In-Depth: Non-Existent Rights

The Federal Law “On the Bringing of the Land Code of the Russian Federation Into Force” (No. 137-FZ, of Oct. 10, 2001) has set the range of prices for plots of land subject to sale to the owners of real properties built on those plots at the equivalent of 3-30 land-use tax rates depending on the size of the inhabited area where the plot is situated.

In Moscow and other major cities with a population of over 3 million the minimal price equals 5 land-use tax rates. In the regions where local governments have not set a rate at which the sale price of land is to be calculated, land is to be purchased at a price that equals the minimal land-use tax rate.

On the face of it, everything is quite clear. But the situation in Moscow is not that simple. The Moscow government traditionally receives substantial rental revenues from its land and from the sale of leasehold rights through tenders. Hence, city hall is not interested whatsoever in introducing procedures governing the sale of plots to the owners of properties built on Moscow land.

A serious argument adduced by the city officials is that the sale of plots of land in Moscow will wreak serious damage on the social and economic development of the capital. To begin with, city hall fears that the privatization of land in Moscow will prompt businesses to buy up plots of land with a view to their further speculative resale.

Secondly, all that is likely to create conditions for the hostile acquisition and re-profiling of economically important municipal enterprises. Finally, the city government has more than once observed that once private owners take over municipally-owned land, Moscow’s construction plans are likely to face serious obstacles.

Indeed, if, assuming that sometime in the future the government decides to launch construction for public needs on a privately-owned plot of land, it will have to buy it from its owner at a price considerably exceeding the sale price. City hall is convinced that all these problems will result largely from the understated rates set down in the law introducing the new Land Code.

Government Resistance

Hitherto, all the attempts to secure freehold titles to plots of land in Moscow have met with active resistance on the part of city hall.

Solid-Kama was the first Moscow-based firm to obtain a freehold to the 1.7-hectare plot of land beneath its buildings and installations. In a complaint against Solid-Kama and a regional office of the federal Property Ministry the Moscow government urged the city arbitration court to invalidate the deal.

Moscow claimed the federal government had no right to sell land occupied by municipally-owned property because by the time Solid-Kama secured the title to the plot the decision on whether it belonged to the federal government or to the city had still not been taken, city hall claimed. The litigation continued for 18 months until in November 2003 the Arbitration Court of Moscow upheld the claim. Then Solid-Kama filed an appeal and the higher court instance threw out Moscow’s complaint. The city authorities filed a new appeal whereupon all the previous rulings were cancelled and the case was forwarded to the Moscow Court of Arbitration for re-examination. In September 2004 Solid-Kama won the case.

Upon paying approximately 700,000 rubles for a 0.5-hectare plot the PEM Printing House had to wait for nine months until in August 2004 the lengthy litigation process ended and its title to the land was officially registered with the authorities.

The company Ekos came a long way before its lawful title to a 0.5-hectare plot was recognized. The company was forced to take the Moscow Registrar Office to court. The Moscow Ordzhonikidze Plant, Liral Logistics and TsNIIRES, too, have succeeded in securing titles to the land where their properties are situated.

Litigation Across Russia

Resistance by regional authorities across Russia against the sale of land as well as conflicting positions taken by regional courts in settling disputes between local authorities and entrepreneurs prompted the plenary session of the Higher Arbitration Court to address the issue.

In its resolution No.11 adopted on March 24, 2005 (“On certain issues arising from the application of land-use legislation”) the court ruled that owners of buildings and installations have the right to apply for a freehold to the plot of land they occupy to a local government body in charge, which is to examine the application within 14 days and to forward a draft sale agreement to the applicant. If the authorized body fails to do so or to propose a tenancy deal the landlord has the right to file a complaint to the arbitration court requesting it to recognize the actions of the government bodies as unlawful (in accordance with Chapter 24 of the Arbitration Procedure Code of Russia).

The upshot was that Moscow city hall was forced to adopt a decree “On fixing the price for the sale of plots of land to owners of capital buildings, structures and installations in the city of Moscow” (No. 532-PP, Jul. 19, 2005) whereby the authorities set the maximum possible price of Moscow land, equaling 30 land-use tax rates or 45% of the cadastre value of land. Owners of economically important enterprises were offered the chance to purchase their plots at a preferential rate of only 20% of the cadastre value. The decree also instructed the Moscow Department for Land Resources to draft legislation governing land sales.

Nothing Has Changed

It may appear that a legal procedure governing the sale of land to the owners of buildings and installations erected thereon has been established in Moscow; however, it is still too early to judge on the practical side of those provisions.

To begin with, entrepreneurs have proved quite skeptical about the idea of purchasing the land they occupy considering such deals to be what they call a secondary sale. It has to be remembered that securing a freehold title requires withdrawing a considerable amount of cash from operations – a move few companies can afford.

And, considering the tight deadlines set for those willing to re-register their rights to land held in perpetuity, it is quite probable that many companies will have to agree to tenancy deals.

It is worth mentioning that in its resolution on the application of land-use legislation the Higher Arbitration Court of Russia specified that where a tenancy agreement is signed after the Land Code came into force, the building owner is believed to have already exercised his right to privatization through tenancy; hence, he is no longer entitled to obtain a freehold (in line with Article 36, Paragraph 1 of the Land Code).

The interests of other parties to the process, particularly of Moscow city hall, too, have to be taken into account. The city government can ban the sale of most plots of Moscow land by resorting to various methods.

It should also be noted that the Higher Arbitration Court also recognizes the government’s right to refuse to sell a certain plot of land on the basis of legal acts reserving it for public needs. In particular, the government’s decision against the sale will be lawful if the general plan for the development of a city, town or settlement envisages new development on the plot in question.

What makes the situation even worse is that up to now Moscow and the federal government have still not agreed on a delimitation of their rights to plots of land in the capital. The city market is, in effect, an arena where a variety of conflicting interests clash. The positions of Russian companies are quite unstable. Their attempts to resort to new laws may prove too heavy a burden for them. All that casts doubt on the possibility of radical changes on the Moscow market.

Natalia Demianchenko is a lawyer in the civil law department of the KLIFF law firm, and an expert in civil and land-use law. Ms. Demianchenko contributed this piece to Vedomosti.