Real Property.

a. Definition of Real Property.

Immovable items and everything that is firmly connected with land, i.e. objects that cannot be moved without disproportionate damage to their utilization, are real property. This includes land parcels, subsoil areas, isolated water objects, forests, perennial plantings, buildings and structures. Provisions of law governing rights to real property and transactions with it apply also to aircraft, sea-craft, inland ships, spacecraft and other similar objects (Art. 130 [1] the RF Civil Code). Also a business enterprise as an ongoing economic concern is deemed to be a real property under Art.132 of the RF Civil Code.

b. Forms of Ownership.

The RF Constitution (Art. 8) and the RF Civil Code (Art. 212) define three main categories of the property in Russia: private, state and municipal, depending on identity of an owner.

• Private property is that of citizens (including citizens registered as individual entrepreneurs) and legal entities. Limitations on quantity and value of items of particular kinds of property owned by citizens and/or legal entities can be established by the law (Art. 213 [2] the RF Civil Code). However, no such limitations are present currently.

• State property is that of the Russian Federation and Subunits of the Russian Federation (hereinafter – the RF Subunits). Property (including real property) belonging to the RF is the federal property. The property belonging to republics, provinces, regions, cities of federal significance, the autonomous region, districts is the property of the RF Subunits (Art. 214 the RF Civil Code).

• Municipal property is that belonging to municipalities, urban and rural settlements, etc. (Art. 215 of the RF Civil Code).

The rights of owners are exercised on behalf of public entities by the bodies of state authority, bodies of local self-government within the limits of their competence. In cases specifically provided in the law these rights may be also exercised by other legal entities and private individuals (Art. 125, 214, 215 the RF Civil Code).

All categories of ownership enjoy equal status and protection (Art.8 the RF Constitution). At the same time, the legislation provides that certain classes of properties (including certain real property objects) may be owned only by public entities (certain categories of land, waterways etc.). This does not necessarily restrict the ability of the state to grant derivative rights to such objects to private parties.

(i) The Right of Ownership and Derivative Rights in Rem.

A person may enjoy the following rights in Rem to the real property: (1) standard (full) ownership; (2) “economic domain” and (3) “operative management” of property; (4) lifetime inheritable possession; and (5) permanent (perpetual) use. The last two types are applicable to land ownership only (see item “c” (ii) of the present section). The right of economic domain and the right of operative management is not applicable to land and may be exercised only by legal entities of specific corporate forms.

The right of ownership is a primary right in rem (Art. 216, 334 the RF Civil Code). The right of ownership entitles the owner to possess, utilize and convey the property at owners discretion and in his interests (Art. 209 [1, 2] the RF Civil Code). The right of ownership can belong to either one person or to a group of persons. The ownership of two or more persons is called co-ownership and may be one of two types: (1) shared ownership (where each owner has the certain share in the right of ownership), and (2) joint ownership (without allocation of shares). Joint ownership regime is only possible for marital property (Art. 256 the RF Civil Code), property members of a peasant farming operation (Art. 257 the RF Civil Code and 6 [3] of federal law No. 74-FZ) and owners of privatized apartments (the law on Privatization of Housing of 4 July 1991 No.1541-1 (as amended)).

The right of operative management (Art. 296 the RF Civil Code) and the right of economic domain (Art. 294 the RF Civil Code) are derivatives of the full right of ownership. They were developed in the first place to provide a legal regime of property assigned to state legal entities in socialist economy. In a modified form these legal regimes define today rights of legal entities established in certain corporate forms to their property. The government remains the ultimate owner. But all powers of the owner with the exception of a few (for instance, the right to convey the real property) are vested in the entity enjoying the right of economic domain or the right of operative management.

In certain cases private owners may assign the right of operative management in respect of their property to non-government organizations as well.

(ii) Form of the Deals and the State Registration.

Special formal requirements and procedure apply to perfection of rights in the real property and transactions with the real property (Art. 131; Chapter 30 § 7, Chapter 34 § 4; 5 the RF Civil Code). Deals for sale of real property must be made in writing in the form of a single document signed by the parties (Art. 550 the RF Civil Code).

Conveyance of real property objects is certified by a deed of transfer (or by another document of transfer) signed by the parties (Art. 556, 655, 659 the RF Civil Code).

The state registration is mandatory for (1) rights of ownership and other rights in rem to real property (acquisition, conveyance, termination of the rights), (2) all encumbrances of such rights, (3) all transactions with real property. However, if the term of lease is less than one year, such transaction does not require state registration (Art. 651 [2] of the RF Civil Code).

