Real Estate Guide
Principles of ownership
Freehold/Ownership – freehold ownership of immovable assets is unlimited in time. The owner has the right of possession and use of, and disposal over, the property, therefore the owner may at any time dispose over the property, encumber it with mortgage or lease it out to a tenant. The title remains with the owner until it is passed under a sale and purchase agreement, as a donation, etc. Immovable assets can be inherited as any other property in Russia.
Leasehold – the lease agreement is concluded for a period specified in the lease agreement. In case the lease term is not defined, the lease agreement is concluded for an indefinite period. Such lease can be terminated by either party at any time upon three months prior notice. The lease agreement can be either short-term (up to one year, no registration is required) and long-term (more than one year, registration is required). Leased property can be subleased upon the landlord’s consent, unless otherwise provided by federal laws (eg sublease of land plots) or the lease agreement.
Common hold/Usufruct – not applicable.
Condominium ownership – a householders society is a non-commercial organization established to regulate exploitation of multi-apartment buildings, use of apartments and common areas thereof. Householders societies are regulated by the Civil Code and the Housing Code of the Russian Federation. As of 1 September, 2014, the clause of the Civil Code of the Russian Federation introducing a new legal form of non-commercial organizations – a partnership of property owners – enters into force. A partnership of property owners is a voluntary association of owners of immovable property (premises in buildings, including multi-apartment buildings, houses, country houses, gardeners partnership, etc.) created for the joint possession and use of, and disposal over, the property and to achieve other goals. However, such organization does not own the property but only unite the owners for the property management purposes.
Utilization right – not applicable.
Joint/Co-ownership – it is possible for multiple owners to share the ownership to a real estate facility. Usually, this form of ownership is created by inheritance by multiple heirs, in peasant (farm) holding or by joint ownership of spouses, however it can be established by an agreement of the parties. Joint ownership may exist with or without clear indication of ownership share. In case there is no indication of share, all the owners are deemed to have equal shares.
Registration – pursuant to the Russian legislation, a right is deemed existing if it is registered. Rights to real estate and transactions therewith are subject to state registration in the respective register. The Federal Service of State Registration, Cadaster and Cartography (“Rosreestr”) performs state cadastral registration of real estate and state registration of rights to real estate and transactions therewith and maintains the Unified State Register of Rights to Real Estate and Transactions Therewith (“EGRP”).
Functions on state cadastral registration and maintenance of the state cadastral register of real estate are delegated to the Federal Cadastral Chamber (“Cadastral Chamber”), a federal budgetary institution incorporated by the Russian Federation through Rosreestr.
Rosreestr makes entries on registered rights to real estate and transactions therewith into the EGRP, and the Cadastral Chamber makes entries to the state real estate cadaster on the real estate the rights to which are registered by Rosreestr.
Restrictions on foreign ownership
Pursuant to the Russian land laws, foreign legal entities, foreign citizens and stateless persons are not entitled to purchase ownership title to agricultural land and land within border areas of the Russian Federation. The list of border areas is approved by the President of the Russian Federation. An entity is also considered foreign, provided more than 50% of participation interest therein is held by a foreign company or individual.
Additional limitations regarding foreign ownership may be imposed by federal laws.
Title to real estate
Investigation of title – usually, lawyers or real estate agencies investigate the title and receive extracts from the State Registry. Law firms offer legal assistance in clarification/investigation of the title, drafting of agreements, etc.
Transfer of title – title to the land is transferred to a new owner upon its registration in Rosreestr. State registration of acquisition and transfer of rights to real estate is evidenced by a respective certificate on paper. Such registration is the only valid proof of the existing title.
Registration – after the lease agreement is executed, it is to be registered with Rosreestr (applicable only to long-term lease agreements). If the lease agreement is not registered with Rosreestr, such agreement shall be deemed unconcluded. However, the court practice demonstrates that in the event the parties fail to register the immovable property lease agreement which is subject to obligatory registration, but the landlord transfers and the tenant accepts the property, and the parties reach an enforceable agreement on the amount of rent and other conditions, then such lease agreement is deemed binding on the parties. In such event the tenant’s rights cannot be opposed to third parties (eg the tenant does not have a pre-emptive right to conclude the lease agreement for a new term). The transfer of ownership title to real estate under a sale and purchase agreement is subject to state registration.
