Regulatory Change Boosts Pre-Leasing of Premises

Legal authorities clarify the law on leasing future buidings, which may allow parties to agree a tenancy during the construction process without the need for an intermediate "ageement to conclude an agreement".

The latest changes to Russian lease regulations are likely to bring greater flexibility to agreements between developers and tenants, allowing for properties to be let in advance of completion.

Latest Changes to Russian Lease Regulations

Steffen Kaufmann

Partner

DLA Piper

The Plenum of the Higher Arbitrazh Court of the Russian Federation ("VAS") has recently issued clarifications which are expected to have a significant impact on the legal framework for leasing real estate in Russia. Despite the fact that there is formally no principle of precedent under Russian law, VAS has nevertheless become an important source for legal developments over the past few years.  Resolutions issued by VAS on general matters of law are of a clarifying nature and are considered binding for lower courts.  One example is VAS Resolution No. 13 ("Resolution") which was published on VAS's official website on 21 March 2013 and contains a number of important clarifications relating to leases.  

Lease of future real estate objects

In its Resolution VAS acknowledged the possibility of leasing future real estate, ie real estate objects that are not yet owned by the landlord when the lease is signed. This will have an important impact on development projects by enabling property developers to lease out future building premises during the construction phase or even before. Previously a building had to be completed and ownership rights had to be registered prior to entering into a lease agreement. In practice lease parties often entered into preliminary lease agreements containing only an obligation to conclude a lease agreement once the building is completed, without giving the lessor the right to claim rent or the lessee the right to use the leased premises. The use of this intermediary step involving preliminary lease agreements is likely to fade out following VAS's recent Resolution.

Lease of part of real estate objects

Anna Sitas

Associate

DLA Piper

VAS also clarified the possibility of entering into lease agreements for parts of immovable property objects. Previously leasing part of a land plot, building or premises within a building required separate cadastral registration of the relevant part for identification purposes. Now it is possible to lease part of a land plot, building or premises just on the basis of a map attached to the lease agreement describing the subject matter of the lease. However, this new rule does not apply to state-owned land, so the lease of parts of land plots from the state or municipalities still requires a separate cadastral passport to be issued. 

Less formalistic approach

VAS has also taken a more commercial and less formalistic approach to lease agreements which do not properly identify the leased object or which are not duly registered. In its Resolution VAS held that such lease agreements are not automatically invalid provided the parties imply through their actions that they consider the lease valid. For leases that normally require registration VAS considers it sufficient that (I) the property was transferred to the tenant; (ii) the tenant accepted it without any complaints; and (iii) the parties have agreed on the amount of rent and on other lease terms and have fulfilled their agreed obligations. Such unregistered leases, however, have no legal effect towards third parties (eg a lease must be registered for a tenant to have a pre-emptive right to prolong the lease and for such lease rights to survive if ownership is transferred to a third party).

In addition VAS has issued further clarifications, including such related to rent adjustment rules and the transfer of land rights as a result of acquiring ownership rights to premises in newly constructed non-residential and multi-storey residential buildings.  The Resolution comes amid the on-going civil law reform that involves a number of important amendments to the Russian Civil Code, some of which have already come into force while others are still being debated. The practical implications of the abovementioned clarifications made by VAS can already been foreseen and are widely considered to be an important step in making Russian lease legislation more efficient.