Land Ownership in Russia

  • Russia
  • 04/01/2001
  • Secretan Troyanov

The issue of land ownership has acquired almost mythical significance in today’s Russian politics and is – together with employment – the area where Russian law remains most impregnated by ideological concepts which have become inconsistent with economic reality and are therefore a source of considerable legal uncertainty, in particular for foreign investors not familiar with the Russian environment.

HISTORY:

Alexander II is often criticised for the failure to implement a thorough land reform simultaneously with the abolition of serfdom in 1861. The emancipated peasants were indeed not granted ownership of the land which they cultivated. Afraid of the consequences of too radical reforms the State instead obliged them to buy their land. Despite successive attempts to accelerate the land reform the tsars never succeeded in completing it, and it is widely known that the Bolsheviks came to power with the slogan “All Land to the Peasants”. Ironically it was the Land Decree of the Communist party adopted on October 26, 1917 which barred private ownership of land for decades to come. In the thirties Soviet legal theory developed land law as a separate branch of law characterised by the following principles:

- all land is owned by the State (cf. Article 95 of the RSFSR Civil Code of 1964) and land can therefore not be the object of transactions («земля изъята из гражданского оборота»); – the State grants the right to use land to individuals and legal entities; – the right to use land is unlimited in time, conditional on the purpose for which the land was allocated, and free of charge.

The roots of the current land reform go back to the last years of Soviet rule (the period known as Perestroika). Widely publicised news of ecological damages and the diminishing productivity of agriculture led to harsh criticism of the efficiency and rationality of the State monopoly on land. Already the USSR and RSFSR Constitutions as amended in 1990 avoided the term “State ownership”, but proclaimed instead that land is the property of the peoples of the Soviet Union (достояние народов). The USSR Principles on Land of February 28, 1990 (which replaced the Principles adopted in 1968) did not yet provide for private land ownership, but introduced the right of lifetime hereditary possession for citizens and the possibility to lease land by contract, which permitted certain limited transactions with land. The Principles were implemented by the RSFSR Land Code of April 25, 1991, which replaced the previous Code of 1970 and is still in force today. Pursuant to the Declaration of Sovereignty of June 12, 1990 the Law “On Providing the Economic Basis for Sovereignty” of October 31, 1990 declared all land the property of Russia.

Timid reforms continued after Russian national independence. Amendments to the RSFSR Constitution and the Laws “On Land Reform”, “On Farms” and “On Property in the RSFSR” of late 1990 admitted private ownership of agricultural land for individual farming, gardening, cattle-breeding and similar small-scale agricultural purposes. The State fixed the maximum size of land which could be owned by one individual or family, and the land could be sold only to the State. The land reform was initially strictly limited to the agricultural sector. Privatisation of land was then gradually extended, primarily as part of the privatisation of industry.

Private land ownership received final recognition in the present Constitution of the Russian Federation adopted by referendum in December 1993. However, the constitutional principles still await their full scale implementation. In view of the strong opposition of Parliament against any further reforms, President Yeltsin introduced these by a series of Decrees (the most important of which was Decree No. 1767 of October 27, 1993) which extended the cases where ownership of land could be granted and admitted the right of land owners to dispose freely of their property. Despite the obvious fragility of this presidential legislation and the fact that the provisions of the 1994 Civil Code regulating rights to and transactions with land will become effective only after the adoption of the new Land Code, which has been delayed ever since, it is probably not an exaggeration to say that Russia has today a reasonable legislative basis for ownership of and transactions with land. The real issues are therefore rather (i) the stability of this legislation, (ii) the privatisation of land most of which is still owned by the State in all its forms, and (iii) the formation of an efficient real estate market. There still exists no political consensus on land reform although it is hoped that President elect Putin will accelerate it. However, a radical privatisation of land similar to the voucher privatisation of Russian industry can hardly be expected.

