Do Your Own Due Diligence And Don't Bet On A Promise
- By Vitaly Mozharowski
- May. 27 2013 19:15
Investors should ignore even well-intentioned assurances from officials, especially regarding future changes of land use.
Buying, selling, leasing and developing real estate assets in Russia offers a range of pitfalls for the unwary, but Russian Real Estate law offers considerable protection for all players in the real estate market, as well as clear rights and responsibilities. This means that due diligence, as in every other real estate market, is vital, and should be thorough. But, beyond that, 5 Don't's will provide investors with considerable surety.
Don't rely solely on the Real Estate Registry records. In effective practical terms this is just an information portal, to my great regret. Don't spare on legal due diligence.
Don't limit your legal due diligence to the statute of limitations (normally 3 years) — in practice you could face serious challenges that are more than 10 years old.
Don't be paranoid about development on leased land. Russia is fortunately very specific about that: the expiration of a lease term does not at all mean an obligation to clean up a site.
• Recorded title to a facility can, in practice, have as significant, if not bigger, value/ importance than a landlord's title to the underlying land;
• Public land: a private owner of a recorded facility enjoys an exclusive right to lease or purchase a land plot without a tender; the expiry of a lease term means only that either the lease needs to be extended or the land needs to be privatized by the facility owner;
• Private land: a private owner of a facility located on leased land has a pre-emptive right to purchase that land. The expiry of a lease does not mean the site needs to be cleaned up, instead of the lease being extended. In a deadlocked situation, i.e. the landlord and the facility owner fail to agree new lease terms, a court can decide in one of the following ways:
— establish terms and conditions of a new lease for an extended term, or
— where the market value of a facility significantly exceeds the value of the underlying land, order the landlord to sell the land to the facility owner at a price determined by the court;
— where the market value of underlying land significantly exceeds the value of a facility on it, order the facility owner to sell the facility to the landlord at a price determined by the court.
Don't rely on promises from authorities. Sometimes they promise notably more than they can deliver. Not because they are bad, but simply because they want you to invest on their soil so much.
Don't trust promises from authorities to legally 'cover' your investment from potential future challenges, e.g. land, infrastructure, population, environment, etc. These promises will be immediately forgotten once a prosecutor or other federal authority appears on the scene.