Pay – do not build – Newspaper Kommersant No. 229 (7430) dated 12/09/2022

The bill, which provides for the right of the Territorial Development Fund (FDT) to revoke, at the request of the region, the decision to complete the problematic facility and instead pay compensation to equity holders, was approved yesterday by the State Duma in the second and third readings. The mechanism will work in cases where, after the decision to complete the construction, circumstances are revealed that make it impossible to complete the object in three years from the date of its transfer to the fund, for example, if it is not possible to connect the house to the networks or the need to dismantle structures. On the one hand, this will speed up the restoration of the rights of equity holders, whose problems the authorities promised to solve before 2024, on the other hand, it can reduce the cost of the process and simplify the implementation of new construction projects.

The State Duma yesterday immediately approved in the second and third readings a bill on the possibility of the FRT to withdraw the earlier decision to complete the problematic facility at the request of the region, paying compensation to the affected equity holders. Recall that in order to restore their rights (it is expected that by the end of the year there will be 80,000 of them), the FRT can decide either to complete the construction of a problematic facility or to pay compensation to equity holders (calculated based on an assessment of the market value of 1 sq. m., but not more than 120 sq. m in total) of equivalent housing, made no earlier than six months before the decision on payment.

According to the draft law (more precisely, amendments to the second reading in another draft law), the FRT will be able to win back the decision to complete the construction if the house began to be built without the use of escrow accounts (about 15% of housing is now being built this way) and it cannot be completed in three years after transfer of powers of the developer to the fund. Circumstances preventing completion should be clarified after the initial decision is made, among them are the expiration of the lease period of the site in the absence of grounds for obtaining rights to it, the recognition of the object as an unauthorized construction, the lack of technical feasibility of connecting it to the networks and the need to carry out work to strengthen or dismantle structures. Shareholders can challenge the decision to replace the mechanism for the restoration of their rights in court. At the same time, the regional fund must return unspent funds for the completion of the facility to the federal FRT.

It should be noted that the amendments supplement the previously given FRT right to make a decision on financing the construction of a house on another state site if the problematic object cannot be completed. However, reconsidering the decision in favor of compensation may turn out to be a faster way to restore the rights of equity holders (it is promised that, in general, the problem of deceived citizens should be resolved by 2024), while being less costly for the FRT, taking into account the rise in construction costs and the need to compensate for the cost of only purchased apartments and the possibility after the removal of encumbrances, sell the plot with unfinished construction at the auction for new investment projects.

As the FRT explained to Kommersant, the regions have already received numerous appeals about the impossibility, for objective reasons revealed after the decision to complete the construction, to ensure the completion of the construction of a number of houses. “In such situations, a change in the mechanism is necessary for the prompt restoration of the rights of affected citizens,” the fund notes. The volume and number of objects that meet the requirements of the amendments are added to the FRT and will be clarified based on the results of work with regional funds.

“There is certainly a logic: why spend resources on completing the construction of an object that, nevertheless, will not be handed over to equity holders within a reasonable time, if it is possible to distribute the same resources in a timely manner, restoring their violated rights by paying compensation,” says Orchards partner Yuri Aksenov. Nikita Filippov, head of the De Jure Law Office, also adds that “the duty of the FRT to transfer the constructed object to it no later than three years from the date the developer’s obligations are transferred to it also plays a role – it is obvious that some problematic houses will not be completed.” Vitaliy Mozharovsky, a partner in real estate and construction practice Alumni Partners, is more skeptical: “With the amendments, you can cancel earlier decisions simply by referring to the law, and not bother yourself with complicated explanations about where the money allocated for construction has gone, while the fund and the authorities do not need to bear financial responsibility for non-fulfillment of obligations to already at least twice deceived equity holders.

According to Yevgeny Pugachev, a partner at Legal Plant Law Firm, the amendments are aimed primarily at “reviewing decisions on the use of land plots where houses are located”, over a long period from the date of issuance of a construction decision, the local authorities’ vision of their development may change and a new investor may appear for their development according to new plans. As Nikita Filippov notes, the interests of the majority of equity holders waiting for their apartments will not be affected, but the “revision” of FRT decisions will be unprofitable for citizens with non-residential facilities – for them, including parking spaces, compensation is calculated from the price paid under the contract.

Evgenia Kryuchkova