The Russian Government has limited the application of penalties with regard to shared construction agreements for the period between 3 April 2020 and 1 January 2021

Pepeliaev Group advises that, starting from 3 April 2020, a Resolution of the Russian Government[1] has come into force. It sets out the specifics of applying financial sanctions to developers and construction stakeholders as well as other measures of liability for the non-performance or improper performance of obligations under shared construction agreements (“SCAs”).

Please be reminded that Law No. 214-FZ[2] provides for other measures of liability for the parties to a SCA for the non-performance or improper performance of obligations under SCA:

• a penalty (default interest);
• the reimbursement of losses;
• payment of interest for using monetary funds.

A penalty (default interest)

If a developer violates the deadline for transferring the shared-construction facility to the construction stakeholder, the developer is to pay to the construction stakeholder a penalty (default interest) of 1/300 of the Bank of Russia’s refinancing rate on the price of the SCA for each day of the delay. If a participant in shared construction is an individual, the developer should pay double the amount of the specified penalty (default interest) (article 6(2) of Law No. 214-FZ).

Similarly, if the payment deadline under the SCA is violated, the construction stakeholder is to pay to the developer a penalty (default interest) of 1/300 of the Bank of Russia’s refinancing rate on the amount of the delayed payment for each day of the delay (article 5(6) of Law No. 214-FZ).

Resolution No. 423 that has been adopted establishes that the specified penalties will not accrue in the period between 3 April 2020 and 1 January 2021[3]

Losses

In addition to the penalties (default interest) provided for in Law No. 214-FZ and in the relevant SCA, a party that has violated the SCA is to reimburse the entire losses incurred by the other party by the non-performance or improper performance of the SCA. At the same time, losses are to be reimbursed to the extent that they have not been covered by the specified penalties (default interest) (article 10 of Law No. 214-FZ).

Resolution No. 423 excludes the possibility of losses[4] being recovered from a party to an SCA if such losses:

• were incurred in the period between 3 April 2020 and 1 January 2021;
• have resulted from the introduction of a regime of high alert or a state of emergency in the relevant territory which is the location of the shared construction facility that is being built.

Interest

If the construction stakeholder unilaterally withdraws from the SCA or if the SCA is terminated through court proceedings at the stakeholder’s request, the developer is to pay to the stakeholder interest on the SCA price paid by the stakeholder in the amount of 1/300 of the Bank of Russia’s refinancing rate as at the date of the performance of the obligation to repay the SCA price. The above interest accrues from the date when the stakeholder pays the money on account of the price of the agreement until the date when the developer repays the money to the stakeholder. If the stakeholder is an individual, the developer pays double the amount of the specified interest.[5]

Resolution No. 423 provides that the specified interest will not accrue in the period between 3 April 2020 and 1 January 2021.

Deferred payment of penalties that accrued before 3 April 2020

Resolution No. 423 also provides for a grace period until 1 January 2021 for the payment of a penalty (default interest) or interest and for the recovery of losses if the claims for such payment or recovery were raised by the stakeholder against the developer before 3 April 2020.

In addition, please note that Resolution No. 423 also prohibits the controlling bodies in the area of shared construction from applying to the commercial court seeking a suspension of the developer’s activity in relation to raising funds from the stakeholders in the event that the developer has for 3 months unlawfully withheld the agreement price paid under the SCA, or does not pay penalties of RUB 100,000 or more in total. The specified prohibition on applying to the court extends to cases when the developer has committed the relevant violation in the period between 3 April 2020 and 1 January 2021. [6]

What to think about and what to do

We recommend that developers take account of the provisions of Resolution No. 423 when determining the amount of the penalties that may be applied to them if there is a violation of an SCA, and refer to the above resolution in their objections against the stakeholders’ claims to recover penalties, including claims that have been asserted through court proceedings.

Help from your adviser

Pepeliaev Group’s specialists are ready to provide comprehensive legal support to the parties to SCAs with respect to all issues that may arise in connection with violations of obligations arising from SCAs.