In Depth: Tracing the History

When beginning to research the rights of the real estate property, which the investor is interested in, for example a land plot or some building, it is first of all necessary to clarify that the person or company offering the property for sale is in fact the owner of the property. Here lawyers and their clients usually are effected by the difficulties connected with the lack of valid Unified State Register of Immovable Property (the Property Register). The law on state registration of rights on immovable property and transactions therewith only entered into force in the beginning of 1998. Before then transactions were not registered with the unified state authority in Russia.

Therefore it is not uncommon that, when attempting to conclude a transaction on immovable property, it becomes clear that the property is not on the Register, as it was not taken into account. Connected to this fact, a legal review of the rights of the property, does not in general reveal the current right holder. But even if the property is on the Register and the property's right holder stated on the Register is the same person as the seller, it does not guarantee that another pretender to the current ownership will not appear. It is not uncommon for this claimant to the ownership to turn out to be some local self-government state authority.

One must remember the history of privatisation in Russia in the 1990s. Executive power authorities had to conclude the privatisation transactions in the appropriate form. But in fact this did not always happen. Earlier almost all property in Russia was state-owned and as a consequence almost all property which is now in private hands, one way or another left the possession of the state. There were many breaches in privatisation transactions in the 1990s. If so wished it is possible to find defects in many transactions.

Investors must be vigilant when buying real estate, especially that which was privatised before 1998. State authorities' practice of repudiating privatisation transactions is now fairly widespread. The period for bringing a claim is three years from the moment the state became aware or should have become aware of a breach of its rights.

For example our lawyer colleagues had a disputable case with the real estate of DOSAAF (Russian abbreviation for the: Voluntary Society of Assistance to the Army, the Air Force and the Navy).

DOSAAF in soviet times was an enormous social organisation for assisting the army, air force and navy in preparing for military action. It had many administrative building, various training bases, car factories and warehouse premises in Moscow, the Moscow suburbs and other regions. All this property, which as a rule was located in very sought-after places, was considered property of this social organisation. Plus there was another series of premises, which the state similarly transferred to DOSAAF to carry out its activities. The transfer of one such premises - namely a warehouse complex of several thousand square metres close to Moscow - took place in the 1960s. The premises were simply transferred from one assets sheet to another, without any documents about transferring ownership title from the state to DOSAAF. Part of the warehouse was built with the definite participation of the state. Between 1990 and 1991 when DOSAAF began to split up, its property was divided and transferred within the jurisdiction of the enterprises to other organisations.

Our client acquired this warehouse complex from the DOSAAF right holder. All the ownership titles to the all the warehouses were registered to the client on the Property Register in accordance with the new law on state registration of rights on immovable property and transactions therewith.

It happened that soon after this the state authorities started investigating the seller. They came to the conclusion that he had unlawfully disposed of the property on his assets sheet. The state concluded that these warehouses were built with the state's budgetary funds and are the property of the Russian Federation and the seller did not have the documents on the ownership title to these premises. The state made a claim in court to have the ownership rights to these premises recognised as theirs. For the seller to be able to dispose of them, he had to prove that he built them with his own money or acquired them in a legal manner.

A lot of time was spend collecting proof. The premises in question were built, completed and reconstructed over thirty years from 1950 to 1980. With great difficulty we managed to discover documents which proved that DOSAAF built this complex with its own funds. Our client also put a lot of his money into refurbishing and reconstructing these warehouses. It turned out that all of these additional payments were a little higher than the original cost of the warehouses.

After all the rebuilding a new real estate property had practically been built and our client had received the ownership title to it in on a legal basis. As an additional argument we referred to the expiry term of bringing a case has passed. We found a letter to DOSAAF from the state authorities. It said that the above stated fact has been known by the state for a long time, but for some reason the were silent on it and did not turn to the court to protect their rights. But the law says: If you have missed the period for bringing a claim to court, then on the basis of this reason alone the court can refuse to protect their rights. We won the case. Although the courts are usually not confined to examining only this reason and examine the case of is substance. It would be risky to rely on this argument alone.

Problems also occur if during the privatisation protest some property is not reflected in the appropriate way in the relevant documents, and an enterprise, which considers it theirs, tries to formalise their right to this property and sell it. When they start formalising the certificate of registration of these rights, the registering authorities ask questions.