The rights and transactions are recorded in the Unified State Register by the respective state justice bodies (under Art.131; 164 the RF Civil Code; the RF Federal Law On the State Registration of Rights to Real Property and of Transactions with It No.122-FZ of 21 July 1997 (as amended) (hereinafter – the federal law On the State Registration).

State registration is an essential step for perfection of rights to the real property and validity of transactions involving rights to the real property (Art.164, 219, 223 of the RF Civil Code). Registered rights to real property may be appealed in the court (Art.2 [1] the federal law On the State Registration). State registration of rights must not be confused with special technical registration: a cadastre register of lands and technical recording (inventory) (e.g. for buildings).

After enactment of the federal law On the State Registration a compulsory certification of transactions involving rights to the real property by a notary was cancelled (Art.7 of Federal Law No. 15-FZ of 26 January 1996 On Enactment of the Second Part of Civil Code of the Russian Federation) except for mortgage (real property pledge) (Art.339 [2] of the RF Civil Code) and some forms of real property sales contracts (Art.584 the RF Civil Code).

State registration of the rights to real property is confirmed by the certificates while the state registration of transactions is confirmed by special “registration inscription” on the relevant documents.

c. Land Regulation.

(i) General Provisions.

The land legislation of the RF is actively developing now. The RSFSR Land Code of 1991 is repealed. Land rights are mainly governed by (1) Chapter No.17 of the RF Civil Code, (2) the newly adopted RF Land Code (hereinafter – the RF Land Code) No. 136-FZ dated 25 October 2001, as amended (both of which came into effect on 29 October 2001), and also (3) by recently adopted RF Law No. 101-FZ On Turnover Of Lands Of Agricultural Purpose (as amended).

Russian legislation consists of Federal legislation, applicable to the entire territory of Russian Federation, and Legislation of the RF Subunits, applicable only to the certain territory of the RF Subunits. Russian Federation and RF Subunits have joined authority in respect of issues on possession, use and disposal of land (Art. 72 of the RF Constitution). There is only one exception – agricultural land that is under the authority of Russian Federation (Art. 27 of the RF Land Code). Moreover, the RF Subunits does not have right to determine any limitations for turnover of agricultural land plots (Art. 1 of the federal law On Turnover Of Lands Of Agricultural Purpose).

The most part of Chapter 17 of the RF Civil Code contains for basic provisions related to (1) ownership and other rights in rem to land, (2) relationship between rights to a land plot and to other kind of real property situated on the same land plot, (3) easements and (4) taking (withdrawal) of land plots for state and municipal needs.

The new federal law On Turnover Of Lands Of Agricultural Purpose contains basic provisions on (1) property rights to agricultural lands, including so-called co-ownership of land plots of this category, (2) other derivative rights to agricultural lands, (3) transactions with agricultural land plots.

The RF Land Code covers the following areas: (1) forms of the land ownership, use and possession, (2) land easements, (3) rights and duties of the land owners and users, their emergence, termination and limitation, (4) compensation of losses and damages to agricultural production and forestry in the case of taking land plots for state or municipal needs, (5) protection of land rights and consideration of disputes, (6) land payment and valuation of land, (7) land monitoring and management, (8) the state land registry, (9) land preservation and control, (10) liability for a breach of land law, (11) special-purpose lands (such as agricultural, of inhabited localities, industry, power production, transport, communications, defense, security, etc), (12) specially preserved territory and facility lands, (13) forestry, water stock land and reserve land.

(ii) Forms of Ownership, Land Titles and Some Limitations

In accordance with Art. 9 [2] of the RF Constitution, the land and other natural resources may be in the private, state and municipal forms of ownership. Under Art. 16 [2] of the RF Land Code, allocation of state lands among federal regional and municipal ownership is regulated by Federal Law on Allocation of State Ownership of Land No. 101-FZ dated 17 July 2001.

Owners may possess, use and dispose of their land plots freely, unless in doing so they cause damage to the environment or violate the rights and lawful interests of other persons (e.g. Art. 209 [3], 260 [1] the RF Civil Code). Unless otherwise established by the law, the ownership right to the land plot is extends to the surface (the soil) layer, enclosed water objects, forests and other vegetation situated within the boundaries of the land plot (Art. 261 [2] the RF Civil Code). There are some limitations connected with the legal regime of some types of land, which are restricted from commercial exploitation, e.g. specially preserved territories (e.g. Art. 129 [3], 209 [3] the RF Civil Code, Art. 56 the RF Land Code).

