In-Depth: No Need to Rush into Tenancy

Some provisions of ruling No.11 of March 24, 2005 “On certain issues arising from the application of legislation on land use”, deserve special attention from Moscow real property owners who are considering securing freehold titles to the plots of land under their buildings.

For example, the ruling clearly explains that if a property owner informs the government of his intention to secure a title to a plot of land by entering into a sale agreement and the government body concerned does not send him a draft sale agreement, or offers him a tenancy deal instead, the property owner has the right to ask the arbitration court to recognize the acts or actions (inaction) of the government body unlawful.

Moscow City Hall often denies companies permission to purchase the plots of land they occupy insisting on a tenancy deal, and in doing so it gravely violates the rights enshrined in Article 36 of the Land Code of Russia.

Sometimes government bodies reject applications from proprietors for freehold tenures because the plot in question is reserved for governmental or municipal needs under legal acts to the effect.

The Higher Arbitration Court of Russia has elucidated that the application for a freehold title can be rejected if the plot in question is reserved for development of a different property, in accordance with the general development plan of the city, town, or other settlement, adopted before the property owner applied for the freehold.

That document may be of interest for Moscow companies awaiting relocation beyond the Moscow outer ring road (MKAD). Before the government adopts a legal act reserving it for federal or municipal purposes the plot of land can be privatized. However, if such an act is adopted, the government’s refusal to sell it will be lawful.

Before the Moscow government approved the General City Development Plan – adopted by the Moscow City Duma in the third and final reading on April 27 – many companies, in principle, could secure the title for the plots under their facilities.

If the government rejects the company’s application for freehold tenure because of future forfeiting of the plot for public purposes, it is necessary to make sure that the given plot is expressly included in the General Plan, and not in some other act.

The Higher Arbitration Court ruling is also of interest regarding the opportunities for companies to acquire plots of land where the government share is over 25%.

The Higher Arbitration Court, through comparative analysis of the law, has established that such companies are entitled to privatize the land under their facilities, while the ban on the acquisition of government-owned property imposed by Paragraph 1 of Article 5 of the Federal Law “On privatization of federally- and municipally-owned property” is not applicable in that case.

The Higher Arbitration Court also clarified that where a real estate property owner had entered into a tenancy agreement for the plot of land before the Land Code of Russia took effect, i.e. before October 30, 2001, he still has the right to secure a freehold.

However, if the tenancy deal was signed after the Land Code came into force, the property owner loses that right, as he has already exercised his right either to buy the plot or to rent it, in line with Paragraph 1 of Article 36 of the Land Code.

Although that conclusion appears somewhat controversial, it still has to be taken into consideration. Companies who, for various reasons, decide either to enter into a tenancy deal or to have it extended, and some time later decide to purchase the plot will most likely have their application rejected, either on the basis of the given ruling or after the Moscow government, as a party interested in the continuation of the tenancy, takes the matter to court.

The Higher Arbitration Court of Russia has expounded the legal procedure for defining the sale price of a land plot subject to privatization. In line with Article 2 of the law on enacting the Land Code of the Russian Federation, the value of the plots of land for sale to the owners of property occupying those plots, in line with the provisions of Article 36 of the Land Code, is defined by the government of the region where the plot is located, and if the value is not set, the minimal land-use tax rate is applied.

Moscow has still not passed a legal act governing the sale price of plots of land enabling companies to secure the title to their plots at minimal price that equals 5 land-use tax rates.

It should be noted that companies who have already secured a freehold over their plots have paid the price equivalent to 30 land-use tax rates. But nothing is known of any specific precedents where the price was lowered.

Quite often courts have to decide if the owner of a building (installation) can exercise the right of using the plot on the same terms and conditions on which it was used by its previous owner, who held it in perpetuity.

The Higher Arbitration Court has explained that if the buyer, in line with the provisions of Article 20 of the Land Code, is not entitled to perpetual use, he can only enter into a lease agreement or purchase the freehold.

In line with Paragraph 2 of Article 35 of the Land Code, the maximum size of an area of the plot occupied by a building, a development or an installation and necessary for its operation is defined in accordance with Paragraph 3 of Article 33 of the Land Code, proceeding from the legally set rules for the allocation of land for certain activities, or from the rules governing land use and development, or project documentation.

The question of whether the size of the plot of land subject to privatization meets the aforementioned requirements is complicated.

However, where a dispute arises between the property owner and the government body seeking to decrease the plot in question, the latter must prove that a larger plot was allocated unlawfully in the first place.

Some erroneously believe that property owners are only entitled to a freehold over a small part of land around the building’s perimeter (depending on the number of stories), while the other part can only be leased.

A company that previously secured a title to its property, including real estate property, is provided a plot of land necessary for the operation of all its facilities and ensuring an uninterrupted production cycle.

During the building and allocation of a plot of land, the necessary regulations are usually observed. That is why the owners of buildings and facilities have the right to privatize the entire plot previously allotted to them.

Olga Novikova is a lawyer specializing in complex arbitration cases and counseling companies on securing freehold titles to land plots.