Actual Issues of Legal Due Diligence in Russia

Valentina Gluhovskaya
Managing Partner
Norton Rose (Central Europe) LLP

For those actively engaged in the real estate sector, legal due diligence with respect to a property and land plot to be acquired is a well-known and necessary element in any land transaction. However, proper attention is not always given to certain technical issues, such as verification of the actual location and boundaries of the land plot.

According to official information, only 77 percent of all the existing land plots in Russia are registered in the state cadastre. This means that about one third of all land plots are not registered in the state cadastre. Among them are those granted in the early 1990s, when no requirements existed for state registration of rights to real estate, and such rights could be valid regardless of whether or not they were registered. Some practitioners consider that in such cases the availability of legitimate title documents is sufficient to enable the issue of a clean title report but, in doing so, they may fail to take into account some important issues. For example, in the course of the cadastral registration procedure the new owner can face the problem of boundaries of the purchased land plot not coinciding with the registered borders of adjacent land plots.

Therefore, it is essential to determine not only the actual location of the land plot you are interested in, but also the boundaries of all the adjacent pieces of land, in order to avoid protracted litigation and the potential risk of purchasing a smaller land plot of a different conformation.

It is essential to examine a cadastral plan of the territory — a plan of a cadastre quarter reflecting in graphic and text forms all registered plots, roads and natural objects (such as rivers and lakes) which help to establish the position of the relative boundaries and/or locations of the land plots.

Natalia Petrovskaya
Senior Associate
Norton Rose (Central Europe) LLP

The above procedure should also be followed when intending to acquire a land plot registered in the state cadastre: if there are any “vacant” adjacent territories, it is recommended that a special land survey be carried out to collect as much information as possible about them, including their use and ownership. According to Federal Law “On the State Cadastre of Real Estate,” the boundaries of a land plot are determined not only by title documents, but also by documents specifying the location of the boundaries during its formation or the boundaries which have existed on the basis of actual usage for fifteen years or more and/or are fixed taking into account natural or man-made objects which help determine the location of the land plot’s boundaries.

An equally important issue is the potential distinction between holding rights to the land and possession.

This has recently become particularly important because in court practice there is evidence of a tendency to protect the rights of an actual owner (the person who uses the land de facto, not only de jure).

For example, the last registered owner cannot overcome defects in transactions previously made in respect of the property by referring to the fact that he is a bona fide acquirer, if a property was not actually validly transferred to him (article 6 of the Judicial Practice Review on certain matters related to reclamation of the property from illegal possession, information letter of HAC No. 126 dated 13 November 2008).

The last registered owner also will have no right (if a property has not been withdrawn from an actual possession of a person, who possessed this property earlier) to refer to expiration of the limitation period. This means that a court may examine very old documents related to a property in assessing the position (for example, documents concerning allocation of a land plot for construction in 1938 were examined in such proceedings).

We believe this tendency will become stronger, as reflected in the provisions of the Concept of legislation development approved by the decision of the Council of the RF President for codification of civil legislation dated 7 October 2008. In particular, the Concept suggests the introduction for the first time in the legislation of a notion of “possession” and identifies it as an actual fact, which can be acquired as a result of actual actions, but not as a legal consequence of a transaction.

In this article we have covered only some of the provisions which are important within the context of real estate legal due diligence. Consideration of these issues, and where possible addressing them, should be part of the legal work involved in any real estate transaction.