Investors in the construction of apartment buildings in Russia are protected by Federal Law No.214 ‘On Shared Investments in Construction of Apartment Buildings and Other Property’ dated December 30, 2004 (Law 214).
Law 214 provides an adequate level of protection to individual and corporate investors, including state registration of shared investments agreements, mortgage of the land under the construction to the benefit of the investors, severe penalties for the developer and more.
No wonder many developers have been trying to avoid structuring their relationships under Law 214 and have been trying to bypass it. But they have been running out of possibilities. Suddenly they got unexpected support from the authority that is in charge of the state registration of shared investments agreements.
There have been cases when the state registration of such agreements was denied because the registration authority believed that Law 214 was not applicable to a specific construction project.
Indeed, Law 214 came into force on April 1, 2005 and has it that Law 214 is applicable to the investments in the construction of apartment buildings for which construction permits were obtained after Law 214 entered into force (i.e. after April 1, 2005).
The legal definition of this term was introduced by the Urban Planning Code of Russia (the Code) that came into force on December 20, 2004. Under that definition, a construction permit is a document that confirms the compliance of the design documentation with the applicable requirements and authorizes construction of the property by the developer.
The introductory law to the Code also clarified that until a new form is approved by the federal government, local forms used by the Russian regions shall remain valid.
The Russian government passed a decree on the approval of the form of a construction permit on November 24, 2005.
It creates certain difficulties because in some regions (e.g. in St. Petersburg) a construction permit was a document that allowed development of a parcel of land. Therefore an act of the city government making the land available for construction should be regarded as a construction permit.
We have seen examples when the registration authorities refused to accept official construction permits arguing that decrees of the city government issued before April 1, 2005 should be regarded as such.
In practice this means that even in case a developer demonstrates in the course of a due diligence review a valid authorizing the construction issued in accordance with the Code, the developer may still have a valid reason to refuse structuring the relationships with the investor under Law 214.