Most changes in Russian commercial real estate law in 2020 were associated with the COVID-19 pandemic and the governmental bans and restrictions introduced in connection with it.
Law 98-FZ
Among key legislative changes in the past year, one can single out the Federal Law of April 1, 2020, No. 98-FZ “On Amendments to Certain Legislative Acts of the Russian Federation on the Prevention of and Response to Emergencies,” which, among other things, introduced certain measures to support tenants of non-residential properties.
Law 98-FZ contained a general framework granting tenants the right to demand a reduction in rent for 2020 due to the impossibility of using the property as a result of the state of emergency or a “high alert regime” in relation to COVID-19 (a special statutory regime introduced by each Russian region imposing restrictions on mass gatherings, and ordering the closure of certain municipal or private facilities, etc.)
In addition, until October 1, 2020, the law granted certain categories of tenants operating in the most affected sectors of the economy the right to a deferral in the payment of rent. For small and medium-sized businesses, it also granted the right unilaterally to terminate the lease if the lessor refused to reduce the rent.
A distinctive feature of these support measures was to transfer some of the financial risk caused by the pandemic to landlords without providing them with any substantive support measures at the federal level. On the regional level, only some of Russia’s constituent entities introduced legislation aimed at supporting real estate owners in the form of waivers of part of their local real estate taxes or access to certain state grants, but in practice few owners were able to benefit from such measures due to the extensive bureaucratic requirements.
Recent practice has shown that for tenants, the proposed support measures were equally insufficient. In particular, instead of rent deferrals the majority of tenants needed rent discounts – but clear legislation on the subject was never adopted. It was expected that the general framework on rent discounts envisaged in Law 98-FZ would be supported by further specific legislation, but this was never passed. This led to countless conflicts between landlords and tenants in which the latter demanded rent discounts by reference to Law 98-FZ, but no one knew how such rent reductions should be applied in the absence of any concrete legislative base. As a result, the owners and tenants agreed on compromise solutions virtually without regard to the adopted legislation.
Integrated Development of Territory
Another important legislative change in 2020 related to the integrated development of territory. The new law superseded various norms governing the integrated and sustainable development of territory. Among other changes, the amendments established procedures for the seizure of real estate for the purposes of integrating the development of territory and for compensating the owners of the real estate.
These amendments were met with a positive response from the construction industry as they should simplify the redevelopment of residential areas currently occupied by houses in poor condition. Having said that, there is a general concern that this new legislation may potentially be abused by developers due to the ambiguous requirements for choosing sites for the integrated development of territory as it may apply to any real estate located on land of high interest to developers and not just rundown buildings.
Mortgage of Residential Properties
Another legislative change last year that proved to be an effective support measure for the construction industry was the governmental program for the mortgage of residential properties with government-subsidized interest. This program largely contributed to an increase in demand for new properties over the past year, which in turn stimulated the development of the construction industry and provided significant support to developers during the COVID-19 crisis.
Although the program has recently been extended until July 1, 2021, its further application is being debated among state authorities as there is a general concern that despite its positive effect on the construction industry it may also contribute to an increase in the average residential property price.
By Sergey Trakhtenberg, Partner, and Olga Elliott, Senior Associate, Dentons
This Article was originally published in Issue 8.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.