We therefore believe that most distinguishing features of today’s land law will not disappear whoever wins the current debate on the desirable extent of private land ownership:

1. Although the Civil Code follows the traditional approach of continental law systems and considers land as immovable property (this was for the first time clearly affirmed by Presidential Decree No. 1767 of October 27, 1993), land will continue to have a special status. The traditional position of Russian law reflected in the 1993 Constitution, the 1991 Land Code, the 1994 Civil Code and other laws is to consider land a natural resource along with water, forest and the subsoil (“недрa“), which leads to the ideological position that land belongs to all and must be protected as a national asset. Land is therefore not an ordinary good (“товар“) and should not be an object of investment and speculation, but must be used efficiently, rationally and without damage to the ecology. It can therefore hardly surprise that the regulation of private ownership and use of land in today’s Russia can be compared to the traditional concept of a concession granted by the State for the exploitation of a natural resource. Land law will thus continue to be a separate branch of law with its own specific principles.

2. The focus on the conception of land as a limited natural resource leads to the State being perceived as the guarantor of the optimal allocation of land. Obviously most contemporary States have introduced some form of development planning (in Switzerland known as “Raumplanung“ / “aménagement du territoire“) restricting the rights of the landowner. However, in Russia the use of the land in conformity with the purpose for which it was originally allocated («целевое назначение») is practically a condition of ownership, and the land may be expropriated if it is used for another purpose or not used at all. A development planning exists only in and around population centers. All other land is a priori agricultural except land covered by forests or water which is regulated by the Land and Water Codes and may not be privately owned.

3. The Roman law principle “superficies solo cedit” (the owner of the land owns what is on the land) does not apply in Russia. Once a building has been erected with the consent of the landowner and registered in the real estate register, the right to the building includes a right to the land (the situation is comparable to what is known in Switzerland as a right to build – “Ueberbauungsrecht“ / “droit de superficie“). This concept allowed Russia to develop a real estate market in the absence of land ownership. The role of the State as landowner is thus effectively restricted to the allocation of undeveloped land.

4. Since land law is used as an instrument of control over the allocation and use of the land, in particular, in order to implement the State’s agricultural policy, the central issue is obviously less the ownership of the land per se, but rather the right to dispose of it (in political discussions the Russians use the terminology «гражданский оборот земли»). This explains why the Civil Code has perpetuated specifically Russian limited proprietary rights: lifetime hereditary possession for citizens and permanent possession for legal entities. These rights are really servitudes (“usufructs”) but would as such be considered as null and void under Swiss law because they are not limited in time and thus deprive the rights of the land owner of all substance. Economically the position of the beneficiary of these rights does not differ from that of an owner except that the rights are not transferable (except to heirs in case of death).

LAND OWNERSHIP TODAY:

Although the Russian Constitution explicitly guarantees private ownership of land (Articles 9 and 36), the law currently admits it only in three cases:

- For individual housing and agricultural needs: The 1991 Land Code permitted the transfer of land into private ownership of Russian citizens for private farming, housing, gardening, cattle breeding and other small-scale agricultural uses. The members of kolkhozes and other collective farms could obtain joint or co-ownership of their land. Subsequent legislation , most of it related to the reform of agriculture, confirmed and extended the right of citizens to obtain land and to dispose of it.

- As part of the privatisation of industrial and commercial property: President Yeltsin interpreted the law on privatisation of State and municipal property as including the possibility to privatise equally the land occupied by such property . This presidential legislation, which later also provided for the sale through auctions and tenders of the land needed for the extension of existing enterprises, seems to have lost its basis when the Law No. 123-FZ of July 21, 1997 “On the Privatisation of State Property and the Principles of Privatisation of Municipal Property in the Russian Federation” excluded all forms of land privatisation from its scope. However, the relevant Presidential Decrees have not been abrogated.

- For construction projects: More recent legislation permitted the sale of land in populated areas through auctions and tenders for general construction projects in accordance with existing development plans.

The success of this legislation depends obviously to a large extent on the willingness of the local authorities to form and inventory land plots and to organise auctions and tenders, but also on the interest of potential buyers to purchase the land. While agricultural land was partly granted for free, the price of industrial and other land fit for construction is an important obstacle to large-scale privatisation, in particular considering the fact that – as mentioned above – ownership of the land does not really improve the position of the owner of the building.

