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A New Look at Things: The reform of right in rem in Russia

In April this year the State Duma of the Russian Federation approved in its first reading the draft of the Federal Law proposed by the President, which is expected to introduce significant changes to the civil law. This draft is fairly lengthy and informative and affects almost all sections of the Civil Code. However, the most significant changes will be made to property law. Therefore, this article will focus on these particular changes.

Due to these changes the provisions of the section of the Civil Code dedicated to property law have significantly improved the detail of the law, and the section as such has been supplemented by new categories of right in rem. In this connection the title of the section that contains the provisions on right in rem (note: in the current version it is called "the right of ownership and other rights in rem") has been changed to the "Rights in rem". There are four subsections specified in the "Rights in rem", that is: 1. "Ownership"; 2. "The General Provisions of the Rights in rem"; 3. "Property Right" 4. "Limited Rights in Rem". Let us now consider the structural content of each subsection.

1. Ownership

The Civil Law is welcoming a new term and, therefore, a new legal category - the category of ownership. The term ownership implies the actual possession a person has over the object of ownership which is maintained as long as the owner has a freehold to the object he owns. Ownership in rem is not subject to state registration.

At the same time, if there are several proprietary interests over one object, including the legal proprietary interest, the person who exercises the actual freehold of the object shall be considered the owner thereof.

The objects of ownership may include:

  • any chose (including monies and securities);
  • property with certain generic features, provided it is distinguishable;
  • property being in the process of its creation;
  • some part of immovable property provided the borders of such property can be identified.

Acquisition of ownership is possible in various ways and, as the general rule stands, ownership in rem is acquired de facto (for example, by delivery of the item to the purchaser). Also, ownership can be acquired by the unilateral actions of the purchaser, if the transferor creates for the purchaser conditions for the free access to the object. In case ownership is confirmed by an instrument of transfer an individual specified in such instrument shall be considered its owner, unless proven otherwise by a court of law.

The legislators have identified two types of ownership - legal and illegal. Illegal possession, in turn, can be in good faith (bona fides) and in bad faith (mala fides). Ownership shall be lawful only if it is based on the property right (or another right in rem, involving a legal proprietary interest) or based on the agreement made with the owner (of the holder of another right in rem, involving a proprietary interest). If an individual owns an object without the legal grounds, he nevertheless, may be declared as a good faith owner thereof. This stands for cases where an owner was not and could not be aware of the fact that his purchase is illegal or the fact that the grounds for his legal ownership are void. Besides, according to the draft, there is a presumption of legality and good faith of ownership, i.e. any ownership shall be considered as legal and good faith unless the court provides otherwise.

Ant owner (whether a legal one or not) is entitled to protect his ownership rights by one of the following means:
  • independently (by self-defiance);
  • through an application to the authorized government bodies or local authorities;
  • through the court.

The claims for protection of a proprietary interest can be made only by a person who has been deprived from it, and the claim must only be made against a person who actually holds that object. A dishonest owner seeking protection of his property must prove that he had been the owner of that object for one year before the breach which was the grounds for bringing the claim for protection of his ownership fights. A person against whom the claim is made is prohibited from using his possession of that object as the grounds for objection. Instead the current owner has to make a counterclaim to protect his ownership; and the object under dispute must be transferred for safekeeping to a third party which is defined by the court (sequester).

2. General provisions on the rights in rem

This paragraph contains the general provisions on the rights in rem, covering the definition, the objects, the types of rights in rem and the provisions concerning protection of rights in rem. The notion of rights in rem is introduced into the Civil Code. The rights in rem are such rights which give their holder an immediate freehold of an object and they are the grounds for joint or separate legal ownership, use and disposal thereof within the set limits. The features of rights in rem, according to the project, are:
  • right in rem creates an immediate encumbrance over and object and is attached to it;
  • right in rem does not have an expiry date;
  • right in rem is not terminated if the proprietary interest has become void.

