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10.01.18

The buyer did not have time to register the rights to the purchased property. What will happen if the seller goes bankrupt?

Let us consider the following situation. The seller and the buyer entered into a sale contract of immovable property. The seller is declared bankrupt, his bankruptcy trustee refuses to apply to Rosreestr with a joint application to register ownership transfer to the buyer. He refers to the fact that the object of immovable property is included in the bankruptcy estate and will be sold at auction, and the proceeds will be used to repay creditors claims. What should the buyer do?

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Let us consider the following situation. The seller and the buyer entered into a sale contract of immovable property. The seller is declared bankrupt, his bankruptcy trustee refuses to apply to Rosreestr with a joint application to register ownership transfer to the buyer. He refers to the fact that the object of immovable property is included in the bankruptcy estate and will be sold at auction, and the proceeds will be used to repay creditors claims. What should the buyer do

If the buyer wants to return the money paid, he shall apply to a commercial court that considers this bankruptcy case with an application to be include in the register of creditors.

If the buyer wants to obtain ownership on the object, he shall apply to a court at the object s location with claims on the state registration of ownership transfer on the object (part 7, art. 15 of the Federal Law "On state registration of immovable property" and part 3, art. 551 of the Russia s Civil Code). If the seller is declared bankrupt by the court, such a claim will be satisfied if the object at the time of the claim has been transferred to the buyer. Otherwise, the object will be included into the bankruptcy estate by a bankruptcy trustee. In this case the buyer can claim only a refund.

The buyer may face the following difficulties. The Chamber for Commercial Disputes of the Supreme Court of Russian Federation recently released two decisions (dd.17.10.2017 № 305-ЭС17-12927 and dd.17.11.2017 № 305-ЭС17-12136), which deny the possibility to satisfy claims urging the bankrupt to register of the right s transfer if the object is included in the bankruptcy estate. Here the buyer bears possible risk as the Supreme Court does not explain the meaning of "included in the bankruptcy estate"; is the object still considered to be included in the bankruptcy estate, if the seller has transferred ownership to the buyer? The Supreme court makes arguments in both decisions that may suggest that the issue of the object s owner has no legal significance anymore, and that the courts shall refuse to file a claim against the bankrupt to register the right s transfer anyway. The Supreme Court refers in both decisions to cl. 1, art. 131 of the Bankruptcy Law. According to it, all property of the debtor, available on the day of bankruptcy proceedings and identified in its the course, shall be included in the bankruptcy estate, that will be used to satisfy claims of the debtor s bankruptcy creditors. The Supreme court also refers to cl. 2, art. 551 of the Russia s Civil Code. According to it, even though the parties have executed the sale contract before registering the ownership transfer, it cannot serve as grounds for changing their relations with third parties. The seller remains the owner of the property for third parties until the ownership transfer to the buyer is registered.

Meanwhile, it is impossible to refuse such claim if the object is in the buyer s ownership. Can a bankruptcy trustee by its own decision include the object into the bankruptcy estate, if the object is not owned by the seller (in case № 305-ЭС17-12927 the bankruptcy trustee made it by drawing up an inventory list, although the ownership was transferred to the buyer)? In my opinion, he cannot do it. Indirectly, we can concluded it from §61 of the Resolution of the Plenum of the Supreme Court and the Supreme Commercial Court of the Russian Federation dd.29.04.2010 № 10/22. According to it, if one of the parties under the sale contract of immovable property avoids taking actions on the state registration of the ownership transfer of the property, the other party shall have the right to appeal to this side with the claim to register the transfer of the property s ownership (cl. 3, art. 551 of the Russia s Civil Code). The buyer s claim for the state registration of the ownership transfer shall be satisfied provided that the seller fulfills the obligation on the property s transfer. According to §2, cl. 1, art. 556 the Russia s Civil Code, unless otherwise provided by law or contract, the seller fulfills his obligation on the property transfer upon transferring the said property to the buyer and upon signing the relevant transfer document by the parties. Courts of general jurisdiction adhere this approach, satisfying claims against bankrupts on the state registration of the ownership transfer if the object has been transferred to the buyer (see the appellate decision of the Moscow State Court dd.26.01.2017 №.33-0095, and the appellate decision of the Volgograd Regional Court dd.16.03.2016 №33-3102/2016).

