Bill Closes Apartment Sale Loopholes

Lawmakers are proposing amendments to the law on shared-equity construction, changes that lawyers say would close the majority of loopholes now used to sell apartments in new houses.

Federal Law No. 214, on shareholder participation in the construction of apartment buildings and other real estate properties, entered into force on April 1, 2005. The legislation banned developers from taking money for an apartment before receiving regulatory approval to start construction; obligated them to include all deadlines in contracts, along with fines for missing them; and required that agreements be registered to prevent the same apartment from being sold twice.

Sellers immediately found ways around the law, however. According to estimates from market participants, only about 5 percent of new apartment buildings at the investment stage are sold through the legal procedure in Moscow, compared with about 60 percent across Russia.

Prosecutors are not looking into schemes because of the freedom of contracts and the difficulty of punishing violations, said Alexander Kogan, a member of the State Duma's Budget and Taxes Committee who helped develop new amendments to the law.

The changes will block workaround schemes, such as selling "the right to sign a contract" to purchase property and the sales of bills of exchange that can be "converted" into an apartment. The sale of any residential real estate involving the raising of funds from individuals with the promise of future ownership must be conducted exclusively under Law No. 214, the amendments say.

"The freedom of contracts extends to things that are not specifically dealt with in the law. Now the very object of regulation is being described more specifically. Before, this law regulated the signing of a contract on shared-equity construction, but now it is on raising citizens' funds — excluding cooperatives, mutual funds and mortgage-backed securities," Kogan said.

Additionally, the Administrative Offenses Code would include fines of 500,000 rubles to 1 million rubles ($16,800 to $33,600) for each violation of Law No. 214, up from 100,000 rubles to 200,000 rubles now.

The changes also include a few concessions for builders. Value-added tax would no longer have to be paid on money raised from contracts on shared-equity construction, and the time frames for registering contracts and the list of documents required for reregistration of contracts would be reduced. Additionally, the law would widen the list of things that the funds could be spent on.

The proposed bill really would block the majority of ways used to sidestep the law, said Maxim Kuznechenkov, a partner at Baker & McKenzie.

"Now it's only possible to raise funds through the means described in the law," agreed Andrei Lebedev, a lawyer at Yukov, Khrenov & Partners. He called the amendments a "serious attempt to bring order to the process," since they would detail what exactly is being regulated, and the means and procedures for raising funds are more clearly spelled out.

There is still the possibility of using schemes involving cooperatives, Kuznechenkov said, "although they aren't as widespread as the bills-of-exchange scheme and schemes involving preliminary agreements."

"The law on shared-equity construction is a necessary law, but builders' concerns can draw fines, such as for missing deadlines. And the process of getting approval to start construction doesn't help when it comes to working in strictly defined time frames," said Tatyana Palchikova, deputy head of the company Trest 1991.

The changes passed the Duma in a first reading in February 2009, and they are now being considered by the Financial Markets Committee, Kogan said, adding that he hoped that President Dmitry Medvedev would approve them as soon as mid-April.