Home / Doing business in Russia 2020 / Real estate and construction / Planning and construction issues
  1. Introduction
    1. Political and administrative structure
    2. Legal environment
  2. Common forms of business structures for foreign investors
    1. Main types of structure
    2. Registration, liquidation and reorganisation of business structures
    3. Shareholders’ and participants’ agreements
    4. Strategic industries
  3. Anti-monopoly issues
    1. General legal and regulatory framework
    2. Scope of application of the Competition Law
    3. Anti-competitive practices and restriction of competition
    4. Liability
  4. Tax system
    1. General approach
    2. Corporate taxation
    3. Incentives
    4. Special tax regimes
    5. Taxation of individuals
    6. Double taxation treaties
  5. Customs regulations
    1. Mutual trade between the EEU members
    2. General approach
    3. Trade between EEU and non-EEU countries
  6. Currency control
    1. Foreign currency transactions
    2. Consequences of breach/Penalties
  7. Lending in Russia
    1. Lending documents and governing law
    2. Jurisdiction
    3. International finance transactions and repatriation requirements
    4. Security interests
    5. Recognition of security trusts
    6. Syndicated loans
    7. Enforcement
    8. Suretyships and guarantees
    9. Bankruptcy considerations
    10. Other lending related issues
  8. Employment and migration
    1. Formalising the employment relationship
    2. Managing employment relationships
    3. Terminating an employment agreement
    4. Specifics of employing foreign nationals
  9. Personal data protection
    1. General approach
    2. Scope of the Data Protection Law
    3. Liability
    4. Right to be forgotten
  10. Intellectual property
    1. General approach
    2. Contractual aspects of intellectual property rights
    3. Rights over the results of intellectual activity
    4. Company names, trade names, trademarks and appellations of origin
    5. Intellectual property rights infringements
    6. IP Court
  11. Advertising issues
    1. General approach
    2. Scope of application of the Advertising Law
    3. Violations of the Advertising Law
    4. Liability
  12. Anti-corruption and compliance
    1. General approach
    2. Legal framework
    3. Compliance requirements for companies
    4. Concept of corruption in Russian law
    5. Possible targets of bribery
    6. Liability and penalties for corruption
    7. Example of sector-specific anti-corruption measures
  13. Real estate and construction
    1. Rights to real estate
    2. Real estate transactions
    3. Resolution of real estate disputes
    4. Planning and construction issues
  14. Corporate bankruptcy
    1. Insolvency criteria
    2. Stages of bankruptcy proceedings
  15. Import substitution and production localisation in Russia
    1. Measures affecting goods importation and current import substitution legislation
    2. Localisation incentives
    3. Sector-specific impact of import restrictions and localisation requirements
  16. Banking sector
    1. Legislative and regulatory framework
    2. Licensing and operations
    3. Deposit insurance
    4. The anti-money laundering law
    5. Bank secrecy
    6. FATCA and CRS
  17. Environment, energy efficiency and renewables
    1. Environment
    2. Energy efficiency
    3. Renewables
  18. Infrastructure and public private partnerships
    1. General approach
    2. Key PPP legislation
    3. Russian PPP environment
    4. Financing
    5. Legal issues
    6. Prospects for infrastructure projects
  19. Oil & gas
    1. Legislative framework
    2. Ownership and licensing
    3. Restrictions on foreign investors
    4. Licences
    5. PSAs

Real estate and construction

General approach

This chapter relates to real estate and construction matters in Russia, which are governed by a complex body of laws and regulations. Key legislation in this respect includes:

  • the Civil Code of the Russian Federation (the “Civil Code”);
  • the Land Code of the Russian Federation (the “Land Code”);
  • the Town Planning Code of the Russian Federation (the “Town Planning Code”);
  • the Forest Code of the Russian Federation;
  • the Water Code of the Russian Federation;
  • Federal Law No. 102-FZ “On Mortgage (Pledge of Immovable Property)” dated 16 July 1998 (the “Law on Mortgage”); and
  • Federal Law No. 218-FZ “On State Registration of Immovable Property” dated 13 July 2015 (the “Law on State Registration”).

Key contacts

Contact
Artashes-Oganov
Artashes Oganov
Partner
Head of Real Estate & Construction

Planning and construction issues

Land categories

Different land categories and types of permitted use are assigned to land plots in order to optimise their utilisation.