If the object is transferred to the buyer, the bankruptcy trustee cannot include it into the bankruptcy estate, since the buyer is its legal owner (§3, cl. 60 of the Resolution of the Plenum of the Supreme Court and the Supreme Commercial Court of the Russian Federation dd.29.04.2010 № 10/22). In order to return ownership to the bankruptcy trustee, the buyer s ownership grounds must be annulled, i.e. the sale contract must be terminated (for example, due to the seller breaching payment obligations) or become invalid (for example, on the grounds specified in Chapter III.1 of the Federal Law "On bankruptcy"). After that the object s ownership returns to the debtor and can be included into the bankruptcy estate. It is impossible to include the object owned by the buyer into the bankruptcy estate by mean of including it into the inventory list, as the bankruptcy trustee did in case № 305-ЭС17-12927. The buyer still remains as the owner, but since he cannot register the ownership transfer, the object stay permanently out of touch. It is impossible to acquire it due to acquisitive prescription, since the buyer is the rightful owner. The Supreme Court of the Russian Federation unlikely wanted to achieve such result while denying claims on the state registration.

However, what to do if the court denied the claim to register the transaction? In our opinion, there is only one way out: to wait for the completion of bankruptcy process, liquidation of the seller and its exclusion from the register, then apply to Rosreestr. This option is specified in cl.62 of the resolution the Plenum of the Supreme Court and the Supreme Commercial Court of the Russian Federation dd.29.04.2010 № 10/22. According to it, if the seller has no heirs or in case of the seller s liquidation as a legal entity, the buyer with transferred ownership to the property under the sale contract is entitled to apply for registration of the ownership transfer. If the state registrar refuses to register the ownership transfer without the seller s application, it can be appealed to the court under the rules of ch. 25 of Civil Procedural Code of The Russian Federation or ch. 24 of the Commercial Procedure Code of the Russian Federation. While considering the buyer s claim, the court shall verify that the seller has fulfilled the obligations on the ownership transfer and that the buyer has fulfilled payment obligations. The court shall satisfy the buyer s claim, if the seller s absence is the only obstacle to the state registration of the ownership transfer. The court obliges the state Registrar to perform actions for the state registration of the ownership transfer in the operative part of the decision.

The claim against the bankrupt on registration of the ownership transfer of the immovable must be distinguished from the claim against the bankrupt on registration of the transaction. The latter can be filed if the bankrupt avoids applying to Rosreestr for the contract registration, for example, the mortgage contract, equity participation in construction, the agreement on assignment of the rights from the registered lease contract, etc. The basic difference between these two claims is as follows.

According to §7, cl. 1, art. 126 of the Federal law "On insolvency (bankruptcy)", upon declaring the debtor as a bankrupt by the court decision, all claim of creditors on monetary obligations, mandatory payments, other property claims (except for current payments specified in cl.1, art. 134 of the Law, and the claims to recognize the property ownership, to recover moral damage, to recover property from illegal ownership, to verify invalidation of void transactions and to apply consequences of their invalidation) can be presented only during the bankruptcy proceedings. The explanations, fixed cl. 34 of the Resolution of the Plenum of the Supreme Commercial Court of the Russian Federation № 35 dd. 22.06.2012 "On certain procedural issues related to consideration of bankruptcy cases", state as follows: during the bankruptcy proceedings the claims of creditors on non-monetary property obligations (on the ownership transfer, performance of works and rendering services) ) that have arisen before the commencement of the bankruptcy proceedings and are treated according to the rules of art. 100 of the Bankruptcy Law, can be filed. Therefore, such claims are subject to a monetary assessment, specified in the register, in order to determine the number of votes at the meeting of creditors and satisfaction terms.

Thus, the Federal Law "On insolvency (bankruptcy)" allows creditors with non-monetary claims transform it into monetary claims if the debtor fails to fulfill or fulfills improperly any civil obligation. Given that the claim on the state registration of the agreement is a non-monetary claim and cannot be considered as a property claim, since it does not involve any actions with the property, the state registration itself does not create rights to immovable property. It only officially recognizes them. The said claim is a non-monetary claim on official recognition of the legal consequences caused by the parties having committed legally significant actions with the property.