The rights to the land may be conveyed by: (1) acts of state bodies; (2) transactions (contracts); (3) acquisitive prescription (similar to adverse possession - Art. 234 the RF Civil Code); (4) privatization of state and municipal property (Art. 217 the RF Civil Code); (5) succession.

Besides the right of ownership, land rights in rem include:

(1) the right of lifetime inheritable possession of a land parcel.

This is a rudimentary form of an ownership right granted to individuals only in course of early privatization of the land.
This right may not be granted to individuals after enactment of the RF Land Code; but this right is valid if it was granted to individuals prior to the enactment of the RF Land Code.(Art. 265-267 the RF Civil Code, Art 21 the RF Land Code),

(2) the right of permanent (perpetual) use of a land plot.

The right may be granted to state and municipal institutions, federal state-owned enterprises and also to governmental and local government bodies only; the right may not be granted to citizens and other legal entities, however this right is valid if it was granted to the latter prior to the enactment of the RF Land Code and in the latter case the right will have to be substituted for lease or the land plot will have to be privatized until 1 January 2006 (Art. 268-270 the RF Civil Code, Art. 20 the RF Land Code, Art. 3 [2] of Federal Law No. 137-FZ of 25 October 2001 On Enactment of the RF Land Code, as amended, (hereinafter the federal law On Enactment of the RF Land Code), and

Lifetime inheritable possession and permanent (perpetual) use are close to the full right of ownership, however all these two derivative rights to land plots may not be conveyed by the beneficiary to other persons.

(3) the right of gratuitous fixed-term use

Gratuitous fixed-term use is a modification of a previous regime that was called “temporary use” under RSFSR Land Code of 1991.

In respect of public lands (owned by the State and municipalities) this right may only be granted to state and municipal institutions, federal state-owned enterprises and also to governmental and local government bodies, and also for not more than one year (Item 1 (1) of Art. 24 of the RF Land Code). Private entities (individuals and corporations) are expressly excluded.

However in respect of private lands this right may be granted under the certain agreement to any individuals or legal entities without mentioned above restrictions as to the period.

Also gratuitous fixed-term use can be used as the right on so called “service allotment”(Art. 24 the RF Land Code).

Unlike the right of ownership or the right of lifetime inheritable possession, the right of permanent (perpetual) use allows its holder to convey the land plot under lease or gratuitous fixed-term use of other persons only upon consent of the owner of the land plot (art. 270 of the RF Civil Code).

Certain limitations in respect of land use are imposed in the RF Land Code by references to specific purpose use according to designated categories of land (division of the land into certain categories) and allowed use according to the territorial zoning (varieties of land using within one category of land).

The Land Code defines the following categories of the land (Art. 7 of the RF Land Code):
- Agricultural-Purpose Lands;
- Lands of Settlements;
- Industry, Power Production, Transport, Communications, Radio-Broadcasting, Television, Information Technology, Space-Flight Support, Defence, Security, Security Lands and Other Special-Purpose Lands;
- Specially Preserved Territory Lands;
- Forestry Lands;
- Water Resources Lands;
- Reserve Lands.

Each category of land is divided into the territorial zones, depending to the mentioned above allowed use in accordance with the nature of the special task for which it is used or intended to be used. For instance, such category of land as ‘the Land of Settlements’ has 9 (nine) main territorial zones: ‘‘residential zones’’; ‘‘production zones’’; ‘‘public and business zones’, “engineering and transport infrastructures zones”, “recreational zones”, “agricultural use zones” , “ special purpose zones”, “military objects zones” etc (Art. 85 of the RF Land Code). Territorial zoning of Lands of Settlements are also in correspondence with territorial zoning rules of the RF Town - Planning Code, adopted on May 7, 1998 (Art 34, 27, 40).

A transfer of the land plot from one owner, user, tenant, lessee to another is not per se a ground for changing category of land (the classification category and also the designated purpose of land plot).

In respect of public lands (lands owned by State and municipalities) there are two procedures for granting land rights for construction purposes (1) without preliminary coordination of location of facilities (through an auction or tender) or (2) with preliminary coordination of location of facilities (without an auction or tender). Ownership rights to land plots can be acquired only through auctions or tenders, while leasehold rights can be acquired through both procedures (Art. 30 [1-3] the RF Land Code).