Under Article 72 of the Russian Constitution the regulation of land is a joint competence of the Russian Federation and its Regions . It is therefore the general opinion that the Regions may adopt their own land laws as long as they are not in contradiction with federal law. Various such laws have been adopted in a number of Regions. In particular, several Regions and municipalities have organised experimental land auctions. However, it seems that none of these sales has been an overwhelming success, probably because of the absence of a real market value of land, which is a problem not only for the purchasers, but also for the sellers and precisely one of the reasons for conducting experimental sales. It is interesting to note that Moscow, once a fervent opponent of land privatisation (Presidential Decree No. 96 of February 6, 1995 on the Second Stage of Privatisation in the City of Moscow allowed Moscow to delay the privatisation of land) has also recently decided to conduct land auctions .

OTHER RIGHTS TO LAND:

As mentioned above Soviet law created two specific rights to land – lifetime hereditary possession (пожизненное наследуемое владение) and permanent use (постоянное бессрочное пользование) – which are basically equivalent except that the first is granted for private and the latter for commercial use. The legal concept of the right of permanent use is very similar to another legal construction inherited from Soviet law which is still used for the transfer of fixed assets (buildings, etc.) to the balance sheet of State enterprises and confers to the latter a proprietary right to such assets (so-called rights of economic management and operative administration – хозяйственное ведение / оперативное управление) while the State retains full ownership. The beneficiaries of all these rights enjoy some kind of usufruct, i.e. can possess, use property and the revenues therefrom, but not dispose of it. The basic difference consists in the fact that the right to use land does not have a balance sheet value (Russian accounting rules consider the right to use land an immaterial asset).

We believe that the initial intention of the reformers of land law was to abolish these rights by converting them into full ownership. Presidential Decree No. 2287 of December 24, 1993 abrogated the provisions of the Land Code which regulated lifetime possession and permanent use of land. We therefore doubt that there still was a legal basis after December 24, 1993 to confer such rights – at least on the federal level. Article 51 of the Law No. 1550-I of July 6, 1991 “On Local Self-Government in the Russian Federation” and Article 51 of the Law No. 154-FZ of August 28, 1995 “On the General Principles of the Organisation of Local Self-Government in the Russian Federation” authorise the municipalities to allocate land based on the rights of lifetime possession or permanent use alternatively to the transfer of ownership or lease by contract.

The right to use land for a limited period of time can further be granted in the form of a right of temporary use, either free of charge (up to three years) or in the form of a lease. Contrary to the rights discussed above which are based exclusively on an administrative decision, these rights are granted on the basis of a contract. Under the 1991 Land Code the maximum duration of a lease is 50 years – usually reduced to 49 years. Land lease agreements have the clearest legal basis (Article 607, point 2 of the Civil Code which is in force). They make it possible to assign the contractual rights to the land (although the consent of the landowner remains necessary). According to the Land Code lease agreements may be terminated unilaterally, but only against full compensation. Lease agreements normally regulate the consequences of expropriation or breach of contract in some detail. The rent can be freely negotiated by the parties (according to Letter 04-3-04/77 of the State Tax Service of May 3, 1996 it can even be zero) although in practice rent is obviously fixed on the basis of certain average values determined by the competent administration. By auctioning off the rights to conclude land lease agreements the Moscow Government succeeded in creating a market for undeveloped land plots.

TODAY’S LEGISLATION ON LAND:

As indicated above Russian land law consists today of the 1991 Land Code most of the provisions of which must probably be considered as abrogated pursuant to the above mentioned Presidential Decree No. 2287 of December 24, 1993, as well as a considerable number of laws, presidential decrees, government resolutions, etc. which reflect day-to-day politics during the last ten years. It is easy to get lost in this mass of unsystematic legislation. Unfortunately today many questions do not have a precise answer, i.e. depend on the view taken by the competent local administration or the registering authorities. It is, for instance, not clear whether the purpose for which land was allocated also restricts the circle of potential owners, i.e. whether land allocated for individual housing, gardening, etc. can be transferred to a legal entity. Legislation would have been considerably simplified if chapter 17 (Articles 260 – 287) of the Civil Code, which was adopted in 1994, had entered into force. However, this will be the case only after the enactment of the new Land Code.