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11.01.17

The Law “On the state registration of immovable property”. What is new?

On January 1, 2017, the Federal Law № 218-FZ dd. 13.07.2015 "On the state registration of immovable property" (hereinafter, the new law) came into force, replacing two other laws: "On the state registration of rights to immovable property and transactions with it" (hereinafter, the old registration law), and "On the state cadastre of immovable property" (hereinafter, the old cadastre law). The old registration law dd. 01.01.2017 became ineffective with the exception of one article 31.1, which terminates on 01.01.2020. The old cadastre law continues to operate in a substantially updated version as it excludes all the rules on cadastral accounting, and now this law, as stated in its part 1 Art. 1 "regulates relations arising due to implementation of cadastral activities, activities of self-regulatory organizations of cadastral engineers, the National Association of self-regulatory organizations of cadastral engineers".

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On January 1, 2017, the Federal Law № 218-FZ dd. 13.07.2015 "On the state registration of immovable property" (hereinafter, the new law) came into force, replacing two other laws: "On the state registration of rights to immovable property and transactions with it" (hereinafter, the old registration law), and "On the state cadastre of immovable property" (hereinafter, the old cadastre law). The old registration law dd. 01.01.2017 became ineffective with the exception of one article 31.1, which terminates on 01.01.2020. The old cadastre law continues to operate in a substantially updated version as it excludes all the rules on cadastral accounting, and now this law, as stated in its part 1 Art. 1 "regulates relations arising due to implementation of cadastral activities, activities of self-regulatory organizations of cadastral engineers, the National Association of self-regulatory organizations of cadastral engineers".

The reasons for the new law are the need to eliminate the shortcomings of the previously existing registration and accounting system: the inconvenience and high cost of the two registers, duplication and inconsistency of their information. Therefore, it should eliminate the gap between cadastral accounting as an object and registration accounting as rights to an object, simplify and accelerate registration and accounting procedures, reduce the risks of operations in the real estate market.

The article continues discussion on what is new, important and useful in the new law as compared with the old laws.

1. There is a Unified State Register of Immovable Property (USRIP). It combines the previously existed the Unified State Register of Rights to Immovable Property and Transactions with it and the State Cadastre of Immovable Property. The USRIP consists of the register of immovable property objects (the cadastre of immovable property), the register of the rights, restrictions and encumbrances of immovable property (the register of the rights to immovable property), and the register of borders (earlier data on them were contained in the cadastre of immovable property). Previously registers were kept on electronic and paper media. The USRIP is conducted in electronic form. Only registered files will be kept in paper form.

2. There are new objects of immovable property that are subject to cadastral accounting and the rights to which are to be registered: parking spaces, a single complex of immovable property, the enterprise as a property complex. Parking spaces are recorded in the USRIP and registered as independent objects of immovable property. Accounting for a single complex of immovable property and registration of the right to it is carried out in two cases: (1) construction of objects of immovable property is completed, and its design documentation provides for operating as such a complex, (2) if the owner requests to combine accounted and registered objects of immovable property that have a single purpose and are inextricably connected physically or technologically, or located on the same land plot. It is possible to register the property right to the enterprise as a property complex only after performing accounting and state registration of the rights to each object which is its part.

In contrast to the previous registers, the USRIP includes information on the territories of advanced socio-economic development, territorial development zones in the Russian Federation, gambling zones, forest areas, forest parks, hunting grounds. Moreover, the USRIP contains the history of operations with objects, all changes made to it will also be saved, and these data will be reflected in the USRIP extract. This is useful to check the legal purity of the object during its transaction.

3. Rosreestr (the Federal Service for State Registration, Cadastre and Cartography) has sole power to account and register rights. Cadastral chambers used to work on cadastral accounting but they do not exist anymore.

