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Buying a new building in Russia: what are the risks and what should I look out for?

  • Buying a new building in Russia: what are the risks and what should I look out for?
08.01.2022
Чилингарян Левон Гайкович
Author:
CHILINGARYAN LEVON
Юрист
Legal services

The real estate market has a huge number of offers to sell the rights to residential premises that are still under construction. How to minimize the risks when buying such housing? What to pay attention to and what you should not agree to? We are now going to talk about it.

There are two ways to get the rights to the housing under construction: to sign an agreement of participation in the construction and to join a housing construction cooperative that has the rights of the developer.

You may also be offered other ways, such as:

  • Preliminary contract of sale
  • Co-investment
  • A bill of exchange scheme

However, such offers reflect the builders' desire to escape from the law protecting “shareholders” and to get the opportunity to dishonestly perform their duties. Do not agree to them!

Let us consider below the peculiarities of the above-mentioned legal ways of attracting shareholders' money:

Housing construction cooperative

A housing construction cooperative is a non-profit organization. The right to housing will be granted to the housing construction cooperative member upon payment of the fee. The highest governing body of a housing construction cooperative is a meeting of its members. They elect the management board of a housing construction cooperative, they approve the project documents, and they independently manage their activities. In other words, you do not enter into a contract with the organization and it owes you money, but you are a part of the organization and have a corporate rather than the contractual relationship with it. Such relationships are governed by the articles of association of the cooperative. Therefore, the consumer protection legislation does not apply to the members of the housing construction cooperative! Neither do they have the rights granted to the shareholder under the law on participation in shared construction. The legal protection is much less. For example, it is virtually impossible to collect a forfeit from the cooperative for late delivery of the house.

However, if you still want to take the risk, pay attention to the following documents:

  • Charter. Look at what mandatory contributions from members of the cooperative it provides for, what is the order of payment of the share fee in the event that you decide to leave the ranks of its members. Note that the decision of the general meeting may change the dues (at the initial stage of construction, the construction company usually has more votes).
  • Extract from the unified state register of legal entities. It will help you make sure that such a legal entity exists and is not in the process of liquidation or reorganization. Pay attention to the person acting without power of attorney - the chairman. You can negotiate just with him or a person authorized by him. He must sign the documents offered to you to sign. It is advisable to request a copy of his passport.
  • Documents for the land. Make sure that the land belongs to the HCC on any legal right, that this right has not expired yet, and that the land category is suitable for construction.
  • The building permit must be issued to the same HCC, it must be the developer, or it must have a contract with the developer.
  • Check the HCC databases for bankruptcy, enforcement proceedings, and lawsuits.

Do not give proxies to people you do not know to attend the meeting. If you do, all important decisions will be made without you.

Contract for participation in shared construction

Citizens acquiring rights to real estate under share participation construction agreements are protected by both the Federal Law No. 214-FZ “On Participation in Share Participation Construction of Apartment Buildings and Other Real Estate and on Amendments to Certain Legislative Acts of the Russian Federation” dated 30.12.2004 and the Law of Russian Federation No. 2300-1 “On Consumer Rights Protection” dated 07.02.1992. In addition, the Federal Law No. 127-FZ “On Insolvency (Bankruptcy)" dated 26.10.2002 provides for a special status for them.

Still, developers continue to go bankrupt and “sharecroppers” lose money. Therefore, every citizen who decides to enter into a contract for participation in shared construction should independently or through a lawyer check the developer and its history, the documents for the facility under construction, the contract for compliance with the law. Here are just the main points:

  • The first and most important rule is not to transfer money to the developer before the state registration of the contract. According to the law, payment under the contract is made only after its state registration.
  • It is important to make sure that no bankruptcy, liquidation or reorganization proceedings have been commenced with respect to the legal entity-developer and that the person offering you to sign the documents is indeed a representative of the developer. To do this, we check it against information from the bankruptcy register, obtain an extract from the Unified State Register of Legal Entities in the same manner as described above, and analyze the information obtained.
  • You can make sure that bankruptcy does not threaten the developer in the near future on the basis of checking the accounting documentation.
  • It is necessary to check the land ownership documents - whether the developer owns the land plot, by what right, for how long, what category of land it belongs to.
  • It is important to make sure that there is a building permit and that the project declaration has been approved by the supervisory authority in accordance with the law.
  • Check the information about the properties sold by the developer, lawsuits and enforcement proceedings.

After checking the developer and the new building, it is necessary to carefully study the documents offered for signing. 

The Dvitex law firm provides support services for new-built property transactions.

Legal support in the Dvitex law firm when buying real estate in a new building includes:
  • Verification in terms of “legal compliance” of the property to be purchased
  • Verification of information about the builder
  • Due diligence in concluding share participation agreement
  • Assessment of risks and formalities of the agreement to be concluded
  • Support of the client in the bank and at the signing of the deal

Buying a new building in Russia: what are the risks and what should I look out for?

