How timeless it is, the gravity of the earth

Is it possible to sell at a bankruptcy auction a land plot owned by a debtor agricultural enterprise on the right of permanent (indefinite) use (PBP)? The Supreme Court of the Russian Federation (SC) will consider this issue. This right was widespread in the USSR, but in the Russian Federation it was left mainly for government institutions. The rest of the citizens and companies that were assigned the outdated PBP right needed to re-register their plots as ownership or lease, but so far not everyone has done this. In the event of bankruptcy of those who have retained the PBP for land, the question arises about the fate of this asset and the possibility of selling it to pay off debts. There has not yet been a unified approach in practice, lawyers say.

Legacy of the USSR

The Supreme Court will consider the possibility of selling, within the framework of bankruptcy, a plot owned by the debtor under the right of PBP. Arbitration manager Anton Sychev explains that PBP appeared in the USSR, when all land was the property of the state: “When distributing it among workers, a way was needed to somehow secure it for them, without giving them full rights to the land. After the collapse of the Union and the emergence of private property, this method of ownership lost its relevance.”

In 2001, the Land Code of the Russian Federation left the opportunity to own land plots on the basis of PBP rights only to government bodies, state and municipal institutions, state-owned enterprises, as well as historical heritage centers of former presidents of the Russian Federation. Private owners were ordered to re-register the PBP for the right to lease or buy the plots into ownership, but, Mr. Sychev clarifies, not everyone has done this so far.

“As a rule, there is not enough money to purchase such land plots,” notes the head of the legal bureau “Olevinsky, Buyukyan and Partners” Eduard Olevinsky. “The owner does not want to re-register the plot for rent for the same reason, because for this it is necessary to carry out land surveying and register the primary right, and this is an expense.”

And although the law obliges owners of land with the right of PBP to re-register it, it does not prohibit such ownership in principle, “that’s why they are in no hurry to do it,” notes Anton Sychev.

In this regard, the presence of land under the right of PBP is by no means uncommon. So, in the report Rosreestr on the condition and use of land in 2020 stated that 304 violations were identified in relation to land plots with a total area of ​​14.9 thousand hectares, the owners of which did not fulfill the obligation to re-register their PBP rights. “It is clear from the document that often this right is not re-registered, but is terminated, for example, due to the transfer of plots to the management of forestry enterprises and transfer to forest lands. As a rule, this is due to the overgrowing of lands of former agricultural enterprises,” points out Anton Babenko, partner at the Padva and Epstein law office.

Most of the lands under the right of PBP are intended for agriculture. The total area of ​​such plots is 12.79 million hectares, which is more than 95% of all agricultural land assigned to departmental institutions and enterprises, follows from the report of the Ministry of Agriculture (.pdf) in 2021.

Defense land

The lands of a departmental enterprise are also discussed in the case referred to the Supreme Court. As part of the bankruptcy of the Federal State Unitary Agricultural Enterprise (FGUSP) Roshchino, subordinate to the Ministry of Defense, its bankruptcy trustee challenged the ministry’s actions to unilaterally terminate the PBP with a land plot of 3.1 million square meters. m. The order on this was issued on March 1, 2022 by the director of the Department of Military Property of the Ministry of Defense, citing the lack of evidence of the use of the site for its intended purpose.

The manager believed that “actions to seize the debtor’s property led to a gratuitous decrease in his assets and are an invalid transaction.” Arbitration courts of three instances satisfied the manager’s request and returned the land to the bankruptcy estate, indicating that the termination of the FGUSP’s right to the land had no basis, counter-execution and caused harm to the bankrupt’s creditors.

Disagreeing with the court decisions, the Ministry of Defense appealed them to the Supreme Court. The Ministry indicates that the PBP right cannot be considered as an asset of the debtor, which can be put into civil circulation by alienation at auction in order to replenish the bankruptcy estate. FGUSP, the complaint says, does not have the right to independently dispose of the rights to this plot, therefore the actions of the Ministry of Defense “could not cause harm to the debtor’s creditors.” The Supreme Court considered these arguments worthy of attention and referred the case to the Economic Collegium, the hearing is scheduled for November 27.

Distressed property

Mikhail Yasenkov, partner at YurTechConsult, says that in practice there were different opinions regarding the fate of such plots and the possibility of their alienation as part of the owner’s bankruptcy. Some courts believed that it was possible to sell. Thus, in 2011, the Presidium of the Supreme Arbitration Court came to the conclusion that it was permissible to sell land plots at bankruptcy auctions under the PBP right, says arbitration manager Alexey Antonov. This was explained by the fact that such lands are not classified as property subject to exclusion from the bankruptcy estate, and are also not limited or excluded from circulation.

Other courts have strongly opposed such a sale. Mr. Yasenkov agrees with this position, clarifying that PBP is a limited property right, therefore “the owner can use the land, but does not have the right of disposal, that is, he does not have the right to sell the land plot, lease it, exchange it, bequeath it.”

In cases of bankruptcies of agricultural enterprises, some courts allowed the debtor company to buy the plot during bankruptcy proceedings or re-register the PBP with a lease right and sell it as part of a single property complex.

Specifically, Federal State Unitary Enterprise “Roshchino” was previously denied the right to purchase the land as a property, and the courts found that the land was not actually used by the enterprise. Moreover, the company wanted to purchase land at a price of about 15% of its cadastral value.

But if the debtor buys a plot at a preferential price and then sells it at the market price to satisfy the creditors’ demands, “a situation arises when the state actually indirectly participates in repaying the debtor’s debts,” notes Anton Babenko. “This circumstance, combined with the absence of direct rules on the procedure for re-registration of the right to PBP in bankruptcy, acts as a source of disputes with the authorized bodies,” the lawyer emphasizes.

Rent by purpose

Thus, the most optimal solution is to lease this land – before bankruptcy or already in the process. “The practice of bankrupts re-registering land plots from PBP to lease in order to subsequently satisfy creditors’ claims appeared in the mid-2000s. As in the case of re-registration outside of bankruptcy, this did not present any legal difficulties in the absence of opposition from the authorized bodies,” says Mr. Babenko. “This approach seems to me to be the most correct for bankruptcy situations – first re-register and then sell, instead of inventing ways to sell something that in the current legal system is no longer subject to regulation,” says Mr. Sychev. At the same time, lawyers note that in this case the land should continue to be used for its intended purpose.

There are also cases when a building or a complex of buildings is sold at a bankruptcy auction, and the right to the land plot under it is then formalized by the buyer of the property for rent, says Eduard Olevinsky, noting that “this is a semi-legal method.”

In the case of Federal State Unitary Enterprise Roshchino, lawyers most likely believe that the Supreme Court will overturn the court decisions and support the complaint of the Ministry of Defense. This position of the Armed Forces, believes Alexey Antonov, “can encourage businesses to re-register liquid land plots for lease or ownership, so that in the event of bankruptcy or a deterioration in their financial situation, they can quickly sell the asset and repay debts to creditors.”

Anna Zanina