Updated regulation in the sphere of shared-equity construction of real estate
Pepeliaev Group law firm advises that a number of amendments to Federal Law No. 214-FZ dated 30 December 2004 (“Law No. 214-FZ”) have come into effect regarding participation in the shared-equity construction of apartment buildings and other real estate, as have amendments to other regulatory acts.[1]
Please find below a brief overview of the new developments in legislation in the sphere of shared-equity construction.
1. The ban on attracting individuals' funds via methods not stipulated by Federal Law No. 214-FZ has been extended to non-residential premises
Before the above amendments were introduced, it was prohibited to raise individuals' funds via methods not stipulated by Law No. 214-FZ, when such individuals assumed ownership title to real estate. The prohibition was established solely with respect to residential premises in apartment buildings.[2]
Starting from 27 June 2019, the ban has been extended to all premises (both residential and non-residential ones) in all real estate (apartment buildings and other facilities).[3] The regulation has been introduced in order to impose requirements on developers of non-residential buildings who raise funds from individuals. The requirements are similar to those applied to developers of apartment buildings.
The amendments are designed to curtail the possibilities for developers to bypass the prohibition by way of constructing ‘units’ (non-residential premises)[4] instead of apartments (residential premises). Specifically, according to the general rule developers of units will be obliged to use escrow accounts opened with an authorised bank for placing funds received from participants in shared-equity construction.[5]
2. When it is impossible to complete construction, compensation payable to affected participants in shared-equity construction must be calculated based on the market value of a flat at the date when the compensation is paid
The regulation which was in effect until 27 June 2019 stipulated that, if a developer goes bankrupt and it is impossible to complete construction, the compensation payable by the public not-for-profit organisation Foundation for Protecting the Rights of Citizens Participating in Shared-Equity Construction (the “Foundation”) was assessed based on the market value of a square metre of equivalent residential premises at the time when the shared-equity construction agreement (the “SCA”) was concluded. The Federal State Statistics Service calculated the amount of such compensation.[6]
In accordance with the adopted amendments, the amount of compensation will be determined based on the report of an appraiser to be engaged by the Foundation and based on the market value of equivalent residential premises at the moment when such compensation is paid.[7] The opportunity to receive compensation was also given to people who acquired non-residential premises or a parking space under the SCA. In this case, the amount of such compensation will be equal to the price indicated in the SCA.[8]
3. Developers who are permitted to raise funds from participants in shared-equity construction by using ‘old mechanisms’ without any escrow accounts may revert to using escrow accounts
Under the SCA which provides for a transfer of residential premises, a developer who was permitted to complete construction of a real estate facility without escrow accounts being used must make contributions to the compensation fund.[9] If the above condition is complied with, the developer may conclude such SCAs. The registration authority that registers such SCAs will check if the developer has fulfilled the above obligation.[10]
Starting from 27 June 2019, if a developer does not want to make any contributions to the compensation fund, it may revert to using escrow accounts. To do so, changes should be made to the project disclosure statement and amendments should be entered in the Unified Information System for Housing Construction. It is not permitted to use both methods for raising funds from participants in shared-equity construction (to conclude SCAs while making contributions to the compensation fund in some cases and using escrow accounts in others) simultaneously with respect to the same facility under construction.
4. To register an SCA, no statement is required that a developer and project disclosure statement conform to the requirements of Law No. 214-FZ
Starting from 27 June 2019, the above statement of conformity is no longer required to be presented for the state registration of an SCA.[11]
If an apartment building is constructed under an SCA, the statement is still required for raising funds from participants in shared-equity construction.[12]
5. Rejection of a statement of the conformity of a developer and of a project disclosure statement with the requirements of Law No. 214-FZ is waived with respect to facilities to be constructed using escrow accounts
Starting from 28 June 2021, the requirement will be waived that developers who raise funds with the use of escrow accounts must obtain a statement of conformity.[13]
What to think about and what to do
With the above amendments being adopted, developers are advised to familiarise themselves with the content of such amendments and to take these into account when they plan and carry out activities involving the construction of real estate which is financed with the funds of participants in shared-equity construction.
Help from your adviser
Pepeliaev Group’s specialists are ready to provide integrated legal support to developers on any issues arising when real estate is constructed and funds in shared-equity construction are raised from participants.
[1] These amendments were introduced by Federal Laws No. 175-FZ dated 1 July 2018 “On amending the Federal Law “On shared-equity construction of apartment buildings and other real estate and on amending certain items of Russian legislation” and certain items of the legislation of the Russian Federation” and No. 151-FZ dated 27 June 2019 “On amending the Federal Law “On shared-equity construction of apartment buildings and other real estate and on amending certain items of Russian legislation” and certain items of the legislation of the Russian Federation”.
[2] Article 1(2) of Law No. 214-FZ (in the text in effect until 1 July 2019).
[3] Article 1(1)(a) of Federal Law No. 151-FZ.
[4] In Russian legislation, all premises are divided into residential and non-residential ones. There is no definition of the term ‘unit’ in Russian legislation. ‘Units’ are generally understood to mean non-residential premises that are constructed and purchased to be lived in.
[5] Article 3(1.2)(2) of Law No. 214-FZ.
[6] Article 13(2) of Federal Law No. 218-FZ dated 29 July 2017 “On a public not-for-profit organisation for protecting rights of citizens participating in shared-equity construction when developers become insolvent (go bankrupt) and on amending certain items of the legislation of the Russian Federation”.
[7] Article 13(9)(с) of Federal Law No. 151-FZ.
[8] Article 13(9)(d) of Federal Law No. 151-FZ.
[9] Article 3(4) of Law No. 214-FZ.
[10] Article 48(3) of Federal Law No. 218-FZ “On the state registration of real estate” dated 13 July 2015.
[11] Article 10(2)(a) of Federal Law No. 151-FZ.
[12] Article 3(2) of Law No. 214-FZ. Please note that if a developer raises funds from an individual where the latter assumes ownership title to residential premises in an apartment building but does not have an statement of conformity this may result in an administrative liability for the developer and a fine of between RUB 500,000 and RUB 1,000,000 (article 14.28(1) of the Russian Code of Administrative Offences). This offence may also serve as the ground for imposing criminal liability if such an offence is committed with respect to a large or especially large amount (articles 200.3(1) and 200.3(2) of the Russian Criminal Code). The legislature has also imposed a prohibition on placing advertising related to raising funds of participants in shared-equity construction if no such statement of conformity has been obtained (article 28(8) of Federal Law No. 38-FZ “On advertising” dated 13 March 2006). If the prohibition is not complied with, this may result in administrative liability for violating legislation on advertising and a fine of RUB 100,000 to RUB 500,000 for legal entities (article 14.3(1) of the Code of Administrative Offences).
[13] Article 1(8)(e) of Federal Law No. 151-FZ.