4. Cadastral accounting of objects and registration of rights will be carried out both simultaneously and separately.

The old laws could not provide simultaneous implementation of accounting and registration. According to the new law, if there is no information about the object in the USRIP, its cadastral accounting and registration of rights are carried out simultaneously in the case of creating the object of immovable property, terminating the object of immovable property, the rights to which are registered in the USRIP, creating or terminating a part of the object, which is subject to restrictions of rights and encumbrances of the object that must be state-registered. Without simultaneous cadastral accounting right s transfer registration takes place as well as confirmation of previously arisen rights. The new law also deals with situations when cadastral registration is carried out without simultaneous registration of rights. It includes creating object of immovable property based on permit to put a construction object into commission, terminating the object of immovable property, the rights to which are not registered in the USRIP, changes in main characteristics of the object of immovable property.

5. Rules for application on cadastral accounting of immovable property and state registration of rights were amended. Previously, anyone could file such an application. Under the new law, the list of applicants depends on how procedures of accounting and registration are carried out - simultaneously or separately. For example, if accounting and registration are implemented simultaneously, the owner or the legal holder of the land plot on which such immovable property object is located, can file the application. Moreover, if accounting and registration are carried out separately, a state authority or local government that issued permit to put the object into commission can file the application. Previously, applications for cadastral accounting and registration were filed at the location of the object within the cadastral and registration district. Under the new law, the place to apply and submit documents does not depend on the location of the object of immovable property.

Under the old registration law, the refusal grounds to accept documents submitted for registration were the presence in them of erasures, additions, strikethrough words and other unspecified corrections, their execution in pencil, as well as if documents were so seriously damaged that it was impossible to interpret their content clearly. Under the new law, these circumstances are the ground to return documents without consideration. Moreover, the Registrar can leave the application without consideration in case if electronic documents have incorrect format, or applicant s signature is absent in the application for cadastral accounting of the object or registration of rights.

The old cadastre law did not provide the grounds to refuse documents, and the old registration law prohibited it. Under to the new law, the documents can be returned if identity of the applicant who directly applied the documents is not established (for example, the applicant does not present a passport).

Previously, while sending documents for registration by post, it was necessary to certify only the signature on the application at the notary office. The new law requires the notary to certify the entire package of documents to be sent.

6. The grounds to suspend cadastral accounting and state registration by the decision of the Registrar are specified. Previously, the old laws provided each its own list of grounds for suspension and refusal of the documents. One of the grounds for refusal each law called failure to eliminate reasons for suspension. The new law combines all pre-existing reasons for suspension and refusal into one list of grounds for suspension (compared to the existing grounds, this list is increased significantly - there are 55 grounds). This list combined lists stated in old laws, specified these grounds, and added new ones.

Under the new law there is only one ground to refuse registration or accounting: if the reasons interfering with implementation of the state cadastral accounting and (or) state registration of the rights are not eliminated within the period of suspension. Among the new grounds for suspension it is worth noting the following: nullity of the transaction, on the basis of which a registered right appears; created (being created) object of immovable property, which construction (reconstruction) does not require the issuance of a construction or commission permit, in accordance with the legislation, or the object does not correspond to the type of the land permitted usage where it is created (being created), or does not correspond to the town-planning regulations; the land plot on which the object of immovable property is created (being created), is provided or transferred by the owner not for the construction (placement) purposes of such object; the room is not isolated or separated from other premises in the building or construction (except for parking spaces).

We also should note that the period of suspension has increased. Previously, upon the Registrar s decision the registration of rights could be suspended for one month, and upon the the applicant s request - for three months. The new law increased these terms. They will be: three months suspension upon the decision of the Registrar (except for certain grounds provided by other suspension terms); six months suspension upon the applicant s request.

New grounds for termination of accounting and registration. The new law provides new grounds to terminate cadastral accounting and registration of rights: the termination of registration is possible upon the request of a notary, if he is the one who has filed documents for registration. If the premises are purchased with the bank s credit funds or target loan provided by another legal entity, the termination of state registration of rights related to the alienation or encumbrance of the premises is allowed only if parties of transaction apply jointly and provide documents that confirm consent of the creditor (lender).