For example in 1992 and 1993 our client privatised a premises on the first floor of a residential house and then reequipped it as a office. In the index of property passing to the new owner as a result of the privatisation, it was recorded that the property of a certain area in a certain house was transferred from the state to the new owner. But it is too little to just state the total area, you need to state the specific characteristics of all property according to the documents of the Technical Inventory Bureau. When the owner, deciding to dispose of this property, went to the Russian Registration Authority, he was requested to show where exactly in this house his rooms were located and this was not visible in the presented index. The registration of the ownership title was suspended. If the client did not present additional documents - the privatisation proceedings and etc - his ownership title would be refused.

In these situations he often has to search for the necessary papers and turn to state authorities, but all of this needs to be done carefully. If the state understands that these premised are in dispute then it can bring a claim to court about recognising its ownership title to these premises. It turns out that the owner, trying to formalise his rights, caused himself more harm.

De-privatising or repudiating ownership titles of organisations can trigger so called 'raiders'. Using various methods of seizing the enterprise, starting with buying up shares and participation interest, credit debts and ending with actions aimed at blocking the enterprise's production. Using completely legal means of state authorities' information about the possible repudiation of privatisation transactions, increased with informal connections with the department's officials, raiders can start the process of de-privatising the premises they are interested in with the help of the state. Unscrupulous sellers of property don’t shy away from such methods. Using all possibilities to put the enterprise under the threat of collapse and by such a method press the owner into signing the necessary agreement.

It is not uncommon for cases, when the owners of the company, which are registered as having the ownership title to the real estate, to begin separating the business. It is understandable that each wants to push out the other person, their former companion, from the business and leave him with nothing. It leads to alternative shareholders and participants' meetings of companies with limited liability and two general directors, two stamps, etc appear.

Therefore it is necessary for buyers, purchasing real estate from a company, to carry out an in-depth legal review of the authority of the person who will sign the contract on behalf of the company. Find out the legal authority of the general shareholders' (participants') meeting, approving the transaction to sell property and electing the general director of the company, check the series of other important moments.

When the rights to the real estate have been checked, especially in cases where the premises were privatised and then not resold, it is important to look at all documents, in one way or another connected with them. There are some things which in principle you can overlook, for example small non-fitments and alternative versions in the contract for sale and purchase. Maybe breaches in terms for the parties to carry out the obligations under the contract, for example small delays in the payment period, etc. Such details will not lead to the transaction being declared at invalid, ie they are not dangerous, but which individual lawyers love to cling to in court. Therefore the less of such defects in the documents the better.

Not everything is so unambiguous with good faith acquirers. Everybody assumes that they cannot take their real estate from them. But in fact the law and namely the Civil Code, states quite definitely: property can be obtained form any unlawful owner, including those who acquired it in good faith, if it was purloined or withdrawn for the owner against his will by any methods.

A good faith buyer is someone who did not know and had no reason to know that he previous sellers did not have the right to sell the real estate property. If an initial lawful owner come to the buyer and proves his right to the property (and that it was taken from him against his will), then the court will take a decision about requisitioning the property from the buyer. The good-will buyer in his turn can turn to the seller, from which he brought the property and demand the money is returned.

In general everyone always relies on the history of the real estate. The Civil Code contains only general provisions. All conditions and procedures on concluding transactions, for example contracts for sale and purchase, are not described in detail in the Civil Code, therefore it always remains possible for the parties to interpret the more general provisions of the law. To assign everything in detail is in principle not possible. The plenary session of the Supreme Arbitrage Court gave additional explanations of the law, a review of legal practice was published, where specific examples of practice and their judgment were quoted.

And although such a system of precedence does not exist in Russia, a review of the legal process for judges is an important source of information when making decisions in cases. It is unlikely that the judge would make a decision with goes against the advice of the Supreme Arbitrage Court. And if a case there is some vagueness, which can be interpreted in various ways, the lawyers can make use of this. In fact many provisions of a contract or any legal document have defects which allow themselves to be used by for interests of the clients. When we prepare for a legal process, we look not only at the legislation, but also at all practice of examining similar cases. We screen those decisions taken in analogous cases which were not in the favour of the organisation and choose positive decisions for the clients and refer to them during the case.