The current version contains an approximate incomplete list of the existing rights in rem, while the draft contains a finalized definite list thereof. Thus, the rights in rem are the proprietary rights and the limited rights in rem, under which the law suggests to include the following:
  • the permanent (perpetual) ownership right of the plot;
  • the right for construction;
  • the servitude;
  • the right of individual leasehold;
  • the pledge;
  • the right for purchase of property belonging to another person;
  • the right to receive proprietary interest;
  • the right of efficient management;
  • the right of restricted ownership of the plot.

Clearly, the new list, if compared with the others, has significantly broadened and specified the range of rights in rem. Acquisition (change, termination and transfer) of rights in rem for the immovable property is subject to state registration. A right in rem comes into force from the moment such acquisition (change, termination, transfer). A transaction of acquisition of the rights in rem must be certified by the notary public. This amendment is mainly aimed at tackling the existing fraudulent patterns.

There are changes in the category of remedies for the breach of proprietary interests. The current provisions of the code (Chapter 20 of the Civil Code of the Russian Federation) provides for 2 types of remedies for the breach proprietary interests: by means of recovery of property from unlawful possession and by means of remedies other than termination of possession. The second type of remedies is not codified in detail. The draft provides for 4 types of remedies for the breach of proprietary interests. That is the remedies for the breach of proprietary interests can be performed by:
  • recovery of property from unlawful possession (a compulsory (vindicatory) claim);
  • remedies for the breach of proprietary interests other than termination of possession (a negative claim);
  • release of property or another object of proprietary interest from custody (removal from inventory);
  • recognition of the proprietary interests.

The remedies for the breach of proprietary interest previously known to the Civil Code have received the respective names borrowed from the Roman law (a vindicatory claim, a negative claim). Until recently such terms have only been used by legal scholars in legal theory and in legal journals, but they were not officially adopted by the legislation. Such remedy for the breach of proprietary right as release of property from custody (removal from inventory) was not officially adopted by the current version of the Civil Code. This remedy is only mentioned in the legislative procedures of the civil law (Articles 140, 442 of the Civil Procedure Code of the Russian Federation). According to Article 12 of the current version of the Civil Code of the Russian Federation, recognition of a right is one of the remedies for the breach of civil rights. Recognition of a right (recognition of a proprietary interest) has also been considered to be one of the means of acquisition of a proprietary interest (Article 222 of the Civil Code of the Russian Federation). The Civil Code does not consider recognition of a right as a remedy for the breach of right in rem and, therefore, the amendments related to specific remedies for the breach of right in rem and their detailed regulations in fact fill in the gaps in the current laws.

3. Property Right

The general provisions related to defining the notion and contents of the property right, classification into private property, public property and municipal property, did not undergo any significant changes. A before, the contents of the property right are the three rights: possession, use and control. The draft sets out the new regulations for acquisition of property right on immovable property:
  • The property right over an immovable property is subject to state registration and it come in force from the day of such registration;
  • The property right over an unauthorized structure built without the required permission for construction on a plot that belongs to the state or to municipality, the person who has built it having his civil rights allowing him to built thereon, such right can be recognized as belonging to this person, provided the said unauthorized structure has been built without any major breaches of town planning and construction regulations;
  • The property right over a technology complex of property (a group of single purpose buildings, facilities and other similar objects which are inseparable and are connected to each other actually and technologically, perhaps, located on a single plot) arises from the date of state registration which is acceptance without a prior registration of the right over the individual property objects;
  • The property right over an immovable property purchased through a transaction shall pass to the purchaser from the day of state registration of the title of ownership in the purchaser’s name; as the general rule stands, the property right over an immovable property can only be registered by its legal owner;
  • The property right over a building or construction comes in force only from the date of its state registration and belongs to the owner of the plot, unless otherwise specified by the laws.
  • The property right over a development project the construction of which has not been completed yet shall cone into force from the date of its registration; an owner is entitled to apply for state registration of the said right, provided such object is in line with the feature of the immovable property object.

As per the amendments under consideration the new regulations for certain types of property shall be introduced:

The Chapter on the property rights over land is added by a new provision where the notion of a plot as a property object is clarified: an object of the property right can be a plot on the land surface which boundaries are defined, which boundaries are duly defined and ascertained and which has been entered in the records of the state land registry. Alienation of a plot by its legal owner being also the owner of the buildings and constructions on this plot, shall not be allowed without simultaneous alienation of these buildings and structures.

