29.07.08

The following is an English-language adaption of a far more detailed Russian-language article on the same subject. The Russian was written for lawyers. This adaptation is intended for managers and entrepreneurs.

Commercial Property in Russia
Anna Barysheva, Legal Consultant
and Josh Wilson, Communications Director
Alinga Consulting Group

PepsiCo made headlines late last year with plans to build a $170 million dollar facility in Russia. Pepsi is not alone: General Motors has recently announced plans to build a second Russian assembly plant; Hewlett Packard is moving forward with plans to build a computer assembly plant; and Goodyear Tires is considering locations for its first Russian production facility.

Whether growing or just planning a market entry, today companies are more likely to seriously consider owning property in Russia. This move can bypass potentially troublesome rental agreements and turn the challenge of skyrocketing real estate costs into an investment strategy.

This article will briefly overview the legislation that regulates commercial property in Russia in order to help potential investors better understand the law and the required processes. Investors should, of course, secure qualified legal help before concluding any property purchase.

Registration of Property

To be classified as commercial property in Russia, a facility must be "intended exclusively for commercial use." "Commercial uses" are limited to office space, storage, sales, and production.

No matter how property rights are obtained – whether through purchase, trade, court ruling, donation, inclusion into the charter capital of a company, or by other means – any change of rights concerning that property must be registered.

According to Article 131 of the Civil Code, proprietary rights to real estate, as well as the creation, limitation, transfer, or limitation of such rights, must be registered and entered into the Unified State Register of Rights (known by the Russian acronym EGRP).

This means that the new owner must register his/her ownership with the government offices associated with the EGRP in order to have any rights over the property.

This same registration requirement applies to anyone with any rights to the property (even other than ownership). Rights can be registered to nearly anyone or any entity, including Russians and foreigners, domestic and foreign organizations or corporations, and even domestic and foreign governments.

To initiate the process, the purchaser must submit an application and any required documentation. This documentation can vary depending on the type of property, the type of transaction (sale, donation, etc.), and the location of the sale. 

This documentation can include:

• The contract of sale
• A title document certifying the sellers' rights to the property, if those rights are not already registered with the EGRP.
• Documentation of payment for the property, whether in cash or in kind, as stipulated by the contract.
• Documentation of the fulfillment of any other conditions for sale or transfer as stipulated in the contract.

The application and documentation must undergo a legal review at the EGRP government offices. The review includes verifying the documents' authenticity, conducting legal due diligence, and assuring the legality of the transaction. If no ground for rejection is found, then the rights are entered into the EGRP and the applicant receives a standard Certificate of State Registration of Title.

Legal Support

Good legal support for transactions of commercial property should start with verifying that the parties involved have the right to make the transaction described by the contract. Specific attention must be paid to how the seller came to obtain rights to the property and to the documentation concerning the seller's right to own, use, and manage property for sale.

Everything that will be submitted to the EGRP should be examined closely beforehand as well. All contracts and other documents should be closely checked to make sure they coincide with the requirements of Russian law and to make sure that they do not conflict with one another.

If the sale is being made through an agent, the agent's authorization to sell the property must be confirmed. Such authorization can only be obtained via a power of attorney signed between the agent and the person who holds the rights to the property. The identity of the agent must also be confirmed, usually on the basis of his/her passport number as listed on the power of attorney.

Often, if an agency is involved, the power of attorney is only executable by the director of the agency, who must personally sign any documents concerning the sale.

A power of attorney may be sub-delegated to another person. However, this can only be done through a second power of attorney and only if the original specifically authorizes the grantee of power to sub-delegate the power to others.

Corporate Transactions

Russian law provides for specific restrictions on the sale of property by commercial organizations. For instance, when property is sold by a joint-stock company and the value of the property represents 25-50 percent of the total assets of the company, the transaction must be approved by the board of directors unanimously. If the value exceeds 50 percent of the company's assets, the decision must be made by general meeting of shareholders by a majority vote (75 percent of voting shares).

If the purchaser is a commercial organization, the property must be valuated before the purchase. This may be done by independent appraiser – in which case the assessor's report must be reviewed along with other documentation to determine the validity of the transaction. This report should show that the price paid for the property is reasonably close to its market value.

There are many other specific rules governing corporate purchases and sales. If any of these rules are violated, the transaction can be ruled invalid by a court if the case is brought to trial. Again, this is all the more reason to make sure qualified legal help is sought before any major purchase or sale. 

Consideration of Leases and Other Contracts

Buyers should also be aware that buildings in Russia are often owned by one entity, while the land under it is leased from another (most often the state). Any lease concerning the land should be carefully inspected.

The lease will often stipulate procedures for its re-issuance to a new owner as well as specific purposes for which the land (and buildings on it) may be used. The buyer should also confirm that payments are up-to-date on the lease, because this can affect the smooth transfer of rights. Any mortgages taken on the property should be researched for similar reasons.

If the land will be included with the building, an annual land tax will be applicable. This tax is also levied on those who occupy land based on a "permanent lease" with the government.

Buyers should also be aware that any active lease agreements concerning the property – or any part of the property – are transferred to the new owner, with only the ownership name and information unchanged. If the original owner has not maintained the property in accordance with Russian legislation and in accordance with lease agreements, the new owner can be held liable to make the alterations and perform any necessary maintenance.

Purchasing property in Russia is a complicated, multistage process. Many documents and facts must be verified before the purchase can be safely made. While this article has familiarized the reader with some of the major issues deserving close attention, obtaining qualified legal support for any transaction is the best way to ensure that a transaction is properly and legally concluded. While purchasing property can be a profitable and even advisable move, there are many pitfalls to be avoided.

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