Agricultural-Purpose Lands (hereinafter – agricultural lands) means lands outsides of inhabited localities boundaries which have been granted for agricultural needs and also intended for such purposes. Since Agricultural Lands are the best, most fertile and most valuable soils, most of restrictions and limitations for turnover and use of lands were established in respect of this kind of lands.

(1) The owner (or the possessor) of an agricultural land plot may only use it for agricultural purposes (Art. 1, 6 of the federal law On Turnover Of Lands Of Agricultural Purpose and Art. 77, 78 of the RF Land Code). Damage, poisoning, pollution, destruction of the fertile part (stratum) of the soil or other improper use of land is prosecuted.

(2) The owner must use an agricultural land plot in compliance with the allowed use established for particular zone of agricultural land where such land plot is located. The owner can choose particular type of allowed use from a special list established by zoning rules of respective region, without obtaining any additional permissions or consents (Art. 6 of the federal law On Turnover Of Lands Of Agricultural Purpose and Art. 7 of the RF Land Code).

(3) Legal entities or individuals can purchase public and municipal lands only through public auction, except in case where a lessee purchases the land plot after 3 years of lease (Art. 10 of the federal law On Turnover Of Lands Of Agricultural Purpose).

The Government has a first refusal right in case of sale of private agricultural lands.

In case of sale of private land plot, except in case of a public auction, the seller should notify the relevant RF Subunit (according to the location of land plot) about the sale of the land plot. If the RF Subunit refuses or does not respond within a month, the seller can sell the land plot within a year at a price no higher than that offered to the RF Subunit (Art. 8 of the federal law On Turnover of Lands of Agricultural Purpose).

(4) Reindeers feeding grounds in Edge North and distant pasture-lands, can not be privatized at all (Art. 1 of the federal law On Turnover Of Lands Of Agricultural Purpose).

(iii) Land Rights of the Owners of the Other Types of Real Property.

Owners of the buildings, houses or constructions have an exclusive right to privatize underlying state or municipal land plots or to acquire a land lease right in accordance with Art 36 [1] of the RF Land Code.

However, the term of such lease can not exceed 49 years (Art. 28 [3] of the RF Law No. 178-FZ On Privatization of State and Municipal Property of 21 December 2001).

Prices for public lands sold in the cause of privatization in cities with more than 3 million inhabitants range from 5 to 30 times of the annual land tax in under-populated areas they may vary from 3 to 10 times of the annual land tax for the plot (as of the beginning of the current calendar year). The land tax amount is also based on the location of the particular land plots. A relevant minimum land tax rate established on a federal level is applicable until the time when a Russian region sets land price (Art. 2 [2] of the federal law On Enactment of the RF Land Code and Art. 28 [7] of the federal law On Privatization of State and Municipal Property).

When a public land plot is being sold, an adjustment index (established by the RF Government within the range between 0.7 to 1.3) is applied to its value to take into account the prevailing type of use of the neighboring real property located thereon (Art. 2 [3] of the federal law On Enactment of the RF Land Code).

Owners of properties have the right of permanent (perpetual) use of the part of the underlying land plot unless otherwise provided for by the laws, the agreement with the owner or the decision on the conveyance of the state or municipal land plot (Art. 271 [1] the RF Civil Code).

If the right of ownership to the buildings, constructions or other kind of real property (“properties”) situated on the land plot owned another person is transferred to a new owner, the latter acquires the right of the use of the corresponding part of the land plot on the same terms and in the same scope as the former owner of the real property (Art. 271 [2] the RF Civil Code, Art. 35 [1] the RF Land Code). Exceptions to this rule are established in Art. 3 [2] the federal law On Enactment of the RF Land Code where, for instance, the buyers of properties located on the land plot will have either to lease or purchase the plot instead of keeping the previous right of the permanent (perpetual) land use.

The transfer of the right of ownership to the land plot is not a ground for the termination or modification of rights to use of this land plot belonging to the owner of properties situated on this land plot (Art. 271 [2] the RF Civil Code).

Certain procedures and limitations are applicable to sale and acquisition of “ownership shares” of agricultural land, including pre-emptive rights of other owners and state, obligation for notifying other owners and state bodies about sale (Art. 12-18 of the federal law On Turnover Of Lands Of Agricultural Purpose).

(iv) Invalidity of Land Deals and Misrepresentation.

Transactions with the land are subject to general civil law rules. However, there are specific regulations applicable to such contracts.