Under the Land Code, land in Russia is divided into seven land categories (each with a designated prescribed use):

  • agricultural land;
  • land of settlement;
  • industrial land (for the purposes of industry, energy production, transport, communication, television, radio broadcasting, cosmic activities, defence and other special purposes);
  • land containing specially protected areas and objects (e.g. nature parks);
  • forest land;
  • land near water; and
  • reserved land.

Specific regulations may apply, depending on the land category. For example, when agricultural land is being sold, Russian regions enjoy pre-emptive rights of purchase, as do municipal authorities, in the situations provided for by the relevant regional legislation. As mentioned above, foreign investors (including companies and individuals) are not allowed to own agricultural land, but may only obtain lease rights. Agricultural land that is not used in accordance with its designated prescribed use may be expropriated from its owner under a court decision.

Essentially, the most suitable categories for development and commercial construction are industrial land and land of settlement. It is possible to build warehouses, commercial buildings and production facilities on the land plots within these categories provided that the type of the land’s permitted use allows it.

Back to top ↑

Permitted use of land

Each land category has different conditions for the use of land, and the Land Code requires that each plot be used only in accordance with the applicable category and established type of permitted use.

Since 2014 a type of permitted use of a land plot may only be determined in strict compliance with the classifier of types of permitted land use (the “Classifier”) which provides for an exhaustive list of the types of permitted use. Local authorities have to bring local regulations on the territorial zoning (i.e. the rules of land use and development) in line with the Classifier by 1 January 2021. Although this deadline is almost reached, not all local authorities have yet aligned their local regulations with the Classifier.

Back to top ↑

Change of land category and permitted use

 
Land category

It is possible to change the category of a particular land plot. For example, regional authorities may change a land plot’s category from “agricultural” to “industrial” (e.g. for the allocation of a warehouse complex) subject to a number of obligatory procedures. A land plot may be assigned to the category of land of settlement only when it is annexed to the territory of a certain settlement (included in the borders of that settlement). This can be done only by amending/adopting a general plan of a certain settlement. Most settlements have now adopted their general plans. However, there are some rural settlements where town planning documentation is still missing.

Changing the category of forest land or land near water is more complicated (as it involves federal authorities) and is strictly regulated. Legislation provides an exhaustive list of circumstances allowing a change of category in these cases.

Permitted use

The owner of a land plot may change the type of permitted use at its own discretion according to the adopted town planning documentation (general plan of the settlement and rules of land use and development). Where town planning documentation is not adopted, permitted use of a land plot cannot be changed. Also, it is generally prohibited to issue construction permits if rules of land use and development have not been adopted.

Back to top ↑

Zones with restricted use

Before recent law developments entered into force on 4 August 2018, the Russian legislation contained only fragmentary regulation of zones with restricted use. A new Federal Law1  introduced to the Land Code a new chapter on the legal status of zones with restricted use, thereby harmonising the legislation. In particular, an exhaustive list of 28 zones with restricted use was established. This list includes, among others, zones of energy industry facilities, railways, sanitary protection zones, etc. The Russian Government has to approve separate regulations for each type of zone with restricted use and has done so for most of such zones. It is also planned that the State Register will contain information about the boundaries of all zones with restricted use.

Developed land plots which are affected by zones with restricted use may only be used in strict compliance with the legal regime of the respective zones. Otherwise, the affected buildings and structures located on them may be subject to demolition. If they are demolished, their owners or other legal holders are entitled to demand their market repurchase price and/or compensation for losses from the owner of the capital structure around which the relevant zone is established, or from the state or municipal authorities.

Back to top ↑

Town planning framework

The Town Planning Code stipulates that each urban settlement must adopt its town planning documents, including: (i) regional and municipal territory planning documents that establish the boundaries of various development zones in large territories; (ii) city general plans that set out the boundaries of various functional development zones within individual urban settlements; and (iii) rules for land use and development that establish territorial zoning and describe in detail what may be done in each territorial zone of each urban settlement. The town planning documents establish territorial and functional zoning of the settlement territories and indicate existing town planning limitations, such as “red lines” and protection zones. Construction planned for any new development must comply with the prescribed town planning limitations and zoning. For example, the construction of a large shopping mall in a recreational zone would not be permitted.