Information on the register – the information contained in the EGRP is available to the public and is provided to any person upon request. Any person is entitled to request and obtain any information on real estate, unless the access is restricted by law.
Commercial leases – no special rules are applied to commercial leases.
Structure of a real estate transaction
Negotiation/terms of agreement – usually, commercial terms are negotiated by real estate agents who represent the landlord and the tenant. In most cases, law firms are hired to draft agreements and support the transaction/registration of rights.
Heads of terms – are commonly used in commercial transactions. Generally, heads of terms are not legally binding. However, in some cases they might be treated as a preliminary lease agreement, provided the form of the HOT allows such qualification. For purposes of preventing such situation the parties indicate in the heads of terms that they are not intended to be legally bound by the document.
Investigation of title – usually, real estate agencies investigate the title and receive extracts from the State Registry. Law firms offer legal assistance in clarification/investigation of the title, drafting of agreements, conducting due diligence procedures, etc.
Purchase deed – not applicable.
Contracts – contracts should contain mandatory conditions set forth in the Civil Code of the Russian Federation for every type of contracts. The most important condition is to include a detailed description of the facility. As regards building lease agreements, such agreements should also indicate the amount of rent. In addition, lease agreements usually indicate the lease commencement date. The agreements are binding for the parties and a failure to move into the premises may result in commencement of the lease term without the tenant actually residing in the premises.
Completion/closing – not applicable.
Post completion – not applicable.
Leases – a lease agreement is concluded for a period specified in the lease agreement. In case the lease term is not defined, the lease agreement is concluded for an indefinite period. The lease agreement can be either short-term (up to one year, no registration is required) and long-term (more than one year, registration is required). Leased property can be subleased upon the landlord’s consent, unless otherwise provided by federal legislation.
Social rent – social rent is a form of lease when the government provides residential premises to persons with poor living conditions. The procedure for providing premises on terms of social rent is established by federal laws, decrees of the President of the Russian Federation, the laws of constituent entities of the Russian Federation. Premises under social rent contracts are leased to persons that are recorded as in need of accommodation.
Transfer of ownership to leased property (alienation) – while leasing out the property the owner is allowed to alienate the leased property without the tenant’s consent. Such alienation does not affect the validity or conditions of the lease agreement. The lease can also provide for the tenant’s right to purchase the facility.
Language requirement – subject to the Federal Law on the State Language of the Russian Federation, the state language of the Russian Federation is subject to compulsory use in operations carried out by organizations of all forms of ownership. Documents can be bilingual and must indicate that the Russian language prevails.
Governance of lease signature/administration – a lease agreement must be signed by a person authorized to do so by the statutory documents. All other persons may sign agreements only under a power of attorney.
Usual commercial lease terms
Summary of available lease types – not applicable.
Alterations/modifications – alteration of the premises is possible upon the landlord’s written consent. Installation of separable improvements does not require such consent, unless otherwise indicated in the lease agreement (ie certain types of improvements may be prohibited by the landlord). Improvement is deemed inseparable, provided it cannot be removed without causing damage to the leased property.
Assignment and sub/under letting – it is possible for the tenant to sublease the premises upon the landlord’s consent. A sublease agreement may not be concluded for a period exceeding the period of the lease. Unless otherwise provided by the lease agreement, early termination of the lease agreement entails termination of the sublease agreement. If the lease is void, the sublease agreement shall also be deemed void. The tenant always remains responsible for actions of the sub-tenant and is liable for damage caused to the property by the sub-tenant (with the exception of the assignment). Agreements may contain other provisions limiting the rights to sublease the property or allowing such sublease under certain conditions.
Destruction/reinstatement – not applicable.
Duration of lease – as provided by the law, a lease agreement can be entered into for a fixed or an indefinite term. The parties may agree on any term, and a real estate lease agreement with a term exceeding one year is subject to state registration. In the event the lease term is not defined, the lease agreement is concluded for an indefinite period. Such lease agreements can be terminated by either party at any time upon one month’s prior notice, or in case of immovable property – upon three months’ prior notice.
Forfeiture/irritancy – not applicable.
Insurance – the landlord may insure a building or an apartment, and insurance payment is sometimes included in the rent. According to the existing market practice, the tenant must insure its property situated in the leased premises and its third-party liability for personal injuries and property damage.