The terms and conditions of sale or exchange of land plot are null and void if they (1) establish the party’s right to repurchase the land plot at its own discretion; (2) restrict execution of further transactions with the land plot; (3) restrict the party’s liability in the event of conflicting claims of third persons in respect of the land plot (Art. 37 [2] the RF Land Code).

Although land servitudes (easements) remain valid in case of transfer of the respective land plot to another person, they may not be an independent objects of the purchase, sale or mortgage. Land servitudes (easements) also may be conveyed to the owners of the real property to ensure the use for which the servitude was established (Art. 275 of the RF Civil Code).

The Land Code (Art. 37 [3, 4]) governs liability for misrepresentations connected with the sale of land and provides lessees and purchasers with the right to abatement of the rent payments or the purchase price and even termination rights in cases of the seller’s or lessor’s misrepresentation.

(v) Land Lease

The rights of land lessees have been enhanced in the RF Land Code by granting them (1) a pre-emptive right to purchase leased land if it is offered for sale, (2) a right to assign, pledge, contribute to the charter capital of a legal entity and sublease land unless otherwise provided in the lease agreement, and (3) a right to pledge or assign leasehold rights in case of state or municipal land or to contribute them to the charter capital of a legal entity upon the notice to the landlord (if the lease term exceeds 5 years) (Art. 22 [3, 5, 6] the RF Land Code).

Land lease and sublease agreements which are valid for a term of one year or more are subject to state registration (Art. 26 [2] the RF Land Code).

(vi) Termination of Land Titles and Land Plots Withdrawal (Taking).

The right of ownership and other rights in rem in respect of a land plot terminates when (1) the holder transfers the land plot to the benefit of other persons, (2) the holder waives his right, (3) when the land plot is compulsorily withdrawn (taken) from the holder in cases provided for by the law (in particular, requisition, confiscation, withdrawal of a land plot for the state or municipal needs, in cases of land disuse or misuse (Art. 44 – 47, 49 – 55 the RF Land Code).

The land plot may be withdrawn from the owner for the state or municipal needs by means of redemption (“eminent domain”) (Art. 279 [1] the RF Civil Code). A written notice about forthcoming redemption shall be served upon the owner at least one year prior planned redemption date. In case the parties fail to agree on terms of redemption, the dispute is transferred to the court. The redemption for the state or municipal needs of a part of the land plot can be allowed only with the consent of its owner (Art. 279 [5] the RF Civil Code). The decision of the state body on the redemption of the land plot for the state or municipal needs requires state registration (e.g. Art. 279 [4] of the RF Civil Code).

A land plot may be seized from the owner in cases of the three years non-use of the land plot designated for agricultural production or for construction (the time necessary for the development of the land plot as well as the time during which it could not been respectively used because of the circumstances precluding such use does not count) (Art. 284 the RF Civil Code). A land plot may be also seized from the owner if the land plot is used with a crude violation of the statutory rational use rules, in particular, if the land plot is misused, not used in conformity with its designated purpose or if its use leads to a significant deterioration of the fertility of the agricultural farming lands or has substantial negative impact upon the ecological situation (Art. 285 the RF Civil Code).

(vii) Land Titles, Rights and Limitations for Non-Russian Persons.

According to the new RF land legislation (the RF Land Code) foreign citizens, individuals without citizenship and foreign legal entities (hereinafter the “non-Russian persons”) may acquire and possess land plots in Russia subject to with certain limitations.

One of the main limitations applies to agricultural lands of foreign legal entities, foreign citizens (also apatrides) and Russian companies, having more than 50 % of their charter capital owned by foreign companies or foreign citizens (or apatrides), may possess Russian agricultural lands only on the basis of lease (Art. 3 of the federal law On Turnover Of Lands Of Agricultural Purpose), for a term of not more than 49 years (Art. 9 [3] of the federal law On Turnover Of Lands Of Agricultural Purpose).

Moreover, the owner must sell the agricultural land plot, if according to the law the owner cannot hold ownership right to it (Art. 5 of the federal law On Turnover Of Lands Of Agricultural Purpose).

Non-Russian owners of buildings, houses, constructions (hereinafter - the “real property”) are entitled to acquire ownership title to underlying state or municipal land plots (Art. 36 [9] of the RF Land Code). In this case the ownership title may be obtained only for a fee at the statutory rate set by the RF Land Code (Art. 28 [5] the RF Land Code). Non-Russian owners of the real property located on a private land plot have pre-emptive right of buying or leasing the underlying land plot, however the RF President may adopt a list of types of the real property not covered by this rule (Art. 35 [5] of the RF Land Code).

