Alexander Budylin
Associate
Pepeliaev Group

When it comes to shopping center construction, it is common for developers to raise additional funds during the construction phase by receiving security deposits, advance payments, or both. At the same time, future tenants also have an interest in securing premises before construction is done. How can the risk inherent in buying into a "future" mall be reduced?

Mall premises are typically obtained under agreements allowing the buyer to acquire the rights to the premises once construction is finished and state registration of the developer's title to the mall is completed. It is usually the mall developer that leases out the premises, and federal law allows interested parties to buy rights to premises in these yet-to-be-built malls.

If the developer transfers the ownership title for the premises to the purchaser, the parties need to sign a sale and purchase agreement for the future mall. This type of agreement is a brand-new legal institution in Russia. It was established by Resolution No. 54 of the Supreme Arbitration Court, dated July 11, 2011, with the title "On certain issues of the settlement of disputes arising from contracts related to real estate that will be created or acquired in the future."

Such a sale and purchase agreement has to incorporate a number of conditions. It needs to give building characteristics that allow the purchased premises to be identified. The primary characteristics should be taken from the design documentation for the building's construction. Attaching the floor plan to the agreement may also be helpful.

The purchase price is another condition that must be in the agreement. Significantly, the purchaser can acquire the title to the premises only after the developer has completed the state registration for this title. Should the developer fail to transfer the premises to the purchaser's possession, the latter can ask a court to establish its title to the premises.

For such a claim to be successful in court, however, a number of conditions must be met. The shopping center must have been fully constructed and put into operation; the premises must be in the actual possession of the developer or the purchaser; and the developer's ownership title must be registered in what's called the Unified State Register of Rights to Immovable Property and Transactions Therewith. If any of these conditions have not been satisfied, the purchaser's claim will be rejected.

Bear in mind that the purchasing party named in the sale and purchase agreement for future real estate is not entitled to force the developer to build.

As a result, if the developer fails to perform its obligations to build the mall and transfer the premises to the purchaser's ownership, then the purchaser is entitled to reimbursement for the amount paid to the developer. That buyer also has the right to receive interest (at the Central Bank refinancing rate) on its money for the entire period that the developer held the money. And the buyer has the right to receive compensation for its losses, including the difference between the purchase price set forth in the agreement and market price.

Because the buyer might find it difficult to collect — for example, a developer could be insolvent — we recommend the following methods for mitigating risk. First, the purchaser should carry out financial due diligence on the developer. Second, the developer should provide the purchaser with a third-party or bank guarantee equal to the purchase price. Third, the developer should provide the purchaser with a security based on assets belonging to the developer, or to third parties.

Should the developer lease out the premises in the mall, then signing a preliminary lease agreement is the next step. Similar to other real estate documents, it should give characteristics allowing the leased premises to be identified, copying the main characteristics from the design documentation for the construction. Also, the preliminary lease should give the lease payment amount.

There are a couple of points to keep in mind when this preliminary lease agreement is signed.

In accordance with federal law, a preliminary lease must contain a timeframe for the principal contract to be signed. Should the parties fail to draw up such a timeframe in the agreement, there will be a default obligation to sign the principal contract within one year after the day on which the preliminary agreement was signed.

Therefore, if the preliminary lease does not stipulate a deadline for signing the principal contract, no party to that agreement is entitled to demand that the principal contract be signed once the one-year period has expired. And neither a short-term nor long-term lease agreement can be signed before the state registration of the landlord's ownership title to the premises.

Federal law and legal practice allow for plenty of opportunities when buying into construction-phase real estate. Risks should be fully assessed, though, if you pay for something without having it in hand.