2.1 The distinction between mortgages on land and buildings on the land?
Yes. Russian law contains a general principle of “unity of the land and the buildings located on it” and pursuant to this principle a building must be mortgaged simultaneously with the land plot on which it is located.
It is worth noting that there are specific limited circumstances in which it is possible to take a mortgage over land without a simultaneous mortgage over buildings on it. However, generally we do not recommend this as being a satisfactory security structure.
2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable?
Mortgage certificates (“mortgage bonds”) may be issued by the Property Registry (upon application). This document certifies the right of the bondholder to have the issuer perform the secured (i.e. monetary) obligations. The mortgage bond must contain confirmation of the secured amount (or at least the method of calculating or determining the secured amount). The cost for issuing a mortgage bond is included in the state duty (approx. EUR 100) payable for mortgage registration and need not be paid separately.
As a mortgage bond is a registered form of interest it can be transferred to any third party by way of endorsement. The party transferring its rights to the mortgage bond makes an endorsement (a record) on the mortgage bond stating in detail the full name of the new holder of such mortgage bond. In addition, to support the transfer, the current bondholder and the new bondholder enter into a simple written agreement assigning the rights to the mortgage bond.
2.3 Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered?
Second ranking security may be taken. Under Russian law registerable security is ranked according to the date on which it is registered. Any subsequent mortgage is possible provided it is not prohibited by a preceding mortgage. There is no concept of ‘priority deeds’ under Russian Law and there is no provision under Russian law supporting the prioritisation of claims between parties.
2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender’s consent?
The default position under Russian law is that real estate cannot be transferred to a third party without obtaining any mortgagee’s prior written consent. The parties may agree, however, in the mortgage agreement that the mortgagee’s consent is not required.
2.5 Are there any preferred creditors (other than a prior ranking mortgage holders)?
Yes, under solvent and insolvency liquidation procedures.
During solvent liquidation:
Creditors’ claims are satisfied in the following order of priority: (i) personal injury claims; (ii) severance benefits, wages for employees of the liquidated company and copyright royalties; (iii) compulsory payments owing a budget or a non-budget fund; and (iv) claims of other creditors.
Creditors’ claims which are secured by mortgages are satisfied from the sale proceeds of the mortgaged property ahead of other creditors, except for the creditors listed at (i) and (ii) provided that their rights to claim were created before the mortgage agreement was completed.
During insolvency liquidation:
Russian law applies mandatory priorities under which creditors of the same class will rank equally. In brief these are: (i) “current claims” (e.g. insolvency costs, liabilities incurred after the start of the insolvency proceedings, (ii) “first priority claims” (personal injury), (iii) “second priority claims” (employee related, and royalties) and (iv) “third priority claims” (secured and unsecured claims of other creditors).
Secured creditors are entitled to payments realised from the sale of secured assets, subject to the following thresholds: for secured claims under a facility agreement, the lender is entitled to 80% of the realised proceeds, with the remaining 15% for first and second priority claims, and 5% for insolvency expenses. For other secured claims (other than under a facility agreement) the respective thresholds are 70%, 20% and 10%.
2.6 Can “all monies” mortgages be taken?
No. The scope of the secured obligations should be agreed by the parties in advance and described in detail in the security document.
2.7 Can a landlord’s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how?
Yes, there are two ways to grant security over the rental income: (i) under a pledge of rights to receive rent under a lease agreement; and (ii) under an assignment of rights under a lease agreement.
To perfect the security under an assignment of rights under a lease agreement a formal notice of assignment must be served on each tenant. Failure to notify a tenant will mean it is not obliged to perform its payment obligations to the assignee (the lender).
2.8 It is customary/possible for a lender to take a charge/security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made?
Effective security over Russian accounts is not available. However, it is common practice for an account withdrawal (direct debit rights) agreement to be concluded by the lender, the obligor and the obligor’s Russian account bank, in respect of the obligor’s account(s). This agreement provides the lender with the right to withdraw funds from such account(s) without notifying the borrower, in the event of a breach by the borrower of its covenants and obligations to that lender.
It is not possible for a third party to take a security over bank accounts as the security provider should owe a direct payment obligation to the lender. Any underlying security should contain a direct reference to the lender’s power to obtain a direct debit from the borrower or a third party obligor (where a third party is providing the security for the right of the borrower).
Despite the respective contractual covenants, Russian law does not impose any restriction on a Russian account holder in the operation or maintenance of its accounts.
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