Non-Russian persons may generally lease land parcels except for the cases specified in the Land Code (Art. 22 [1] the RF Land Code). Non-Russian persons may obtain land plots for construction purposes out of the state or municipal lands in compliance with Art. 30 [12] of the RF Land Code.

(viii) Land Rights Registration.

Acquisition, transfer and termination of the rights to the land plot and limitations (encumbrances, easements) of these rights is effected by the State Registration of the respective transactions (e.g. Art. 131, 164 [1], 223 [2], 234 [1], 274 [3], 339 [3], 551 [1], 574 [3], 609, 1017 [2] of the RF Civil Code, Art. 25 [1,2] 56 [6] the RF Land Code). State registration may be refused on the grounds provided by Art. 20 of the federal law On the State Registration only. Such refusal may be appealed in the court. Unless otherwise provided for by RF federal laws, only those land lease, sublease and gratuitous fixed-term land use that are valid for a term of one year or more are subject to state registration (Art. 26 [2] the RF Land Code). Registration is not required if land lease, sublease and gratuitous fixed-term land use are granted for less than one year.

(ix) Documents Required for the State Registration.

To complete the state registration of title an applicant has to submit the following documents (Art. 16; 17 federal law the federal law On the State Registration, Art. 26 (1) of the RF Land Code): (1) an application of the party to a transaction; (2) documents identifying the applicant (its status); (3) confirmation of payment of state registration fee; (4) description of land (parcel) with its cadastre number (including its drawings); and (5) evidence of title: (i) acts of State Bodies on allotment of the land parcel; (ii) deals (contracts); (iii) a certificate of inheritance; or (iv) court judgments.

(x) State Bodies in charge of registration and term of registration.

State registration of immovable property and property rights is effected by the system of specialized institutions (commonly known as the State Registration Chambers), that have jurisdiction over location of immovable property (Art. 9 [1] of the federal law On the State Registration). The period for the State Registration is typically varies from 5 days to one month.

d. Leases.

(i) Definition of a Lease Contract.

Lease contracts are governed by 34 Chapter of the RF Civil Code. Under the contract of lease (or of property rental) the lessor (landlord) for a consideration undertakes to provide the lessee (or tenant) with the property for temporary possession and use or for temporary use. Fruit, products, and income realized by the lessee as the result of the use of the leased property are its property (Art. 606 the RF Civil Code). Lease of the real property is regulated by general provisions on lease contracts (Art. 606-625 the RF Civil Code) also by special provisions related to (1) lease of buildings and constructions (Art. 650-655 the RF Civil Code), (2) lease of enterprises (Art.656-664 the RF Civil Code), (3) finance lease (leasing) (Art. 665-670 the RF Civil Code), and (iv) land lease (Art. 22 the RF Land Code and Art. 9, 10 and 16 of the federal law On Turnover Of Lands Of Agricultural Purpose). A lessor is either an owner of the property (individuals, legal entities) or a person authorized by the law or the owner to rent out the property (Art. 608 the RF Civil Code), for instance by virtue of the right of economic domain.

(ii) Requirements for a Lease Contract.

The RF Civil Code requires that real property lease must set out the following essential conditions to be agreed by the parties: (1) precise description of the real property (identification of lease object); and (2) amount of lease payment. Leases must be writing (Art. 651 [1], 658 [1] the RF Civil Code).

State Registration is required for lease contracts (Art. 609 [2]; 658 [2] the RF Civil Code). Registration of lease contract implies the registration of lease right as a burden of ownership (Art. 26 of the federal law On the State Registration). The RF Civil Code requires a lease for entire building, construction, premises and land plot lease to be registered only if the contract term exceeds one year (Art. 651 [2] the RF Civil Code; Art. 26 [2] of the RF Land Code and Art. 2 of the Informative letter No. 53 of the Supreme Arbitrazh Court Presidium, dated June 06, 2000). Transfer of the real property by the parties is certified by a deed of transfer signed by the parties (Art. 655, 659 the RF Civil Code).

(iii) Duration of a Lease Contract.

The duration of lease contract is determined by agreement of the parties. If the duration of lease is not determined in the contract, the contract is considered to be made for an indefinite term (Art. 610 the RF Civil Code). In this case each of the parties shall have the right to terminate the contract at any time by giving a three months advance notice to the other party.

The period of lease of state land plots under privatized objects of immovable property can not exceed 49 years (Art. 28 [3] the federal law On Privatization of State and Municipal Property); and the lease of agricultural lands also cannot exceed 49 years (Art. 9 [3] the federal law On Turnover Of Lands Of Agricultural Purpose).

