Real estate transactions are invalid without the consent of the government commission
Pepeliaev Group advises that the State Commercial ('Arbitration') Court for the Moscow Circuit[1] has confirmed the position of the appeal court[2], according to which a sale and purchase agreement of real estate entered into in the absence of the consent of the Government Commission on Monitoring Foreign Investment in the Russian Federation (the “Government Commission”) is an invalid transaction.
The essence of the case
OOO "BAUER TECHNOLOGIE” (the “Company”), 100% owned by a German company, had ownership title to a building and three land plots. On 19 August 2022 the Company entered into a sale and purchase agreement for the above real estate with an individual entrepreneur. The transfer of ownership title was registered on 1 November 2022.
Soon the Chief Executive Officer of the Company was changed. Believing that the Company had suffered losses owing to the sale of property at an understated price, the management applied to the court seeking to have the sale and purchase agreement treated as void and the real estate returned.
The Commercial Court for the Moscow Region[3] dismissed claims, having concluded that the transaction was approved by the general meeting of members, was carried out at the market price and caused no losses to the Company. The court rejected the claimant’s arguments that the permission of the Government Commission needed to be obtained, and ignored the requirement to transfer monetary funds to an account of type ‘S’.
The Resolution issued by the court
The court of appeal set aside the resolution of the first instance court in part, recognised the sale and purchase agreement as a void transaction owing to the absence of the permission of the Government Commission to carry it out and enforced the consequences of its invalidity in the form of a bilateral restitution. The cassation court upheld the above position.
In substantiating the issued resolution the court stated that:
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the entry into the sale and purchase agreement resulting in the sale of real estate by a party of a foreign state which undertakes hostile actions against Russian legal entities and individuals to a Russian resident requires the permission of the Government Commission;
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a transaction carried out without the permission of the Government Commission violates the requirements of clause 1 of the Russian President’s Decree No. 81 dated 1 March 2022 and clause 5 of the Russian President’s Decree No. 95 dated 5 March 2022;
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the parties were aware of the restrictions established by the above Decrees, and consequently acted in bad faith when they entered into an agreement circumventing the law, which means that the transaction is invalid under articles 10 and 168 of the Russian Commercial Procedure Code.
Comment
As is well known, Russian law distinguishes two types of invalid transactions: voidable and void. This is relevant for determining the limitation period, the range of persons entitled to challenge the transaction, the procedure for the court to invalidate a transaction and in terms of other consequences.
In this case the court avoided classifying the transaction performed without the consent of the Government Commission, and stated that “depending on the circumstances such transaction can be recognised by the court as invalid”, referring to the grounds for treating the transaction as both voidable (article 168(1) of the Russian Civil Code) and void (article 168(2) of the Russian Civil Code). For this reason the adopted judgments leave legal uncertainty for parties in transactions with persons from ‘hostile’ states.
What to think about and what to do
The position of the commercial circuit court should be taken into account when transactions are carried out with persons linked to ‘hostile’ states[4]. This position demonstrates the need to obtain permission from the Government Commission, as well as to take account of the state authorities’ position and of case law. Otherwise a party that has already performed a sale and purchase agreement may face the obligation to return to the contracting party what was received under the transaction.
Help from your adviser
Pepeliaev Group’s experts provide comprehensive legal support to parties to transactions with real estate.
Our range of services relating to obtaining permissions of the Government Commission includes an analysis of whether permission needs to be obtained for the entry into or performance of a transaction, advising on legal risks associated with the absence of the Government Commission’s permission, and drafting documents that need to be submitted to the Government Commission in order to obtain its permission.Translated by the Translation Department of Pepeliaev Group.
[1] The Resolution of the Commercial Court for the Moscow Circuit dated 23 October 2023 in case No. А41-101031/2022.
[2] The Resolution of the Tenth Commercial Court of Appeal dated 14 August 2023 in case No. A41-16140/2022.
[3] The Resolution of the Commercial Court for Moscow Region dated 11 May 2023 in case No. А41-101031/2022.
[4] Such states are: members of the European Union, the UK, the USA, Switzerland, Japan, and other states (the Russian Government's Instruction No. 430-r dated 5 March 2022).