Moscow Developers Facing Eviction

Elena Stepanova
Senior Attorney
Capital Legal Services

Developers have lately been facing initiatives of the Moscow authorities seeking termination of investment agreements previously concluded for construction of real estate facilities in Moscow and related alienation of the land provided for construction purposes. Does this governmental arbitrary treatment proceed from the Moscow construction sites being frozen by investors as a result of the crisis? Or is it because of an absence of meticulous legal examination on the part of investors, of the procedure for acquisition of rights to land parcels for construction purposes?

Amidst the current economic slowdown, investors are often forced to make decisions on freezing construction due to financial shortage and vague fundraising outlook. This in turn entails a breach of the approved construction timeframes and timeframes for developing the land parcels provided for such purposes.

Such failure to meet contractual terms and conditions often leads to penalties being imposed by the government on a developer, and sometimes the authorities go a step further and initiate termination of developers’ rights to the land provided for construction purposes.

At present, the authorities’ actions on withdrawing land parcels have not become widespread. Alienation of a land parcel is in fact a rather severe measure against a developer in delay and unless there are proposals that could be more attractive for the government from other potential investors, this measure does not always seem reasonable. Moscow authorities still prefer to extend land lease agreements concluded for the period of design and construction in the event of a developer commencing development of a land parcel and when the authorities see good prospects for the project implementation. Current legislation allows such extension, although the decision itself definitely remains at the discretion of the authorities.

Things however are not so simple with residential real estate. As a general rule, provision of rights to state-owned or municipally owned land parcels for residential construction is to be performed through tenders where the lease term constitutes one of the material conditions. Therefore, extension of the lease agreement concluded upon results of a tender is potentially fraught with claims filed by other bidders, who may declare that their rights have been infringed by changes in the material condition of the tender.

Generally, when adopting a decision on termination of an investment agreement followed by alienation of land, the authorities propose to a developer to do so voluntarily, by mutual agreement between the parties, and some developers accept this proposal. But the developer should bear in mind that it is entitled to reimbursement for the documented expenses incurred in connection with implementing the investment project, and to defend its investments in court.

Nevertheless, the current situation pertaining to Moscow authorities terminating investment agreements and rights to land parcels intended for construction also has other grounds not related to freezing of Moscow construction sites, but having roots in the legal realm.

Investment agreements are the most commonly encountered regarding allocation and provision of land parcels for purposes of reconstruction and construction of real estate facilities in Moscow.

In Moscow, provision of rights to land parcels for reconstruction purposes, real estate facilities located thereon and/or new construction, and conclusion of investment agreements is governed by the Moscow legislature. The City Tender Committee holds a tender to select an investor to carry out reconstruction, renovation or construction of a real estate facility, following which either an investment agreement or a lease agreement for the respective land parcel is concluded with the successful bidder.

But the structure of an investment agreement itself is not accepted by the federal land legislation as grounds for acquiring rights to the land for construction purposes. In connection with this, in recent years changes have been made in Moscow from holding investment tenders to holding tenders on conclusion of land lease agreements, development of agreements for areas with buildings already standing and concession agreements.

However, transitional provisions of the law on the enactment of the Land Code of the Russian Federation involved significant difficulties for developers, since registration of titles to land parcels that were developed under such investment contracts (i.e. without any tender process), was subject to several conditions.

Firstly, without a tender process, land parcels might only be leased for housing construction purposes or integrated development for housing construction purposes; relevant agreements should have been concluded prior to Dec. 30, 2007. Second, this procedure is only applicable to investment contracts concluded prior to Dec. 30, 2004. Nevertheless, investment contracts, including inter alia contracts unrelated to housing construction, were also concluded after Dec. 30, 2004. Moreover, as regards certain investment contracts concluded prior to the established date of Dec. 30, 2004, investors did not have enough time to duly formalize land relations prior to Dec. 30, 2007.

Eventually these circumstances caused the Federal Service of State Registration, Cadastre and Cartography to start denying registration of land lease agreements concluded under investment contracts.

In order to find a way out of the current situation, a bill was introduced to the State Duma to amend the Law on enactment of the Land Code, extending the term for registration of rights to land parcels until Dec. 30, 2009. However, adopting such a law would not solve the problems surrounding investment contracts concluded prior to December 30, 2004, and/or those unrelated to housing construction.

It was this very situation that caused the Moscow authorities to start terminating investment contracts. Over the last few months the Moscow Government issued a number of resolutions to terminate current investment projects due to “impossibility of formalizing land law relations in respect to the land parcel”.

Failure to observe the procedure for acquiring title to land parcels established by the law, and use of circumventive schemes may result in claims being taken to court. In a widely published case on the Russia Hotel, the court resolved that the rights to undeveloped land parcels may be obtained through a tender for the sale of the land parcel or the sale of the right to conclude a lease agreement, while the absence of such tender counts as circumvention of the procedure for granting land parcels for construction purposes, as established by the law.

To sum things up, we are positive that the recent tendency in Moscow requires real estate market players to pay closer attention, from the legal point of view, to timely and proper registration of titles to land for construction purposes, and to assess potential legal risks associated with investment projects more carefully.