(iv) Other Conditions of the Lease Contract.

The parties may provide for an option of the lessee to buy-out the leased property either upon expiration of the lease term or before the term has expired, by paying specified purchase price. Such lease contract must satisfy formal requirements established for a contract of purchase of the property.

In the case of lease of a building (construction) the lessee receives all the rights to utilize the underlying land plot (Art. 652 the RF Civil Code).

A law may establish types of real property that may not be leased or may be leased under special conditions only (Art. 607 [1] the RF Civil Code). It is prohibited to enter into financial lease (leasing) contracts in respect of land plots and natural objects (Art. 666 the RF Civil Code).

(v) Rental of Residential Real Property.

Until recently, the housing in Russia was for the most part publicly owned and rented by the citizens from the state for a nominal fee. For this historical reason, the Russian law provides extensive regulation of the contracts of residential real property rent. Most important legal acts here are the RF Civil Code (chapter 35), the RSFSR Housing Code of 24 June 1983 (as amended) and the Federal Law On Fundamentals of the Federal Housing Policy of 24 December 1992 No. 4218-1 (as amended). The legislation in this area is currently under development. The new Housing Code should appear approximately in 2005.

Meanwhile, the current legislation includes the following regulations:

Under the contract for rent of residential units, the owner of residential premises or a person authorized by it (a landlord) undertakes to provide an individual and its family members (a tenant) with specified residential premises (or isolated residential space within premises, such as a room with separate entrance). A tenant must use the premises for residence only and may not, say, open an office or a shop therein.

Different subsets of rules apply to residential units depending on the form of ownership of rented property. Rules governing the contract for social rent of settlements apply to rentals of real property belonging to the state and municipalities (Art. 672 the RF Civil Code), rules related to a contract for commercial rent of settlements are applicable to other residential real property. A social rental contract of residential units provides better protection to the tenant than a contract for commercial rent.

Only an individual(s) may enter into the contract for residential rent as a tenant. Where residential real property is rented by a legal entity, general rules on contracts for lease of real property apply. A legal entity may use residential real property only for dwelling of individuals (Art. 671 the RF Civil Code).

e. Subsurface

(i) General discussion.

Subsurface is defined in Russian law as a part of the earth’s crust going down to the depths accessible for geological exploration and reclamation and located either below the soil or, if there is no soil, - below the earth’s surface or water object bottom, within the borders of the solid earth, continental shelf and exclusive maritime economic zone of the Russian Federation (the law On Subsurface No. 2395-1 dated 21 February 1992 (as amended)). Subsurface is recognized to be a real property and subject to rules on the state registration of real property.

The state has exclusive ownership rights to subsurface, including underground areas and mineral (natural), energetic and other resources contained in the subsurface, which, except for extracted resources, may not be owned by private parties. Owner’s rights: possession, use and disposal of subsurface areas are exercised jointly by the Russian Federation and its subunits.

The legislation in this area is currently under development. One of the changes proposed is re-distribution of powers between federal and regional authorities with a shift to the federal level and elimination of so-called “principle of two keys”.

(ii) Legislation.

The legislation on subsurface is a matter of joint jurisdiction of the Russian Federation and its subjects (republics, regions). Procedures for granting rights to subsurface areas for mining of mineral deposits and generally found natural resources as well as regulations on exploitation of these areas are enacted by the RF federal laws (in particular, the law on Subsurface and the law on Production Sharing Agreements No.225-FZ dated 30 December 1995 (as amended)) and legal acts of the RF subjects. General civil law regulations apply to private economic relations in connection with subsurface use.

(iii) Transfer of Rights.

Pursuant to the Subsurface Law, the subsurface areas cannot be subject of sale, donation, privatization, inheritance, investment, mortgage or other form of conveyance. The rights to exploitation of subsurface areas (license) may be transferred from one person to another only in the cases provided for by the federal laws (Art. 1.2 of the law on Subsurface).

Unlike subsurface areas themselves, extracted mineral and other natural resources can belong not only to the state (municipal) property but also to private property of legal entities and individuals under the terms and conditions specified in the respective license or agreement.

(iv) State bodies. Licenses. Agreements.

In matters relating to subsurface areas the state (the Russian Federation and its subunits) acts through a system of a specialized state bodies. In particular, the RF Ministry on Natural Resources acts as a general coordinator of some special state bodies in respect of different areas of nature resources use. It is the Federal Agency on Subsurface Use which is supervising the activity of individuals and legal entities in connection with use of subsurface.