On 28 March 2017, the Moscow Government approved the rules for land use and development in Moscow. Any new development in Moscow must strictly comply with the requirements including (among others) the permitted use of a particular land plot, certain construction limitations and maximum buildings’ height.

Another important document in respect of a particular land plot is the land plot development plan (“GPZU”). This document contains all information on the land plot which is relevant for construction: the type of permitted use, boundaries, minimum offsets from the boundaries, technical conditions for connection to engineering communications, etc. The land plot development plan is one of the mandatory documents that must be submitted in order to obtain the construction permit.

Back to top ↑

Construction

The construction process in Russia involves various key parties:

  • a client (“zastroyshchik”) – the entity who wants to build a property for itself or for its subsequent sale or lease;
  • a technical customer (“tekhnicheskiy zakazchik”) – a special professional company engaged by the client to supervise and manage the construction of the property;
  • a general designer (“generalniy proektirovshchik”) who develops the design documentation;
  • a contractor (“podryadchik”) or general contractor (“generalniy podryadchik”) who performs the construction works for the client, either by itself or through subcontractors; and
  • various specialised engineering entities that carry out surveys required for the construction.

The client must have rights to the land plot (ownership or lease) where construction is envisaged.

Since the majority of land in Russia is still state-owned, before commencing any construction project, it is important to assess the issues of the land acquisition and obtaining authorisations and permits required for construction on it from various state authorities.

Acquisition of public land for construction

The Land Code stipulates a specific procedure for making publicly-owned land available to individuals and legal entities for construction purposes. Both Russian and foreign individuals or legal entities interested in obtaining land for construction may apply to the relevant authority for the allocation of a land plot. Any refusal to allocate land may be challenged in court (subject to certain restrictions).

Under the Land Code, there is a two-step approach to the provision of land which involves firstly, the planning of territory use, and secondly, the allocation of the land plot in accordance with the designated use.

As a general rule, where the main type of permitted use is construction, a land plot may only be granted for lease. However, in certain circumstances, land plots may be sold through an auction (e.g. for farming purposes) or without a tendering process2).

Allocation of land plots for construction is generally possible through a tendering process only in the form of an electronic auction.

Under the Land Code, there are 46 special grounds under which it is possible to lease a land plot without a tendering process (e.g. where an interested party is a legal entity that is responsible for the construction of power, heat, gas or water supply utilities or for implementation of a major investment project).

An interested party may itself initiate an auction. In this case, it is responsible for carrying out all the preparatory works required for formation of the publicly-owned target land plot.

Save for a few exceptions, a tenant does not have the priority right to renew the lease agreement for a publicly-owned land plot without an auction. This is aimed at enhancing competition in the land market and combating the abuse of rights by bad faith market players. In practice, however, the parties to a lease of public land often follow Article 621 of the Civil Code, which provides that, if a tenant continues to use a land plot after the expiry of the lease term and the landlord does not object, then the lease agreement is considered to be renewed for an indefinite term.

Furthermore, there is an exception from this general prohibition. In particular, a tenant may renew a lease agreement of a publicly-owned land plot without an auction if all of the following conditions are met: (i) the land plot was initially granted without a tender; (ii) the application to enter into a new lease agreement is made before the expiry of the current one; (iii) no other person has an exclusive right to the land plot; (iv) the current lease agreement has not been terminated; and (v) the grounds permitting the conclusion of the land lease agreement without a tender remain applicable before the lease expires.

Apart from the above, land plots may also be provided to a person by the state or municipal authorities through investment schemes or public private partnership schemes (please see the Infrastructure and public private partnerships chapter). In these cases, the title to the land plot is provided to the successful bidder within the time period set out in the respective agreement.

Seizure of land plots for state and municipal needs

The procedure for the seizure of land for state and municipal needs has the following key aspects: (i) a detailed state authorities’ decision-making process for the seizure of land plots; (ii) a procedure for preparing and concluding seizure agreements; and (iii) the specifics of fixing the amount of compensation in view of the land seizure – such compensation is payable not only to landowners, but also to land users and tenants of land plots.

Holders of natural monopolies, subsoil users and other persons listed in the Land Code may initiate a land seizure procedure. Once the seizure decision is adopted by the relevant state authority, it is valid for three years from the date of adoption and may be challenged in court.

