Real Estate Due Diligence in Russia
Real Estate Due Diligence in RussiaUpdated on Friday 01st November 2019
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When it comes to real estate, the Russian legislation makes a clear distinction between the terrain and the structures built on it, treating them separately and individually. Real estate, according to the Russian law, is divided into land parcels, constructions - that can be finished or unfinished - and registered properties, such as airplanes, boats and yachts.
Even if it is not mandatory, real estate due diligence is highly recommended to all individuals and companies seeking to buy properties in Russia. Apart from ensuring a safe transaction, the buyer will also know what to expect after the purchase has been completed.
Below, we present you the main types of real estate due diligence procedures which can be completed in Russia. You can rely on our Russian lawyers for assistance in verifying a property and completing the purchase or sale of real estate located in this country.
Our lawyers in Russia can provide you with a wide range of services including buying or selling real estate and starting a business.
Legal aspects when buying property in Russia
Because of the ramifications of the Russian law on real estate, due diligence is necessary and very popular in Russia when buying a building or a land. The buyer must investigate the legal issues that can appear before making the purchase.
Before buying, due diligence implies a comprehensive assessment of the property to be bought. First of all, the buyer must check if there are any encumbrances regarding third parties who could claim the plot. According to the Russian law, you need permissions in order to use land in certain purposes; therefore, the buyer must make sure the land he or she intends to acquire will be used accordingly, considering the land could be confiscated if used improperly.
Another important matter is to verify the law with respect to environmental and town planning policies.
Real estate due diligence – what is it and how can it help?
Real estate due diligence refers to a set of verifications completed by a person or company intending to buy a property in Russia. The procedure can also be completed by those selling a Russian property who want to verify the credibility of a buyer, however, in most cases the buyer orders such verifications.
There are several types of real estate due diligence procedures which can be completed based on the property to be acquired and the purpose of the purchase. The most common real estate verification procedures in Russia are:
- the legal verification which is completed with the Russian Land Register and which the first real estate due diligence procedure recommended;
- the architectural or technical real estate due diligence which implies a thorough verification by a construction specialist or an architect;
- the financial due diligence which implies verifying a Russian property for financial encumbrances and debts;
- the zoning due diligence which is usually required when buying a commercial property in Russia.
We remind foreign citizens and companies interested in buying properties in Russia that real estate due diligence is not a mandatory procedure, however, it is recommended in order to avoid problems before or after buying the property. Our law firm in Russia can help with thorough real estate verifications with the Land Register.
Carrying out real estate due diligence in Russia
In the past few years, most of Russian citizens did not register their properties with the Land Register which could be a problem when trying to buy real estate in this country. This is why the first stop when performing real estate checkups is the Russian Land Registry where information on the property one intends to buy can be found.
When buying real estate in Russia is very important to verify the boundaries of the property. A cadastral verification is recommended, in this case. One should also verify the property itself. This verification is called technical real estate due diligence and can be completed with the help of an architect. The state of the property is very important, especially if the real estate is bought for commercial purposes.
Real estate due diligence completed with the Russian Land Register
No matter the type of property one intends to purchase, the real estate verification should begin with the Land Register in Russia. With the Register, the future owner can verify various aspects related to the property about to purchase. Among these:
- - the property title of the property (the Land Register keeps track of all owners);
- - if the property is subject to any mortgages, tenancy agreements, third-party ownership;
- - various aspects related to the use of the property, especially when it comes to commercial real estate;
- - information about land plots to be bought for various reasons, including for agricultural or residential purposes.
Russia is a very large country and offers plenty of investment opportunities, many of them related to real estate, which is why real estate due diligence is recommended no matter who the buyer is. Individuals buying properties with the purpose of relocating to Russia are advised to ask for such verifications, but also companies seeking to move or start their activities here and in search of land plots or industrial buildings. Those starting companies in the real estate field are also recommended verify the land plots they intend to buy with the purposes of constructing new buildings.
For all these, our lawyers in Russia can offer their full assistance when it comes to verifying a property or land plot.
Technical real estate due diligence in Russia
The verification of a building from a technical point of view is very important before buying a property in Russia. In the case of companies seeking to acquire industrial buildings is even more important. Such a verification also implies the permits and licenses used for completing various activities in such facilities, or even the possibility of applying for special permits.
Technical real estate due diligence should be completed by construction specialists.
You can rely on our attorneys in Russia for information on the Real Estate Law which is quite comprehensive.
Share deal and asset deal in Russia
When an investor wants to purchase commercial real estate properties, he can choose from two types of transactions in Russia: the share deal and the asset deal. The share sale refers to selling the shares in a Russian company with real estate rights and the asset sale refers to selling the real estate asset itself. Share sales are the common type of commercial real estate sale as the taxes are lower than in the case of asset sales. When performing real estate due diligence in Russia, an investor must pay attention and make sure that:
- - the legal title of the property is correct;
- - the vendor is the rightful owner of the property;
- - there are no mistakes or conflicts between the title of the terrain and the title of the building;
- - there are no restrictions and encumbrances with respect to the public laws;
After performing the real estate due diligence, the parties can decide on an asset (direct) sale, finalized with a sale agreement for the property, or a share (indirect) sale, finalized with a sale agreement of shares in the company. Because of the specific laws is every region of Russia and the multitude of rules that apply to each land plot, it is recommended to address to experts that can advise you when buying a property.
Reviewing the documents when buying a property in Russia
One of the most important steps, which is usually skipped is a thorough verification of the documents related to the property one wants to buy. This step is not included in ordinary real estate due diligence procedures, but with the help of attorneys in Russia one can review the sale-purchase agreement and amend it, if necessary. The ownership title should also be verified when buying real estate in Russia as it could offer a lot of information. One should also check that all other special documents, such as various authorizations related to the property are in place before the sale is completed.
Buying a property in Russia
Those who decide to purchase a property in Russia should that they have rights and obligations, among which asking for real estate due diligence is one of most important rights. Other important aspects when buying real estate are related to the additional costs related to the transaction, among which:
- - the real estate agent’s fee if the buyer requests such services and which can represent between 2% and 5% of the purchase value of the property;
- - the notary fees for notarizing the documents and which implies a fee ranging from 0.7% to 1.5% of the value of the property;
- - the registration fee which represents between 0.01 and 1% of the value of the property;
- - the VAT which must be paid by the seller and which is set at 18% for real estate transactions.
You can contact our law firm in Russia, if you need more information about Russian legislation on real estate.