occupational leases and income automatically transfer?
Russian law treats a lease as an encumbrance that follows the land/ property it encumbers, so if land is sold, the existing leases survive. The new land owner replaces the previous landlord towards tenants. In other words, occupational leases and, consequently, rent automatically transfer to the new land/ property buyer.
What common rights, interests and burdens can be created or attach over real estate and how are these protected?
In addition to leases, the following rights and interests may be created:
- Easements – right of way. Easements may be used to lay pipelines, power lines, etc. over land belonging to other owners. Easements are subject to recording in the Realty Register.
- Right of use of public lands - granted by a simplified procedure to lay linear facilities.
- Reservation for public needs – this is a sort of public notice to the land owner that its land may be withdrawn for public needs. Reservation does not always result in withdrawal, as reservations normally cover much greater areas than are actually required and withdrawn. Reservation is a temporary limitation, normally established for a term of 7 years.
Russian law does not recognise “construction rights” or “rights of light” as an interest attachment over land. These needs are covered by other regulatory instruments: a building permit granted to a developer, spatial planning documents, sanitary requirements and legal actions known as actio negatoria.
Are split of legal and beneficial ownership of real estate (ie Trust structures) recognised?
The Russian legal system does not recognise split of legal and beneficial ownership of real estate or “beneficial ownership” as a type of in rem interest.
The similarly sounding contract of trust of estate known to the Russian legal system is close to the asset management concept and, as mentioned, does not result in split of legal and beneficial ownership. All transactions made by the trustee are executed in the name and on behalf of the recorded owner of the real estate.
What are the main taxes associated with commercial real estate ownership and transfer of commercial real estate?
Buildings and premises are subject to corporate property tax. Tax rates are established by regions, so vary between them.
Land plots are subject to land tax. Tax rates are established by municipalities, so vary from municipality to municipality. Even so, the land tax rate may not exceed 1.5% of the land plot's cadastral value, which, in turn, is established by the regional authorities.
Transfer of corporate real estate is generally subject to VAT at a rate of 18%. VAT and the purchase price are payable by the buyer to the seller, who transfers the VAT to the Federal Treasury. Sale of land plots is exempt from VAT.
There is no stamp duty or transfer tax in Russia.
What are common terms of commercial leases and are there regulatory controls on the terms of leases?
Form of Leases
Forms of commercial property leases are not codified or prescribed in any way; lease provisions of privately owned corporate real estate are generally freely negotiable.
Specific regulatory rules and limitations apply to lease of publicly owned (state and municipal) property.
Rent levels of private commercial real estate are not regulated and are fully negotiable. Until recently, it was common to fix rent in USD payable in the local currency – Russian Roubles. The recent economic turbulence has, however, resulted in a more flexible and tenant-friendly position on the part of landlords towards rent levels. Now, the majority of commercial property leases are fixed in Roubles with the possibility of annual review.
The most common rent basis is fixed rent with a capped annual indexation. Turnover rent is used for high quality retail property. Rent for quality commercial real estate generally consists of the following three components:
- Base rent - fixed, that is, the landlord's remuneration.
- Operating expenses (OPEX) – usually fixed, such as:
- Property management;
- Lift and machinery maintenance;
- Cleaning of common areas;
- Visitor reception services;
- Utilities consumed by the tenant - variable, according to meter readings, e.g., electricity, heating, water and gas.
Transfers and sub-letting
Unless otherwise stipulated in the lease, the tenant may generally, given the landlord’s prior consent:
- Sublet the property (liability toward the landlord under the lease remains with the initial tenant). The duration of a sublease may not exceed that of the head lease.
- Assign/ transfer the lease to a new tenant (liability toward the landlord under the lease passes to the new tenant).
- Mortgage lease rights as collateral.
- Contribute lease rights to a subsidiary company's authorised capital.
A lease contract may contain an upfront landlord’s consent to transfers and subletting.
Renewal and termination
The duration of a private commercial real estate lease is not limited and generally varies from 5 to 15 years.
There are statutory maximum lease terms for publicly-owned land established in Russia, e.g., for agricultural land (49 years), for construction of a building (10 years).
If contractually agreed, on expiry of the lease, a tenant that has duly fulfilled its obligations, enjoys the right of first refusal (all other things being equal) to extend the lease for a new term. The tenant must provide the landlord with a written notice of its intention to extend the lease by the deadline set in the lease or, in its absence, within a reasonable time prior to the lease's expiry.
Unless agreed otherwise, a court may terminate a lease early at the landlord's demand when a tenant uses the property in serious violation or commits repeated violations of the lease and the permitted use of the premises, causes a serious deterioration in the property's condition, fails (more than twice in consecutive months) to pay the rent within the time stated in the lease, etc.