Expropriation of incomplete construction facilities

If a lease agreement of a publicly-owned land plot underneath a construction facility is terminated, the incomplete facility will be expropriated from the developer. An incomplete construction facility is disposed of by sale through an auction. Such a disposal will be possible only if all of the following conditions are met: (i) construction of the asset was not completed by the termination date of the lease agreement; (ii) the land plot was provided pursuant to a tender; and (iii) the delay in the asset’s construction is not due to any action (or omission) of state or local authorities, or persons operating the utility networks to which the asset has to be connected. The purpose of these rules is to encourage developers to meet deadlines for construction projects on leased publicly-owned land plots. These provisions, however, do not apply where a lease agreement has been concluded before 1 March 2015.

Only a court may adopt a decision to dispose of an incomplete construction facility upon a claim to sell the facility through an auction. The claim may be filed by a state or municipal body authorised to dispose of the relevant land plot. The proceeds of the sale must be transferred to the former owner of the incomplete construction facility (i.e. to the developer). However, the developer may extend the term of the lease agreement of a publicly-owned land plot without an auction once, in order to complete the construction. This can only be done if (i) an authority has failed to file a court claim to expropriate the incomplete construction facility within six months after the expiry of the lease term; (ii) the court has dismissed such a claim; or (iii) the asset has not been sold through an auction.

Construction permits

Any construction activity may only be performed on the basis of authorisations and permits issued by state authorities unless an exception applies. The list of such permits and authorisations may differ depending on the type of property to be constructed.

A construction permit must be obtained prior to the commencement of any construction works. This is a formal document that confirms that the design documentation meets the compulsory requirements of applicable law.

Construction permits are issued only in the following cases: (i) the applicant has valid rights to the land plot; (ii) the applicant has received a positive (state or non-state) expert opinion on the design documentation (if applicable); and (iii) there are no contradictions between the documents on rights to the land plot, the design documentation and the land plot development plan.

The Town Planning Code requires the applicant for a construction permit to have rights (ownership or lease) to the land plot. If someone constructs a building on a land plot over which it has no rights, the building may be declared an “unauthorised structure” by the courts or municipal authorities, and demolished at the expense of the person who developed the “unauthorised structure” (please see the Unauthorised structures section).

A holder of rights to the land plot (acting as the client in the construction process) or a technical customer (engaged by the client and acting as its agent) may obtain a construction permit.

A construction permit contains a number of essential elements such as the time period for the construction works, the area of the constructed property and the name of the client. A valid construction permit is one of the documents required to commission the constructed property.

There are, however, some exceptions to this general rule. In particular in connection with non-residential real estate, non-capital buildings and structures can be built without obtaining a construction permit. This type of property was recently introduced3 in Russian law. Non-capital buildings and structures are defined as objects that are not attached permanently to a land plot and whose technical characteristics allow them to be moved, dismantled and subsequently assembled without significant damage to their purpose and change to their main parameters.

Unauthorised structures

In August 2018, certain amendments were introduced4 into Russian law to relax the regulations on unauthorised structures:

  • a capital structure can now be qualified as an unauthorised structure only if it was built in violation of the rules and regulations that were in effect both when (i) the construction commenced; and (ii) such unauthorised construction was revealed;
  • a facility cannot be qualified as an unauthorised structure, if it was built in violation of the restrictions for the use of a land plot and the owner of this facility did not know and could not have known about these restrictions;
  • a court or municipal authority may now allow an unauthorised structure to be brought into compliance with (i) the rules for land use and development; (ii) town planning documentations; and (iii) obligatory construction requirements. This right was added to the right to decide on the demolition the unauthorised structure – which existed in the past; and
  • minimum and maximum terms for the demolition (from three months to one year) and for bringing an unauthorised structure into compliance with the applicable requirements (from six months to three years) were introduced.
Commissioning

Property commissioning is the second most significant formal milestone in the construction process. Commissioning may be divided into two stages:

  • acceptance of the works performed by the contractor/subcontractors by the client; and
  • commissioning of the constructed property by the competent authorities.