There are two different procedures for granting rights to subsurface use: administrative procedure based on licensing (dominating procedure), and contractual procedure presently represented by production sharing agreements (in the latter case a license serves as a supplementary document). A proposal is discussed to expand the contractual procedure and make it dominating.

The Federal Agency on Subsurface Use is authorized to license the use of subsurface areas (Art. 5.3.8 of the Regulation On The Federal Agency on Subsurface Use, approved by the RF Government Regulation dated 17 June 2004).

Production sharing agreements provide for sharing production between the investor and the state. They are subject to special tax regime, which, in particular, provides for payment of certain taxes by the production (Art. 13 of the law on Production Sharing Agreements, Chapter 26.4 of the RF Tax Code).

Lately, expediency of the production sharing agreements was actively discussed. Notably, the latest amendments to the subsurface legislation restricted the regime of production sharing agreements. In particular, the roster of areas that may be exploited under a production sharing agreement can be determined only by federal law. A production sharing agreement can be concluded only on the basis of an auction, and only if previously an auction failed to grant the subsurface area on conditions other than sharing of production (Art. 2 and 6 of the law on Production Sharing Agreements.)

The Ministry on RF industry and energy acts as authorized state body in respect of the subsurface production sharing agreements (Regulations On The Ministry On RF Industry And Energy, approved by the RF Government Regulation dated 16 June 2004 No 284).

The law specifies modes of exploitation of subsurface areas available to private parties. Grant of rights is certified by licenses for specific activities: for mining operations (mineral extraction), construction and maintenance of the underground structures, geological exploration and for other activities. The rights to land use are granted along with issuance of license. Generally, any commercial entity (including foreign legal entities and solo businessmen) is eligible to become a user of subsurface areas. However, natural persons cannot be a party to production sharing agreements. Joint ventures (simple partnerships based on joint activity agreements and not having the status of a legal entity) may become subsurface users provided that all the partners of such association are jointly liable for the obligations (Art. 6, 9, 11 of the law on Subsurface).

Extraction (without explosive works) of generally found mineral (natural) resources for own needs by owners of the land plots situated above the respective subsurface areas is generally permitted without licensing (Art. 19 of the law on Subsurface).

The licenses are issued by the authorized state bodies mainly on the basis of auctions and tenders (Art 13.1 of the law on Subsurface). A prospective user must furnish evidence of sufficient financial and technical procurement to carry out activities efficiently and safely.

The right of exploitation of the subsurface areas may be transferred to another legal entity only in limited number of cases established by law, in particular, in the course of certain kinds of reorganization (Art. 17.1 of the law on Subsurface). A license for exploitation of the subsurface areas acquired by a legal entity may not be transferred to third parties. In case of transfer of the right of subsurface exploitation the license shall be reissued but the conditions set by the previous license are not revised (Art 17.1 of the law on Subsurface).

(v) Subsurface Use.

Sections of subsurface assigned for use (exploration and exploitation) are designated as mining allotments (blocks of deposits within specified dimensions). Depending on the mode of usage these rights are granted for up to 5 years for geological exploration, , for the term of working off the deposit determined on the basis of the respective feasibility study providing for rational use and preservation of the subsurface,- for mining operations (mineral extraction), and up to 25 years for extraction of the underground waters (Art. 10 of the law on Subsurface).

Subsurface areas for construction and maintenance of underground structures (not related to mining operations and/or minerals extraction) and for some other purposes may be granted for use without time limits (Art. 10 of the law on Subsurface).

Subsurface blocks can be assigned for use simultaneously for both geological exploration and mining operations (mineral extraction). In this case mining operations are permitted both during and after geological exploration (Art. 6 of the law on Subsurface).

The following payments are collected for use of subsurface: fees for geological information; tender, auction and licensing fees; regular payments for the subsurface exploitation, one-off payments for the subsurface exploitation upon certain occurrences stipulated in the license; taxes set by the tax legislation and some other payments. . The law provides for the minimum and maximum rates of regular payments. Special tax regime is set for production sharing agreements. (Art. 39, 43 of the law on Subsurface, Art. 13 of the law on Production Sharing Agreements.)

Usage of certain subsurface areas can be limited or restricted for national security reasons as well as to prevent damage to life and health of people and/or damage to economic or environmental objects (Art. 8 of the law on Subsurface).