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Real Estate and Insolvency in Russia: General Issues and Recent Changes

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Although the sanctions imposed against Russia did not have exactly the effect on the country’s economy that was planned, there are still expectations of negative growth and clear signs of an overall massive slowdown.

One of the spheres influenced by these circumstances is real estate, where the market has reportedly decreased by seven percent and the number of bankruptcy cases in 2015 was five times that of 2014. There are no comparative statistics for 2016 available at the moment; however, as many as 167 real estate developers filed for bankruptcy during the first month of 2016 alone.

The rights of creditors and debtors regarding immovable property have to be dealt with by insolvency lawyers regardless of which side they represent. In general, three situations involving real estate within bankruptcy procedures are possible. 

The first involves the debtor as a possessor of a certain real estate asset with a creditor willing to claim it back. In this situation, there are essentially no specific differences with the regular procedure. 

The second situation involves property that belongs or belonged to the debtor before the insolvency procedures began. The insolvency officer will be responsible for asset tracing and searching for any transactions that might be contentious from a legal point of view. Any real estate owned by the debtor may be a solid source of funds that can be used for satisfying creditor demands. Moreover, subject to the Federal Law of October 26, 2002, On Insolvency (Bankruptcy) (the “Insolvency Law”), any deed of property disposal may be challenged within a one- or, under certain conditions, three-year term preceding the date when the debtor is declared bankrupt, thus adding to the bankruptcy estate.

According to the Insolvency Law, any property of the debtor, including real estate, shall normally be disposed of by auction, or via public offer in certain situations.

If the debtor is an agricultural company/entity, adjacent landowners involved in agricultural manufacture shall have priority in terms of acquiring the debtor’s property, including real estate.

Certain issues appear when there is a claim regarding rights to apartments or other real estate that were not completed by an insolvent developer. Although since January 1, 2014, changes in the Law “On Co-funding of Apartment Houses and Other Real Estate Construction and Amending Several Laws of the Russian Federation” have made it obligatory for all real estate developers to insure their liability to clients, there are still many incomplete projects from earlier days, and, unfortunately, no guarantee can be provided that a particular developer will not be in default. Specific procedures are covered by provisions of the Insolvency Law in force since 2011, which enables any person who has invested in real estate construction either to claim their rights to the relevant apartment or other object or to demand a return of the investment amount. In the latter case, the investor’s claims shall have a priority over any other demands, except for those arising from personal injuries and labor relationships. For any claims regarding residential property, the insolvency officer shall keep a separate register, and the property handover shall be subject to approval by the court within six months of the appointment of the insolvency officer.

The final situation involves real estate that had not been registered before the application for bankruptcy was filed. In this case, the insolvency officer will be in charge of all related procedures, including registration and filing any suits regarding declaration of title, if required.

Despite the quite significant role of the insolvency officer, which may lead to abuse in certain cases, the rights of the debtors and creditors to the real estate are quite well protected and may be exercised with due legal support.

By Evgeny Kolpinskiy, Head of Insolvency Practice, Peterka & Partners Russia

This Article was originally published in Issue 3.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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