The risks are increasing for stakeholders that are investors

Pepeliaev Group advises that in August 2022 the Russian Supreme Court issued a Ruling[1] confirming the court practice of the lower courts in the area of shared construction that investors who are individuals are deprived of the benefits in the event of the developers’ bankruptcy when residential premises are acquired for investment purposes.

In particular, an investor who entered into multiple shared construction agreements for apartments in a house that is under construction may not have his/her claims to provide the housing satisfied along with the other stakeholders with respect to apartments that were acquired for purposes other than to provide the family and relatives with housing.

Acquiring apartments for investment purposes deprives stakeholders of priority in the event of the developer’s bankruptcy

Individuals that are stakeholders are granted a number of benefits. For example, in the event of the developer’s bankruptcy the claims of such stakeholders will be included in the register as third-priority claims, while for instance, the claims of a legal entity will be included in the register as fourth-priority claims (articles 201.9(1)(3) and 201.9(1)(4) of Federal Law No. 127-FZ “On insolvency (bankruptcy)” dated 26 October 2002). An individual’s right to housing is of fundamental significance. In view of this, individuals’ contributions to facilities of shared-equity construction were associated with lesser risks than a similar activity of legal entities.

However, as the Russian Supreme Court has confirmed, if an individual acquires a number of apartments that definitely exceeds an individual’s personal need for housing, the consistent application of the “personality criterion” (and, consequently, the investor’s claims being classified as third-priority claims) should be acknowledged as unfair. Therefore, courts of the highest levels have enshrined the practice formed by lower courts[2].

The Russian Supreme Court has formed an algorithm for examining stakeholders’ claims in a case concerning a developer’s bankruptcy. The court should propose for the discussion of the parties the issue of the purposes of concluding an agreement for several apartments. The Russian Supreme Court has urged that the issue be examined in detail as to whether all of the apartments or a part of them were (was) acquired for investment purposes for the creditor’s claims to be classified respectively as third- or fourth-priority claims. If the stakeholder proves that a part of the facilities was intended for personal use, the claims associated with such facilities will be satisfied as a priority.   That is to say, the “criterion of the purpose” is aimed at equal status being actually granted to investors that are individuals and that are legal entities to the extent that the facilities of shared construction are used for generating profit.

The position established by the Russian Supreme Court evidences that when individuals invest funds in the construction of several apartments they should take into account the risk of the priority of the claims being lowered should the developer go bankrupt.  Practice shows that in most cases the occurrence of such risk minimises the chances of such housing or monetary compensation being obtained. 

What to think about and what to do

Individuals planning to invest in facilities under construction based on a shared construction agreement should pay closer attention to checking the status and solvency of the developer, and whether it has the necessary permissions relating to the construction of the facility.  We recommend monitoring from time to time published materials regarding the developer in the Unified Federal Register of Information of Legal Significance About the Facts of Activities of Legal Entities and in the Unified Federal Bankruptcy Register.  The specified sources contain information about the intention of the creditors or of the company itself to initiate bankruptcy and about the deadlines for claims to be raised during the procedure.

Help from your adviser

Pepeliaev Group’s experts provide comprehensive legal support to parties to transactions with real estate. With rapidly changing legislation which is becoming ever more complicated, a purchase of real estate is far from being a trivial task. In such cases we are ready to provide comprehensive legal assistance and to support the transaction.

Pepeliaev Group’s range of services includes advising on sale and purchase issues and closing other transactions with real estate items, analysing risks associated with a particular real estate item, including form the standpoint of potential bankruptcy of the contracting party or its legal predecessors, and protecting in court the interests of a party to a transaction in cases concerning the bankruptcy of a contracting party. This includes contesting the transaction, representing companies in their interactions with state authorities and conducting legal due diligence of real estate. 

[1] The Ruling of the Judicial Panel for Economic Disputes of the Russian Supreme Court dated 22 August 2022 in case No. А41-34210/2020.

[2] The Resolution of the Commercial Court for the North Western Circuit dated 14 April 2022 in case No. А66-7173/2020; the Resolution of the Commercial Court for the Moscow Circuit dated 25 May 2022 in case No. А41-34148/2020; the Resolutions of the Tenth Commercial Court of Appeal dated 23 March 2022 in case No. А41-65911/2019, dated 22 June 2022 in case No. А41-65596/2021, dated 7 July 2022 in case No. А41-83224/2019 and dated 14 July 2022 in case No. А41-55322/2020; the adopted court approach is based on the Resolution of the Presidium of the Russian Supreme Commercial Court dated 23 April 2013 in case No. А55-16103/2010.

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