Obviously the Civil Code also contains a number of general provisions which are already effective. Most importantly Article 130 states that land plots are immovable property. Transactions with land must therefore be registered (Article 164). Article 216 refers to the rights of permanent use and lifetime possession as proprietary rights (вещные права). Articles 129 and 209 define the content of the right of ownership and the rights of possession, use and disposal, and there are provisions on expropriation and specific transactions with land (mortgage, purchase, lease, etc.). However, the Civil Code provides that such rights exist, respectively transactions are possible to the extent permitted by land law . The same principle is set forth in Article 260 of chapter 17 which provides, however, that only a law may restrict the right of disposal and that the use of land may be limited only by a law “or in the manner defined by such law”. Once in force, this article might considerably increase the stability of legislation on land which is regulated today mainly by acts of the President, Government and administrative authorities.

Chapter 17 is by no means revolutionary. On the contrary, it perpetuates the Soviet division of ownership, lifetime (hereditary) possession and permanent use, temporary use and lease. It contains the following provisions:

- Article 261 defines a land plot as a territory within boundaries indicated in the documents issued to the owner by the land authorities including – unless the law provides otherwise – the surface soil (everything underneath is subsoil regulated by a special law ), closed water reservoirs, forest and plants. Anything below (subsoil) and above (air) may be used in accordance with the law. The owner of the land has the right to erect buildings and other constructions in compliance with city development and construction norms and regulations and in accordance with the purpose of the land (Article 263). – Articles 265 – 267 define the right of lifetime (hereditary) possession which may be granted to citizens over State and municipal land. The beneficiary may build on such land and transfer it for a limited period of time against or without payment. He may not sell or mortgage the land.

- Articles 268 – 270 define the right of permanent use which may be granted to citizens and legal entities over State and municipal land. The beneficiary may build on the land and – with the consent of the owner -transfer it for a limited period of time against or without payment.

- Pursuant to Articles 271 – 273 the owner of a building (or other immovable property) erected on a land plot which he does not own is entitled to use the land so occupied (provided the building has been erected with the consent of the landowner), normally based on a right of permanent use unless the law or the agreement with the landowner provide otherwise. In addition he may freely use and dispose of the building. If he sells it the right to the land follows the building (also Article 552 – 554 of the Civil Code). If the right to the land ceases to be effective (e.g. expiry of the lease agreement) and the parties have not reached an agreement on the building, the owner of the land may request that the building be removed and the land restored to its initial condition. However, if it is not permitted to remove the building or if the value of the building clearly exceeds the value of the land, the court may allocate the land to the owner of the building or prolong the validity of his right to use the land.

- Articles 274 – 277 regulate servitudes (easements).

- Articles 279 – 287 regulate expropriation. Land may be expropriated (a) if it is not used correctly or if it is not used in accordance with its purpose during three years from its allocation (without taking into account the time needed to develop the land) and (b) for State and municipal needs. In the latter case the owner must be notified a year in advance and paid the market value of the land. He is also entitled to indemnification for losses which he has a contractual obligation to compensate to third parties.

LAND REGISTER (CADASTRE):

The land register or cadastre (государственный земельный кадастр) existed already in Soviet times and will soon be regulated by Law No. 28-FZ “On the State Land Cadastre” which has been adopted on January 2, 2000 and will enter into force in July.

The Land Register was always intended to inform on rights to land. Initially title to land was evidenced by a State Deed (Государственный акт). Government Resolution No. 493 of September 17, 1991 prescribed the forms in which these deeds were issued. New forms (свидетельство на право собственности на землю) were introduced for ownership rights by Government Resolution No, 177 of March 19, 1992 and later by Presidential Decree No. 1767 of October 27, 1993. According to the 1990 Law “On Land Reform” the rights to land granted and the documents issued under Soviet rule remained valid only until February 1, 1993 unless they were confirmed by documents issued in accordance with Russian law. Pursuant to Presidential Decree No. 2130 of December 11, 1993 (implemented by Methodical Guidelines of Roskomzem of August 30, 1994) all land rights became subject to registration in the Land Book (Поземельная книга) which was kept by the land authorities responsible of the land register (cadastre) .