This Chapter is also added by the rules regulating the entry into force and termination of a property right where severance of plots or apportionment thereof took place. According to them:
  • In case of severance of a plot – the property right over the plot is terminated when the property right over the newly created plots arises;
  • In case of merging of the plots – the property right over the initial plots shall terminate from the date the property right over a newly merged plot has arisen;
  • In case of severance of the plot due to the severance of the stake of the member from the total stake capital, the ownership right of a certain severed plot to the initial plot shall be terminated from the day of state registration of the ownership right for the severed plot of such individual.

The Section on property rights over plots shall be added by the new rules which regulated the limitation of a property right in favor of the neighbors (the neighbors’ rights) as well as in public interest.

According to the draft, the contents of the civil code will also be amended by adding the provisions related to the property right over separate immovable properties – buildings and structures. Damage (ruining) of a building or structure located on other person’s plot does not result in termination of the rights the owner of this building or structure has over this plot. The owner of the damaged building is entitled to its restoration without the consent of the plot owner within five years from the date of the building’s damager (ruining). The content of the ownership right over unfinished property is also regulated, the duty of the owner to complete the property construction within a reasonable time has been enforced; in default of which the court, at the suit of the local government, may decide to sell the property at a public auction in order to pay the owner the funds from the proceeds of the sale.

The current version of the Civil Code contains the provisions which regulate the ownership right over residential property and at the same time it lacks provisions for the ownership of non-residential premises. The draft addresses this gap, and the text of the Code is amended by adding some major provisions on ownership of the premises. According to these provisions premises shall be a part of a building or a structure limited by a three-dimensional closed boundary, suitable for use. The state registration of ownership of the premises in the newly constructed buildings can only be made after the state registration of ownership of the building where the premises are located. The state registration of ownership of the premises terminates the ownership of the building in which the premises are located. The state registration of ownership of the building on behalf of the owners of all premises in the building terminates the ownership right of the said person over the premises. The project also provides for the introduction of special rules to ensure legal regulation of the rights of owners of premises over the plot the building is on and the legal regime of the common areas of the building.

4. Limited rights in rem

As mentioned above, the current version of the Civil Code does not contain a closed list of the limited rights in rem or the regulations thereof. Not only the draft amendments introduce a new detailed list of the limited rights in rem, but also contain the regulations on each type of the limited right in rem.

The permanent (perpetual) ownership right of the land

The permanent ownership right of the land (emphyteusis) is the right of ownership and use of a plot which belongs to someone else, being set for an unlimited period or for a certain period for the purposes of the use of the natural features and the attributes of the plot. The permanent ownership right of the land is subject to state registration and it is set according to the will of the owner based on the agreement for the establishment of a permanent ownership right of the land, the major features of which are: the provision concerning the plot, the purposes for which the plot shall be used, the rental fee for the permanent ownership of the land. The permanent ownership right of the land can be set for an unlimited period or it can be established for a certain period, being not less than 50 years. The rental fee for the permanent ownership right of the land is defined as a fixed fee of money or as a fixed share in the proceeds or products received as the result of the use of the land. The holder of this right in entitled to alienate it, to pledge it or to deal with it in any other manner. The permanent ownership right of the land can be terminated provided:
  • the natural features and attributes of the plot have changed and it resulted in inability to use it for the set purposes;
  • the validity period has expired (if a certain period had been defined);
  • an agreement between the owner of the plot and the person holding the permanent ownership right of the land is made (unless the permanent ownership right of the land has been mortgaged);
  • the plot is redeemed for the purpose of the state or municipality.

The permanent ownership right of the land can also be terminated upon request of the owner provided the holder of this right does not perform his duty of improvement of the plot and causes damages to it or fails to pay the rental fee for 2 subsequent years.