The first stage is critical in respect of the contractual relationship with the contractor or general contractor. Following the acceptance of the works, a contractor or general contractor is entitled to claim for payment for the works performed (the payment mechanism is usually determined in the construction agreement). The warranty period begins to run from the date of acceptance.

The second stage is crucial for the state registration of the property. During this stage the state construction supervisory authority examines the compliance of the constructed property with the construction permit, the design documentation and the land plot development plan. If certain parameters (such as the total area, total structural volume, etc.) differ, the commissioning permit will not be issued and it will be impossible to register the property in the State Register until the revealed deficiencies are fully eliminated.

Since 1 January 2017, the state cadastral registration of a newly-built building or structure is based on the application of the authority issuing the commissioning permit which must submit this application to the Registrar within five working days. Moreover, it is now clearly specified that, for the purpose of the state registration of the ownership title to a newly-built building or structure, it is sufficient that a lease agreement for the land occupied by the property be effective as at the commissioning date.

Back to top ↑

Membership in self-regulatory organisations and licences

Legal entities providing the following construction and design activities must become members of self-regulated organisations (“SROs”) which authorise them to carry out certain activities:

  • designing buildings and structures;
  • constructing, reconstructing and carrying out major repairs of buildings and structures; and
  • engineering and surveying for the purposes of constructing buildings and structures.

With some exceptions, none of the survey, design and construction activities mentioned above are permitted without an SRO membership. Failure to comply with this requirement could result in criminal or administrative liability.

Both Russian and foreign legal entities may be members of an SRO. SRO membership fees depend on the type of activity and may be substantial.

In addition, some construction-related activities are still subject to licensing requirements. Examples of these activities include the installation of firefighting systems or the operation of some industrial facilities classified as posing fire or explosion hazards.

In July 2016, important amendments to the Town Planning Code concerning SROs and admission to the above mentioned survey, design and construction activities were approved by Federal Law No. 372-FZ dated 3 July 2016 (the “SROs Amendments”). Most amendments came into force on 1 July 2017 (with some exceptions mainly concerning a new approach to the organisation of SROs’ activities and the management of SROs, which became effective on 4 July 2016).

The most significant changes imposed by the SROs Amendments are the following:

  • SROs for construction companies operate on a regional basis (i.e. any construction company must be a member of the SRO which is registered in the region of the Russian Federation in which such construction company is itself registered). Exceptions from this regional registration principle are only provided for foreign legal entities and Russian companies incorporated in regions where no construction SRO was incorporated.
  • All admission certificates issued by SROs were invalidated as of 1 July 2017. Therefore, the only document confirming the right to perform survey, design and construction activities will be an extract from the register of an SRO’s members (which will be valid for one month from the date of its issuance).
  • Technical customers must be members of an SRO in order to legally perform their activities.
  • In addition to the general indemnification fund (securing liabilities of SRO members in the event of personal injury or property damage resulting from the destruction or damage to a building or structure), there are some cases when SROs are required to set up another compensation fund securing contractual liabilities of the SRO’s members for non-fulfilment or improper fulfilment of their contractual obligations under the agreements concluded through tender procedures (i.e. under agreements with public authorities, or state, municipalities and other publicly-owned counterparties).
  • The SROs Amendments also regulate in detail requirements applicable to (i) SROs; (ii) SRO members (such as an obligation to hire at least two postgraduate engineers having sufficient work experience and listed in the national register of specialists); (iii) special standards and internal documents of SROs; and (iv) other related organisational aspects of SROs’ activities.

Back to top ↑


“Any legal entity or individual may own private land in the Russian Federation, subject to certain restrictions which regulate the legal status of the land plot.”


[1] Federal Law No. 342-FZ “On Amendments to the Russian Town Planning Code and Certain Legislative Acts of the Russian Federation” dated 3 August 2018. Back ↑

[2] See Article 39.3(2) of the Land Code. Back ↑

[3] Federal Law No. 342-FZ “On Amendments to the Russian Town Planning Code and Certain Legislative Acts of the Russian Federation” dated 3 August 2018. Back ↑

[4] Federal Law No. 339-FZ “On amendments to Part I of the Russian Civil Code and Article 22 of Federal Law on “Enactment of Part I of the Russian Civil Code” dated 3 August 2018. Back ↑


Key contacts

Artashes-Oganov
Artashes Oganov
Partner
Head of Real Estate & Construction