Unless agreed otherwise, a court may terminate a lease early at the tenant's demand when the landlord creates obstacles to the quiet possession and use of the property, undisclosed inherent defects in the property are discovered, etc.
The parties may contractually agree other conditions for early termination of a property lease, including early termination without a cause, but with reasonable prior notice. Depending on the parties’ agreement, early termination of a lease may take place either through a court or out of court (by written notice).
Unless agreed otherwise in the lease, the property landlord is usually responsible for extensive or major repairs to the leased property. The landlord must:
- Maintain the property in working order.
- Cover expenses related to the upkeep of the property.
Unless agreed otherwise, tenants are by default responsible for routine repairs, refurbishments and fit-out of the premises.
Full repairing and insuring leases (FRI) are not common in Russia, although legally possible.
How are use, planning and zoning restrictions on real estate regulated?
Planning and zoning are usually regulated in Russia at the Federal level and have a multilayer structure:
- Territorial planning – determines the location of buildings and facilities on territorial planning charts.
- Zoning – determines the types of permitted use of land plots, their maximum size and limits of the permitted construction parameters (minimum distances between buildings and site borders, maximum height and number of floors, development density, etc.), as well as restrictions on use of land plots and the property located on them (special protection zones).
- Territorial layout - separates elements of the planned structure: blocks, micro-districts and other urban planning elements to establish boundaries of land plots on which development projects and infrastructure are to be built.
Who can be liable for environmental contamination on real estate?
The 'polluter pays' principle is applicable in Russia, meaning that an owner is not by default liable for pre-ownership contamination, provided it can prove that contamination happened prior to its ownership.
There is no general duty to report to authorities, affected third parties, etc. of any environmental contamination unless the level of contamination may be classified as a dangerous or emergency situation. Investigation of land contamination is mandatory only during geological and engineering surveying prior to development of a design for a new construction project.
Is expropriation of real estate possible?
Expropriation of real estate for public needs is possible in Russia. The law contains an exhaustive list of such public needs, e.g., construction of public roads, railways, energy systems, national defence or security needs, etc.
Unless the owner of the real estate concerned agrees, expropriation of property is effected via a court order. In any case, the owner is entitled to compensation equal to the market value of the expropriated property. The market value is estimated by an independent licensed appraiser.
Normally, expropriation is preceded by reservation of real estate for public needs, which is subject to recording in the Realty Register.
Is it possible to create mortgages over real estate and how are these protected and enforced?
Mortgages over commercial real estate are one of the most common types of security in Russia. Mortgages are subject to recording in the Realty Registry. Notarisation is not mandatory but might provide the lender with valuable benefits in the event of enforcement.
Enforcement of a mortgage requires a court order unless the mortgage is notarised or the mortgagor agrees to follow an out-of-court take-over. Unless agreed otherwise, enforcement of a mortgage is normally effected through sale of the mortgaged property by public tender. Unless agreed otherwise, the lender may take over the mortgaged property.
The mortgagor’s insolvency virtually always results in complications to mortgage enforcement.
Are there material costs associated with the creation of mortgages over real estate?
Creation of mortgages in Russia is associated with the following main costs:
- A nominal registration fee – approx. USD 70 to register a mortgage in the Realty Register.
- Notary's fee (notarisation is not mandatory) – approx. USD 500 – 1,000.
- Licensed appraiser’s fee - negotiable.
- Insurance costs (not mandatory) - negotiable.
There is no stamp duty or transfer tax in Russia.
Is it possible to create a trust structure for mortgage security over real estate?
No, the Russian legal system does not recognise split of legal and beneficial ownership of real estate. A mortgage may be established in favour of the lender/ creditor only.
What is the main legislation relating to commercial real estate ownership?
The Russian legal system is a continental one, so is based on statutes. Real Estate ownership is regulated at the Federal level, so works equally in all regions. The main legislation relating to commercial Real Estate is as follows:
- Federal Constitution of 1993 (basic provision on ownership title).
- Federal Civil Code 1994, as later amended (detailed regulation of real estate owner’s rights and obligations, transactions with real estate, etc.).
- Federal Land Code 2001, as later amended (detailed regulation of use of land, land limitations, specifics of public land acquisition, etc.).
- Federal Town Planning Code 2004, as later amended (detailed regulation of spatial planning, zoning and land development).
- Federal Law of 13 July 2015 On State Registration of Real Estate (detailed regulation of real estate ownership transfer and transactions registration procedures).
- Federal Law of 16 July 1998 On Mortgage, as later amended (detailed regulation of mortgage agreements and their enforcement, limitations and procedures).