The right for construction

The right for construction is the right of ownership and use of other person’s plot for the purposes of erection of buildings and structures thereon and the use of the erected buildings. The right for construction is subject to state registration. It is established on the basis of the agreement for the right of construction, the major provisions of which are as follows: provisions concerning the plot, the location of the building to be erected on the plot, the validity period of this right, the fee for the right of construction, as well as the characteristics of the building to be erected (provided the owner of the building shall be a natural person or a legal entity). The right for construction shall be established for a period stated in the agreement for the right of construction, but it shall not be less than fifty years and shall not exceed one hundred years. The fee for the right for construction is defined as a fixed fee of money or by granting the owner of the plot the right to own or use the premises in the erected buildings. The holder of the right for construction is entitled to deal with it in any manner.

The Servitude

The servitude is the right of an authorized person to use to some extend (the limited use) a plot, a building or a structure belonging to another person (the servient estate) for the exercise of his ownership right for the plot, building or structure (the dominant estate), provided that the use of the latter is not possible without a servitude. By virtue of servitude the owner of the dominant estate is entitled to independently use the servient estate (the positive servitude) or to prohibit the owner of the servient estate to use if in a certain manner (the negative servitude). A full list of types of servitude is presented in the draft and other types of servitude shall not be permitted. The following types of servitude can be established:
  • The servitude of movement (the right of passage, the right of livestock passage, the right of drive-through);
  • The construction servitude (the servitude of development, the servitude of holdup);
  • The servitude of drainage (water drainage);
  • The mountain servitude (installation of equipment and structures require for mineral exploration and mining);
  • The municipal servitude (installation, use and repairs of municipal property).

The servitude can not be established if it deprives the owner of the servient estate from the use thereof for its main purposes. The servitude is valid against a certain group of persons upon the agreement of the owners of the servient estate and the dominant estate, in case of a dispute – upon the decision of a court. The agreement for the servitude (the court’s decision) should mention the type of servitude, its conditions, the fee for the servitude that can be either a single payment or in installments.

The servitude shall be terminated in the following cases: upon the agreement of the owners related to the servitude; upon expiry of the circumstances which required a servitude; in case the servient estate and the dominant estate are merged into one; in case the use of the servient estate under its amended purpose is no longer possible under the existence of servitude; upon the expiry date of the servitude (if any); in case the owners of the servient estate and the dominant estate is the same person.

The right of individual leasehold

The right of individual leasehold (usufruct) is when the owner of estate grants to another person (the leaseholder) the right to use and own such estate. The leaseholder can be an individual or a non-profit organization. The use of estate granted into leaseholder to an individual shall not be used for the business activities. The individual leasehold right can not be transferred to another party, including as a general pre-emption or under the transaction. The right of the leaseholder, however, can be established in the agreement the owner of the estate and the leaseholder or can be received as an inheritance based on the will of the owner of the estate. The leaseholder is entitled to hold an encumbered estate and he can require removal from the ownership or use thereof of any third parties. As we can see, as opposed to the servitude, this type allows the powers to own estate. Besides, the leaseholder undertakes to cover all the expenses for the maintenance of the estate at his own expense.

The right of individual leasehold is established for a certain period or for a lifetime. In case the leaseholder is a non-profit organization the expiry period can not exceed twenty-one years.

The right of individual leasehold shall terminate once the encumbered estate has ceased, due to the death of the leaseholder (liquidation of restructuring of a non-profit organization) or the expiry of the individual leasehold period.

The amendment draft of the Civil code of the Russian Federation provides for another type of usufruct, such as social leasehold which is used relating to the residential premises only for the benefit of the persons residing together with the owner of the residential premises and having the right to receive alimony payments from the owner in accordance with the Family Law.

The Pledge

At present the Civil Code contains only general provisions about the charges on property and only indirectly refers to pledge. The amendment draft has detailed reflections and settlement of all the issues related to pledge.

Under a pledge a pledgee in order to satisfy his claims against the pledged property is entitled to deal with the pledged property in the manner set out if the laws and the pledge agreement. Accessory pledge requires the pledge agreement to mention the following details: the essence, the amount of the pledge, the deadlines for the execution of the liabilities. In case of an independent pledge the pledge-holder can define on his own which debt of the pledgor (a third party) is considered secured by notifying the pledgor (a third party) about it. The period of independent pledge can not exceed thirty years.

The object of a pledge can be: a building or a structure; a plot; a right of permanent ownership or a right of construction; premises. A pledge agreement is subject to notary certification (except for certification of an independent mortgage).