Rent review – a rent is subject to review to correspond with the market rate. The review is usually carried out once a year using the CPI rate for the currency of the lease agreement with some minimum level.
Return of the premises – the tenant is obliged to return the premises in the initial condition, taking into account normal wear and tear, and to remove all separable alterations. If an alteration cannot be removed without causing damage to the property and such alterations was agreed upon with the landlord, the tenant may be compensated by the landlord for the cost of such alterations, taking into account the depreciation rate.
Repair/decoration/furnishing – the tenant is usually liable for minor repairs/maintenance and decoration. The landlord is liable for general/structural repairs of the building/of the apartment, and the cost of these major repairs is borne by the landlord, unless otherwise indicated in the lease agreement.
Service charges – may be included in the rent or agreed upon between the landlord and the tenant(s). The Open Book system is not common on the Russian market but it becomes more widespread as foreign landlords take its share of the market. However, it is not much welcomed by the tenants who prefer to have fixed rates and indexation in order to foresee their budgets, even having to pay more.
Termination/break clauses – the Civil Code of the Russian Federation contains provisions pertaining to early termination through the tenant’s or landlord’s fault. Usually, lease agreements also contain other clauses on early termination of the agreement out of court on grounds of the tenant’s or landlord’s default. Such default may include, for example, a failure to pay the rent in time or to comply with other provisions of the lease agreement. Tenants often insist on the right to terminate the lease unilaterally on any grounds.
Increasing covenant strength
Lease deposit – not applicable.
Surety – possible upon agreement of the parties.
Warranty – possible upon agreement of the parties.
Rent deposit/bank guarantee – a rent deposit is the usual form of security. A sum of one month to three months rent is deposited with the landlord (no interest-bearing account is created for such purpose) and can be recovered by the landlord in the event of the tenant’s failure to pay the rent or for purposes of eliminating damage caused to the premises by the tenant. Rent deposits are paid upon signing of the lease agreement and subject to return to the tenant after the agreement is expired/terminated.
Security of tenure
The tenant has a pre-emptive right to execute a new lease agreement upon expiration of the old one. The tenant shall notify the landlord of its intention to enter into such an agreement within the period specified in the existing lease agreement, or, if such period is not specified in the agreement, within a reasonable time prior to the expiration of the lease term. Such right does not apply if the agreement is terminated due to the tenant’s default and/or the tenants in any kind of default under the lease agreement. The former tenant is entitled to sign the lease agreement on the same conditions as negotiated by the landlord with a new tenant (including the rent amount). The pre-emptive right can be cancelled by the lease agreement.
Lease agreements may also include a silent/automatic prolongation clause, ie if the landlord/tenant fails to send a notification to the contrary, the lease agreement is considered extended for the next/indefinite term on the same conditions.
On sale/acquisition of real estate – no special tax is applicable.
Immovable property tax – is paid by the landlord based on the property value. Some landlords include it into service charges.
Income tax – Profit received by a taxpayer is recognized to be the subject of taxation under corporate income tax. The law on corporate income tax contains provisions on tax exemptions, taxation of certain types of income derived by entities and taxation of foreign legal entities on income not related to their activities in the Russian Federation.
Land tax – paid by the landlord unless the land plot is on a leasehold title. Some landlords include this amount into service charges.
Lease tax – no special tax applicable. Local tax – not applicable. Mortgage – not applicable. Other taxes – not applicable. Property lease tax – not applicable. Value added tax – Pursuant to the applicable tax legislation, the sale of goods, services, and works on the territory of the Russian Federation by a legal entity or individual entrepreneur is subject to VAT. Standard VAT rate is 18%. According to the Russian Tax Code, operations on the sale of land plots (or shares therein) and residential real estate are not subject to VAT.
Lease tax – no special tax applicable.
Local tax – not applicable.
Mortgage – not applicable.
Other taxes – not applicable.
Property lease tax – not applicable.
Value added tax – Pursuant to the applicable tax legislation, the sale of goods, services, and works on the territory of the Russian Federation by a legal entity or individual entrepreneur is subject to VAT. Standard VAT rate is 18%. According to the Russian Tax Code, operations on the sale of land plots (or shares therein) and residential real estate are not subject to VAT.
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