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Public auctions, share deals, asset deals

Real estate in Russia may be acquired from public entities (for example, the city of Moscow or Moscow Region), private legal entities (limited liability companies) or natural persons. Applicable legislation prescribes different procedures in each of these scenarios. The main difference is that the acquisition of public land is usually conducted through a public (open) auction and the price of the land plot is determined by auction procedure rather than by the contracting parties. Public auctions, share deals, asset deals.

2.1 Acquisition of real estate from a public owner 

In most cases an investor can only acquire publicly owned land for construction purposes by way of an auction. The acquisition of public land plots without an auction is possible in a few exceptional cases. For example, if the land plots are subdivided from a land plot leased for complex development or if the land plots underlie buildings and structures, the owners of such buildings and structures will have an exclusive right of acquisition over these land plots. Land plots also can be let to legal entities by decree or order of the President of the Russian Federation, provided
the land is to be used for social, cultural and utility facilities or for the implementation of large-scale investment projects, for example for the performance of international obligations of the Russian Federation. Pursuant to the Russian Land Code public bodies can grant a leasehold for construction for a term of 3 to 10 years. The duration of the term depends on the complexity of the building to be constructed on the leased land plot. If the tenant fails to complete the construction works within the term provided by the lease agreement, then the landlord is entitled to terminate the lease, provided that the failure of the tenant to complete the construction in time is a material breach of the lease agreement. The burden of proof for establishing material breach of the lease is on the landlord. Public auctions, share deals, asset deals.
After construction of the building has been completed and the ownership to the new building has been registered, the tenant is entitled either to buy out the land plot beneath the building or to enter into a long term lease for 49 years.
The purchase price or the rent amount (as appropriate) are prescribed by law and are non-negotiable. Public auctions, share deals, asset deals.

2.2 Acquisition of real estate from a private owner

In relation to the purchase of real estate on the secondary market, Russian and foreign investors can acquire real estate directly through a real estate sale and purchase agreement (“asset deal”) or through the acquisition of a company which owns the real estate (“share deal”). In either case the purchase may be made from abroad by the foreign legal entity itself, through the foreign legal entity’s local permanent establishment (representative offce or branch) or through a registered Russian legal entity.
The advantages and disadvantages of a share and asset deal can be summarized as follows. In order to transfer the shares of the property-owning
company the parties must execute a share purchase agreement. Any share purchase agreement must be signed in the form of a notarial deed. As the notaries in Russia are not usually willing to verify whether condition precedents have been satisfed, the parties must conclude a preliminary share purchase agreement, which creates the obligation of the parties to sign the main share purchase agreement only once all of the conditions precedents have been satisfed. A preliminary share purchase agreement must also be signed in notarial form. In contrast, a direct sale and purchase
agreement for real estate can be concluded in a simple written form and usually contains the condition precedents and counter obligations for the transfer of the ownership right and payment of the purchase price. Public auctions, share deals, asset deals.
The buyer of the shares becomes the owner of the shares as soon as the share purchase agreement has been notarized. Nevertheless the legal entity/target must be notifed of the assignment of the shares by the notary, the seller or the buyer within 3 days of the notarization of the share purchase agreement. In the case of an asset deal the buyer acquires the ownership right to the real estate only after its state registration in the Property Register.
According to the State Registration Law, the registration of the ownership title in the Property Register takes 10 working days.
A share deal requires more comprehensive due diligence, as the buyer must review not only the validity of the ownership title to the real estate, but also any previous transactions involving the company’s shares, particularly if the shares have been transferred several times. In addition, the buyer must review the tax liability of the target company, the existence of any non-core assets and the existence of any employee and management claims against the target company, such as compensation claims for unused holidays or golden parachutes.
As opposed to an asset deal, a share deal will usually require antimonopoly approval. The antimonopoly clearance generally takes not less than 30 calendar days. From a tax point of view, a share deal does have the potential to offer some benefts if the seller of the shares is a non-Russian company. The majority of Russian inbound investments are currently routed through Cyprus because of a combination of relatively low domestic taxation in Cyprus and the favourable double taxation treaty with Russia. Other jurisdictions, such as the Netherlands and Luxembourg, are also often used to hold Russian real estate assets either in corporate or branch form. Public auctions, share deals, asset deals.
It should be taken into consideration that under Russian tax law the transfer of shares and land plots are exempt from VAT (18%). However, the selling of the buildings is subject to VAT.

2.3 Payment terms for share deals and asset deals

Payment between two Russian companies can only be made in Roubles. If either the seller or the buyer is a nonRussian company then the purchase price can be nominated in a foreign currency In order to avoid currency risks, the purchase price is usually negotiated as the Rouble equivalent of an amount in Euros or US dollars to be calculated at the exchange rate fxed by any bank as at the date of payment.
In most cases payment of the purchase price under share and asset deals is made through a letter of credit. Some banks offer a letter of credit nominated in a foreign currency, which shall be paid out in Roubles under the exchange rate on the date of payment. Such letter of credits are usually opened as an irrevocable guaranteed letter of credit. This payment tool helps avoid currency exchange risks.
In a share deal, payment of the letter of credit is done by the bank once the bank has been provided with the sale and purchase agreement in the form of a notarial deed and an extract from the state united register of the legal entities confrming that the buyer is the registered shareholder.
With respect to asset deals, the condition for payment is usually the extract from the Property Register confrming that the purchaser has been registered as the freeholder of the real estate without any encumbrances. Under Russian law, payment of the purchase price can be also performed under an escrow agreement entered into between the seller, the purchaser and the bank as escrow agent or through a notary trust account. Since this option is relatively new, neither the banks nor the notaries have signifcant practical experience of them. Public auctions, share deals, asset deals.