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. Last Updated: 07/27/2016

Public Land Acquisition: Available Options

UnknownAnna Minaeva
All land was exclusively state owned until 1990. With the start of land reform, land has gradually begun to enter into circulation. Today, most land transactions mediate a transfer of land from public ownership to private ownership.

The right land plot is an issue of high importance for industrial construction projects and investment security. Before deciding to carry out a project it is necessary to check the designated purpose and permitted use of the land plot and the existing rights and restrictions on rights to it to ascertain, among other things, whether an access road can be built, railway tracks can be laid, and conditions are available for connecting the planned facility to utility networks.

Just as important is the title under which the land will be acquired and the procedure that precedes the conclusion of the transaction.

Under the 2001 Land Code, a private investor who intends to build an industrial facility on land owned by the state or a municipality can either buy the land or lease it. Land is transferred through one of two procedures: provision of land without prior agreement on the location of a facility, or with such agreement.

Both ownership and lease of land can be granted without prior agreement on the location of a facility. As a general rule, a contract is concluded only on the basis of an auction or a tender. An exception is when a notice of the proposed lease of a land plot is published and only one bid is received. No prior agreement on the location of a facility takes place if the facility is to be built in an urban or rural settlement in compliance with town-planning documentation and relevant land-use and development rules.

Eugen Zentner
The acquisition of land with prior agreement on the location of a facility on the part of competent authorities and interested organizations does not require an auction or a tender but is possible only on a lease basis. Essential steps in this procedure are the selection and formation of the land plot, including the establishment on-site, description, and certification of the boundaries of the plot, and cadastral registration.

Today, the Federal Anti-monopoly Service and the Economic Development and Trade Ministry are jointly preparing the next round of amendments to the Land Code. Local authorities plan to require that land be made available for commercial construction only on the basis of an auction. There may be a separate rule for industrial facilities: if there is more than one potential investor, an auction will be held, and if there is a single interested investor, the land plot will be granted under a lease without an auction. A corresponding law may be enacted as early as this year.

Until that happens, in practice the most attractive plan for investors remains the following sequence of actions: obtain prior agreement, conclude a short-term lease, build the industrial facility, register ownership of the facility, and then acquire ownership of the land. This approach has advantages due to several circumstances.

First, only lease, but not ownership, of land can be acquired by an investor for construction without an auction being held (Land Code, Article 30).

Second, the owner of the completed industrial facility will enjoy exclusive privatization rights to acquire ownership or leasehold of the land plot underlying the facility (Land Code, Article 36, Section 1).

Third, in the event that ownership of the land is acquired under Article 36, Section 1, the price of the land plot is set, depending on its location, at three to 30 times the land tax rate. Land tax, meanwhile, is 0.3 percent to 1.5 percent of the land's cadastral value.

Fourth, by concluding a lease agreement the investor avoids risks associated with the need to sell the land if the project is not implemented.

When rights to a land plot are acquired for the implementation of a construction project in line with the above, one should keep in mind the practice established in recent years with respect to the interpretation of the right to the privatization of land on which property facilities stands. The owner of a completed facility who concludes a lease agreement for the land plot it is located on is deemed to have exercised his exclusive right to the privatization of the land plot or the acquisition of a leasehold interest in it, and consequently, to have lost the right to buy the land plot under Article 36, Section 1. The relevant provisions are set out in the Supreme Arbitration Court's Order No. 11 dated March 24, 2005, and Moscow government decree No. 431-PP dated June 27, 2006.

This interpretation of the exclusive right granted by federal law to the privatization of a land plot underlying a property is contrary to the Land Code, violates the principle of the unity of a land plot and facilities securely attached to it, and restricts the right of citizens and their associations to private ownership of land under the Russian Constitution.Nevertheless, ownership of a land plot on which a completed industrial facility has been built can be acquired under Article 36, Section 1 of the Land Code given that the following conditions are met.

First, the land plot for which a lease agreement is concluded for the construction of the industrial facility must be undeveloped. Second, the lease agreement must specify that it is being concluded for the purpose of construction and for the duration of construction. Third, immediately following the completion of construction and the registration of ownership of the industrial facility, the facility's owner should file a statement of intent to acquire ownership of the land plot under Article 36, Section 1. A similar statement may be submitted earlier -- following the registration of ownership of incomplete construction, if the need arises to sell or complete another transaction with the incomplete facility.