An important novelty in this area is the regulation of the right for priority of security interest of the creditors which are secured under the pledge over the general body of other security-holders (priority of charges).

The right to acquire another person’s estate

The amendments draft suggests that a person that owns the right to acquire another person’s estate shall have an absolute exclusive right to purchase this estate so it becomes the property of that person. It should be noted that similar rules apply when a person can acquire a pledged estate that belongs to another person or the right to construct.

The right to acquire another person’s estate is subject to state registration. The registration procedure is carried out as the registration of a charge over an immovable property. In case this estate has not been created yet – the procedure of registration of a charge over any other property shall apply, that new uncreated property shall be included in, be part of or be based on the existing charged property (for example, a plot on which a building will be erected). The right to acquire another person’s estate can be transferred to a third party. The significant provisions of the sale purchase agreement of another person’s estate are: the details identifying the estate; the period of validity of the right to acquire another person’s estate; the size of the payment (in case the right to acquire another person’s estate is granted on a chargeable basis); the period of transfer of the estate; the price and the payment period of the estate under acquisition. The grounds for termination of the right to acquire another person’s estate shall be: when the estate comes under the ownership of the holder of such right; when the owner of the estate buys the purchase rights from the holder thereof; when the holder of the right rejects his right; when the validity period of this right expires; when the estate encumbered with this right ceases to exist.

The right to receive proprietary interest

This notion is a brand new one and it is unknown to the Russian laws. The right to receive proprietary interest allows its holder from time to time to receive from the owner of the immovable property the proprietary interest in the form of goods, monies, works or services in certain volume and in case of failure to receive such interest – to receive the right to deal with the estate by means of claims against as per charge enforcement procedures. However, the main difference of this right from the pledge is that the pledge is an auxiliary security right, while the right to receive proprietary interest is an independent (principal) right. Its difference from the servitude provides for withholding from actions of the owner (refraining from) while the right to receive proprietary interest allows the owner of the immovable property to perform certain actions.

The right to receive proprietary interest arises based on the agreement for the establishment of the right to receive proprietary interest with the owner or on other grounds provided for by the law. The significant provisions of the agreement are: the amount of the proprietary interest to be received, its monetary evaluation, the frequency of returns and the validity period of the proprietary interest. The proprietary interest to be received shall not be under lease of the immovable property charged by this right. The right to receive proprietary interest can be granted for the lifetime of the individual holding this right or for another period which shall not exceed one hundred years.

The right of efficient management

In the current version of the Civil Code the Chapter related to this type of right in rem is called «The Right of Business Administration, the Right of Efficient Management». Therefore, separate legal regulations are set up for the companies (enterprises) that own property on the basis of business administration and efficient management. According to the draft, it has been suggested to resolve this ambiguity in legal regulations and to cancel the notion of business administration. The government and municipal enterprises, based on the right of business administration, which had been created before the official issue of the amendment draft shall follow the rules of the right of efficient management. From the day the current Federal Law was enacted the immovable property belonging to the government and municipal enterprises is considered their property on the basis of the right of efficient management.

According to the amendment draft a company (or an establishment) is not entitled to sell or to deal with in any other manner the immovable property it owns on the basis of effective management. A non-government organization, as the general rule stands, can independently deal with the movable property it owns, while a government organization is entitled to deal with the movable property upon the consent of the owner only. The government organization can only deal with the goods and services they provide without the consent of the owner.

The right for restricted ownership of the plot

This type of the limited right in rem does not have a separate chapter in the draft code. Nevertheless, this right is part of the list in the limited rights in rem in Article 223 of the Civil Code of the Russian Federation (the version containing the draft amendments). The said article on this type of right in rem refers to Article 297.1. of the Civil Code of the Russian (the version containing the draft amendments). Thus, this limited right in rem is considered in the Code as related to the ownership right for the buildings and structures mentioned above. Therefore, the right for restricted ownership of the plot is the right of the owner of the building or structure located on another person’s plot, for the use of this plot under the terms and to the extent provided for by the relevant right in rem or by the agreement with the owner of the plot.