The total period of cadastral accounting and state registration of rights has been reduced. Previously, the total period of cadastral accounting of the immovable property and state registration of rights to it was 10 working days for each procedure. With simultaneous submission of documents for cadastral accounting and state registration, the term of state registration of rights begins from the date of recording information into the cadastre of immovable property, i.e. the maximum period is 20 working days. According to the new law (part 1, Art. 16), the total period of cadastral accounting of the immovable property and state registration of rights is reduced. When submitting documents to Rosreestr, it will be: 5 working days - for cadastral accounting; 10 working days - for simultaneous cadastral accounting and state registration; 7 working days - for state registration of rights. If documents are submitted to MFC, terms of cadastral accounting and registration of the rights increase for two working days.

9. Issuance of data from the Registry. There are two innovations. Firstly, if under the old laws on registration and cadastre information from the registers was provided within five working days, under the new law it makes three working days from the date the registration authority of the rights received request on data issuance. Secondly, the amount of information provided to liquidators in bankruptcy cases has increased. If previously they were provided with information only on the content of title documents and general data about the rights of the debtor to immovable property, the new law supplemented this list with a copy of the title document on the basis of which information is included in the USRIP. Moreover, such information is provided not only in respect of the debtor, but also in respect of all persons belonging to the management bodies of the debtor and persons controlling the debtor. It must help liquidators to deal with the withdrawal of debtors assets.

10. New rules on errors correction contained in the registry. “Errors in data”, specified in the old cadastre law are now called “registry errors”. It is worth noting two new rules: the correction of the registry error is carried out if such correction does not entail the termination, creation, or transition of the registered right to immovable property; it means the removal of land from the cadastral register is banned, which was considered unacceptable in the practice of commercial courts, but was widespread in courts of general jurisdiction. The new law highlighted particularly the correction procedure of the most common and conflict registry errors due to its special importance; it is the error in describing location of land plot boundaries that mostly takes place in the form of boundaries crossing and overlapping. Now, upon request of any person or any body, including the registration authority of rights, the court can decide to correct the registry error in describing location of land plot boundaries.

11. Regarding liability for violations during registration, there are two innovations. Firstly, under the old law when registering rights based on a notarized transaction, the bodies carrying out the state registration of rights are not responsible for the legality of the transaction. Under the new law, the rights registration authority shall not be liable for losses caused by the state registration of rights on the basis of the inheritance certificate, which the court recognizes as invalid, the certificate of share ownership in the common property between spouses or on the basis of a notarized transaction, which the court recognizes as invalid or applied consequences due to invalidity of a void transaction.

Secondly, liability for failure to execute a court decision is limited (this rule will be effective from 01.01.2020). Under the old registration law, an owner of residential premises, who is not entitled to claim it from a bona fide purchaser, and a bona fide purchaser, from whom premises were reclaimed, is entitled to a one-time refund by the Treasury of the Russian Federation, in the case when recovery under the executive document was not made within one year from the beginning date of terms to execute the document in accordance with a legally effective court decision on damage recovery caused by the loss of the said property due to force majeure. Under the new law, this right does not belong to all subjects of the law, but only to citizens who have lost the only residential premises. Moreover, if the recovery used to be made only in the case of the debtor s termination (the death of a citizen or the exclusion of a legal entity from the USRLE), therefore, there would be no need to wait a year, as it used to be under the old registration law.

Conclusions. Under the new law:

1. The number of obstacles to registration and cadastral accounting has significantly decreased: the number of documents submitted has been reduced, registration and accounting procedures have been accelerated, and they are more detailed in order to leave less to discretion of officials. The new law introduced more detailed and systematic rules, which were previously scattered in various regulations and judicial practice: on cadastral accounting when specifying the land plot boundaries, on accounting a part of the object, on increased number of documents Rosreestr is obliged to request independently.

2. Value of notary services increased: faster registration, no verification by Rosreestr of documents legal purity, which reduces the risk of suspension and refusal of registration.

3. The control of Rosreestr over construction has strengthened: the grounds for suspension in case of violation of facilities construction procedure and the obligation to inform the competent authorities about the violations detected during construction have been spelled out in details.

4. Favour of electronic document flow is stated. It will speed up registration and accounting procedures and unload paper archives.

Generally, the new law deserves a positive assessment. Only time can show how it works.


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