A Time to Gather Stones

Igor Gorokhov
Attorney
Capital Legal Services

Amendments to the federal land law give owners of privatized real estate two more years to make the decision to redeem land parcels under their ownership from the state at a discounted price. Has the time now come to gather stones?

Lawmakers have made land pricing directly dependent on population density in a given area — bigger settlements mean higher prices, while parcels outside settlements cost only 2.5 percent of their cadastral values.

The discounted price, however, is available only to the owners of real estate, either acquired from the state or reconstructed as a substitute for destroyed or demolished privatized property. The price for other owners seeking to purchase state land will be determined not only subject to location, but also based on the land tax rate, which may grow to an amount thirty times greater for land in major cities. It should also be noted that exercising the right of land leasing on preferential terms does not enable further preferential redemption.

In any event, the proposed preferential terms look rather attractive for owners who plan to carry out construction of new warehouses, production expansion or any other business development on leased parcels.

To start with, all documents confirming property rights on the relevant land parcel should be collected for each facility and a cadastral passport for the land parcel should be obtained. An application for land redemption should then be filed with the relevant state body, although determining precisely which body may be an entirely separate matter.

If the application is approved, a resolution is adopted granting the applicant an ownership title to the land under consideration. At the same time, the applicant is provided with a sale and purchase agreement for the parcel and asked to pay the redemption price and obtain a new extract from the state real estate cadastre for the redeemed parcel, where the information regarding rights is left blank.

Completion of all these procedures makes it possible to finally become the owner. But as often happens, use of the same legislative standards varies greatly case by case, including in court.

In most cases, disputes examined by the courts within the context of such legal relationships are initiated by the owners of real estate who were denied preferential redemption of the land. The authorities’ motives are clear: The budget revenue generated from leasing out land parcels, especially major ones with operating industrial facilities, is a significant income source for the relevant municipality. That is why local administrations seek means to deny businesses their lawful right to redeem the land.

The argument that an applicant did not privatize real estate facilities on a land parcel, but rather acquired the ownership title to them on the secondary market, is often used by the authorities as grounds for denial. The court practice however is solid: All judges declare that the right to privatize a land parcel at the preferential price is held by both the initial owners and other parties who subsequently purchase the privatized facilities.

Courts are likewise of the opinion that denial of preferential redemption on grounds that the redeemed parcel is too big compared to the facilities located thereon is unjustified. In addition, an applicant may claim redemption of only a portion of the land sufficient for operation of the owned buildings, and such a right is also declared lawful by the courts.

The courts also confirm the right to preferential redemption of land by owners of facilities under construction, and the degree of development of such facilities is of no relevance: When examining such a case, a court declared that the applicant should hold the right to preferential redemption of the land parcel under the facility that was a mere 2 percent complete. In the event the redeemed parcel is provided to an applicant for specific purposes (e.g. for construction), an applicant may be denied the redemption if it fails to fulfill set purposes.

In conclusion, the practice of courts applying legislation in the field of preferential acquisition of rights to state land by owners of privatized facilities generally favors the facility owners. Consequently, what is preventing businesses from becoming rightful owners of such land? Why do expert assessments show that less than 10 percent of land parcels are now privately owned?

Market participants admit that they are in no rush to redeem land parcels due to high prices, restrictions imposed on land use and administrative barriers. Most of the business community is not against redemption, but takes into account the extent of work required, which could be complicated, drawn out and expensive.

At the same time, market experts foresee growth in the cadastral land price in most regions, which may make acquisition of ownership titles to land parcels less attractive in the near future. Preferential terms will ultimately come to end and companies that have not redeemed the land under their facilities will be held liable for administrative offence — for the delay in reregistration of usage rights for the land.

Therefore, market participants each view the issue of whether it is time to gather stones differently. It is also always necessary to consider financial, administrative, managerial and other factors, the range of which may vary in each case.