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Risks resulting from an understated price for real estate

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Pepeliaev Group advises that in August 2022 the Russian Supreme Court adopted a Ruling[1] whereby the understatement of a price for a land plot evidences that a party to a civil law transaction is directly or indirectly aware that the purpose of the transaction is unlawful. 

A party to a contract being aware that the purpose of the transaction is unlawful is a condition for the transaction to be held invalid as a suspicious transaction (article 61.2(2) of the Law on Bankruptcy).  Such awareness is proved on the basis of refutable presumptions (for example, the parties to a transaction having a mutual interest, being aware that the interests of the debtor’s creditors have been breached or that there are signs of the debtor’s insolvency).  

In the case at hand the land plot was sold at a price that is 7 times less than the cadastral value and 9 times less than the market value.  From the standpoint of the Russian Supreme Court, this circumstance “should make any good-faith and reasonable party to a civil-law transaction question whether such disposal is lawful”.  In such situation it is fair to assume that “the buyer is directly or indirectly aware of the debtor’s unlawful purpose”.  
Acquiring assets at an understated price is associated with risks. For a transaction not to be held invalid, the specific reasons should be analysed in each case for the real estate to be sold at a non-market price.  Probably, it is prudent to use the services of a professional  appraiser before acquiring an item. 

What to think about and what to do

Individuals and entities planning to acquire real estate should pay attention to additional risks associated with purchasing real estate.  It should be taken into account that the price of a real estate item should be compared with its cadastral and market values, and that such price should be determined based on the unique features of the real estate. 

Help from your adviser

Pepeliaev Group’s experts provide comprehensive legal support to parties to transactions with real estate. With rapidly changing legal regulation 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, involving support with respect to transactions with real estate.

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, representing the interests of 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 Supreme Court dated 4 August 2022 in case No. А41-70837/2017.

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