The real estate market has a huge number of offers to sell the rights to residential premises that are still under construction. How to minimize the risks when buying such housing? What to pay attention to and what you should not agree to? We are now going to talk about it.

There are two ways to get the rights to the housing under construction: to sign an agreement of participation in the construction and to join a housing construction cooperative that has the rights of the developer.

You may also be offered other ways, such as:

  • Preliminary contract of sale
  • Co-investment
  • A bill of exchange scheme

However, such offers reflect the builders' desire to escape from the law protecting “shareholders” and to get the opportunity to dishonestly perform their duties. Do not agree to them!

Let us consider below the peculiarities of the above-mentioned legal ways of attracting shareholders' money:

Housing construction cooperative

A housing construction cooperative is a non-profit organization. The right to housing will be granted to the housing construction cooperative member upon payment of the fee. The highest governing body of a housing construction cooperative is a meeting of its members. They elect the management board of a housing construction cooperative, they approve the project documents, and they independently manage their activities. In other words, you do not enter into a contract with the organization and it owes you money, but you are a part of the organization and have a corporate rather than the contractual relationship with it. Such relationships are governed by the articles of association of the cooperative. Therefore, the consumer protection legislation does not apply to the members of the housing construction cooperative! Neither do they have the rights granted to the shareholder under the law on participation in shared construction. The legal protection is much less. For example, it is virtually impossible to collect a forfeit from the cooperative for late delivery of the house.

However, if you still want to take the risk, pay attention to the following documents:

  • Charter. Look at what mandatory contributions from members of the cooperative it provides for, what is the order of payment of the share fee in the event that you decide to leave the ranks of its members. Note that the decision of the general meeting may change the dues (at the initial stage of construction, the construction company usually has more votes).
  • Extract from the unified state register of legal entities. It will help you make sure that such a legal entity exists and is not in the process of liquidation or reorganization. Pay attention to the person acting without power of attorney - the chairman. You can negotiate just with him or a person authorized by him. He must sign the documents offered to you to sign. It is advisable to request a copy of his passport.
  • Documents for the land. Make sure that the land belongs to the HCC on any legal right, that this right has not expired yet, and that the land category is suitable for construction.
  • The building permit must be issued to the same HCC, it must be the developer, or it must have a contract with the developer.
  • Check the HCC databases for bankruptcy, enforcement proceedings, and lawsuits.

Do not give proxies to people you do not know to attend the meeting. If you do, all important decisions will be made without you.

Contract for participation in shared construction

Citizens acquiring rights to real estate under share participation construction agreements are protected by both the Federal Law No. 214-FZ “On Participation in Share Participation Construction of Apartment Buildings and Other Real Estate and on Amendments to Certain Legislative Acts of the Russian Federation” dated 30.12.2004 and the Law of Russian Federation No. 2300-1 “On Consumer Rights Protection” dated 07.02.1992. In addition, the Federal Law No. 127-FZ “On Insolvency (Bankruptcy)" dated 26.10.2002 provides for a special status for them.

Still, developers continue to go bankrupt and “sharecroppers” lose money. Therefore, every citizen who decides to enter into a contract for participation in shared construction should independently or through a lawyer check the developer and its history, the documents for the facility under construction, the contract for compliance with the law. Here are just the main points:

  • The first and most important rule is not to transfer money to the developer before the state registration of the contract. According to the law, payment under the contract is made only after its state registration.
  • It is important to make sure that no bankruptcy, liquidation or reorganization proceedings have been commenced with respect to the legal entity-developer and that the person offering you to sign the documents is indeed a representative of the developer. To do this, we check it against information from the bankruptcy register, obtain an extract from the Unified State Register of Legal Entities in the same manner as described above, and analyze the information obtained.
  • You can make sure that bankruptcy does not threaten the developer in the near future on the basis of checking the accounting documentation.
  • It is necessary to check the land ownership documents - whether the developer owns the land plot, by what right, for how long, what category of land it belongs to.
  • It is important to make sure that there is a building permit and that the project declaration has been approved by the supervisory authority in accordance with the law.
  • Check the information about the properties sold by the developer, lawsuits and enforcement proceedings.

After checking the developer and the new building, it is necessary to carefully study the documents offered for signing. 

The Dvitex law firm provides support services for new-built property transactions.

Legal support in the Dvitex law firm when buying real estate in a new building includes:
  • Verification in terms of “legal compliance” of the property to be purchased
  • Verification of information about the builder
  • Due diligence in concluding share participation agreement
  • Assessment of risks and formalities of the agreement to be concluded
  • Support of the client in the bank and at the signing of the deal

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