Law No. 122-FZ of July 21, 1997 “On Registration of Rights to Immovable Property and Transactions Therewith” provided for the formation of a single real estate register kept under the auspices of the Ministry of Justice. This law has been implemented by Government Resolution No. 219 of February 18, 1998 and the Order of the Ministry of Justice, the Ministry of State Property Management and the Ministry for Land Policy, Construction and Housing Policy No. 83/172/23 of July 22, 1998. Previous legislation was formally abrogated by Presidential Decree 112 of January 21, 1999, and the law itself should have been fully implemented by January 1, 2000, i.e. all real estate registration transferred from the previous authorities (different agencies were in charge of State and Municipal Property, Land, Residential Property and Non-Residential Property) to a single registration authority (in Moscow the Moscow State Committee for the Registration of Rights to Immovable Property and Transactions Therewith). Under this legislation the certificates to land cease to be title documents and are replaced by registration, which is evidenced by a registration certificate (свидетельство о государственной регистрации прав на недвижимое имущество). However, the certificates previously issued remain valid. The consolidation of the real estate registers seems an extremely important process as the investor will ultimately want to rely on the concrete documents evidencing the right to a specific land plot.

A separate land register (Единый государственный реестр земель) will nevertheless continue to exist. It will contain information on the cadastre number of the land plot, its location (address), its surface, the category and authorised use of the land, a description of its boundaries, registered proprietary rights and restrictions (encumbrances), economic characteristics (including land value), the quality of the land, the existence of immovables (buildings, etc.) thereon. The new law does not define the government agency in charge of the land register which was previously kept by Goskomzem .
Land is divided into the following categories listed by the 1991 Land Code since Soviet times:

- agricultural land; – land in populated areas (cities, towns, settlements in rural areas), – industrial land and land used for transportation, communications, television, information, cosmic, energetic, defence and similar purposes; – natural parks, recreational land, land of a historical or cultural value; – forest and water; – land reserve.

Development planning and zoning in populated areas (поселения) is today regulated by the City Construction Code No. 73-FZ of May 7, 1998 and the inventory of land within such areas by Government Resolution No. 105 of February 2, 1996. The purpose of city land is or will be defined by the development plans (градостроительная документация) elaborated in accordance with City Construction Code. However, this concerns only a small percentage of the Russian territory.

A further difficulty arises from the fact that the land – originally the property of the Soviet State – needs to be divided into federal, republican and municipal property. Basically there is an assumption that the municipalities own the land within the boundaries of the settlement. Article 214 of the Civil Code provides that all land which is not in private or municipal ownership is State property, which is again divided into federal property and property of the Regions. The law dividing federal and regional property has not yet been adopted. Land is assumed to be in the property of the Region unless necessary for the fulfillment of public functions referred to the competence of the Federation (e.g. defence). Again all these rules are valid only for undeveloped land. Land under construction belongs to the owner of the relevant objects of immovable property . The distribution of the latter between the Federation, Regions and municipalities is regulated by the Resolution of the Supreme Soviet of the Russian Federation No. 3020-I of December 27, 1991.

BUILDINGS:

As mentioned above the investor wanting to erect a building must first secure a land plot. If the land plot is a greenfield site, i.e. not already reserved for construction in a city development plan (градостроительная документация), it must be selected and allocated according to a specific procedure defined by Chapter 5 of the 1991 Land Code. The investor must first agree the site with the local authorities. After that he prepares the technical project documentation and obtains all necessary government consents. Only after this is the land definitively allocated. For this purpose the concrete land plot is designated within the boundaries which are necessary in accordance with the project documentation (отвод) and, if necessary, any previous rights to the land are expropriated (изъятие). As in other countries construction permits and a certain number of consents (sanitary and hygienic, ecological, fire department, etc.) are required to build. Within populated areas building activities are regulated by the City Construction Code No. 73-FZ of May 7, 1998 No. 73-FZ pursuant to which the municipalities (i.e. their organs of architecture and development planning) are competent to grant construction permits.

Most important for industrial projects is the ecological expertise (today regulated by Law No. 174-FZ of November 23, 1995). Under former legislation on foreign investments companies with foreign investment wishing to invest into industrial construction projects were obliged to submit the results of this expertise in order to be incorporated. The new Law No. 160-FZ of July 9, 1999 “On Foreign Investments” no longer establishes a link between incorporation and ecological expertise. It should therefore be possible to incorporate a company prior to initiating the procedure for the allocation of land, which should substantially facilitate financing of start-up costs.

It should be noted that the investor may not obtain ownership rights to the building unless he has been allocated use of the land plot in due form. Moreover, the rights to the building may be registered only after the construction is completed and the building has itself been registered as an object of property rights. This obviously creates difficulties for the financing of construction projects.

LAND VALUE:

One of the purposes of the land register (cadastre) has always been to give information on the land value. According to the Law No. 1738-I of October 11, 1991 “On Payment for Land” there exist three basic values:

- land tax: Land tax is payable by landowners and land-users (except lessees) and basically designed to encourage rational land use. The land tax is considered a local tax and designated as such by Article 21 of the Law “On the Principles of the Tax System of the Russian Federation” of December 27, 1991. The average rates are set by federal law according to the category and location of the land and adjusted annually to take account of inflation (today by a law adopted by Parliament). The concrete rates are set by the local authorities.

- rent: Rent is payable by lessees. Although the rent is subject to an agreement between the parties, in practice rental rates are set similarly to the rates of land tax.

- normative value: This value is used to calculated the sales price for privatisation purposes. Normally legislation does not allow to privatise land below its normative value. Initially Government Resolution No. 112 of February 25, 1992 set this value at 50 times the annual land tax. Resolution No. 1204 of November 3, 1994 increased it to 200 times the annual land tax and allowed the Regions to further increase it up to 75% of the market value. The local administrations could then set the definitive price within the range +/- 25%. Resolution No. 319 of March 15, 1997 abandoned the link between the normative value and the land tax and left it to the Regions to define valuation zones. The local administration could still reduce or increase such values by 25%. Finally Resolution No. 316 of April 8, 2000 “On the Approval of the Rules for State Cadastre Valuation of Land” seems to opt in favour of values set by official experts. The sale of land occupied by privatised property (see above) was also originally linked to the normative value, then lowered to the ten- and finally the five-fold land tax . It is obvious that the normative price was in fact defined more or less arbitrarily and was often prohibitively high.

MORTGAGES:

Land mortgages have first been regulated by Presidential Decree No. 293 of February 28, 1996, which has been replaced by the Law No. 102-FZ of July 16, 1998 “On Mortgage”. The most important restriction is the prohibition to mortgage agricultural land, which obviously leads to the impossibility to pledge crops until harvested. The press reported recently that the Constitutional Court accepted to examine the constitutionality of this restriction.

CONCLUSION:

Despite its complexity and the limitation of ownership rights under Russian’s current laws we do not think that the land issue has much significance for the investor today. As the land follows the building, the main issue which worries the developer or purchaser of real estate after completion and registration of the building are the periodical payments for the land. Given the general tax system of Russia this seems, however, a minor problem. The fact that the investor will always depend on the administration when looking for land on which to realise a new or expand an existing investment and may not purchase land in advance in view of potential future projects may obviously be considered a serious drawback but will hardly be a reason not to proceed with an otherwise successful investment. It seems more in the interest of the State itself to bring some order and stability into its land law, in particular in order to develop the agricultural sector where land is a basic commercial asset. But again there are many reasons besides the land issue preventing investments into agriculture. This does obviously not mean that clients should not carefully examine title to land before making an investment, but if all other preconditions for the investment exist it should normally be possible to obtain satisfactory title to the land.