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New rules on the main point: changes into the legislation on transactions

State registration of real estate and related transactions

Back in the Concept of Civil Law (hereinafter - the Concept) approved by the Federation Council in 2009 mixing of different systems of state registration was mentioned as well as a need to switch to a uniform system. Prior to changes in 2013 the Civil Code provided for the registration of both rights and contracts: it stipulated that property right and other in rem rights in immovable property are subject to state registration and provisions of the second part of the Code relating to sale contracts, gift, lease and rental of real property established mandatory registration of such contracts. This imperfection of legal technique has been eliminated by Federal Law of 30.12.2012 № 302 -FZ, which came into force since March 1, 2013. Originally text of changes into the Civil Code repealed a requirement to register all four named types of contracts, however on March 4 lease was excluded from this list. The right to lease by the legal nature is the main encumbrance of property rights that does not change and does not stop with transfer of fundamental right from one person to another so it is important that a third party could obtain information about the encumbrances in reliable open source - state register of rights. In this connection hasty change into the new version of the Civil Code seems justified in terms of publicity of information about a right to lease.

However, initial version of the Law of 30.12.2013 № 302 -FZ acted only on 2 and 3 March. Legal consequences of lease contracts concluded within these two days are not currently defined. Courts hold opposing viewpoints: some believe that lease contracts concluded on 2 and 3 March do not require state registration, others believe that registration is required due to the fact that the lease is an encumbrance. Currently, the Supreme Arbitration Court of the Russian Federation has prepared a draft of a Resolution of the Plenum, which is supposed to establish that rules of paragraph 3 of Article 308 of the Civil Code shall apply to lease contracts concluded on 2 and 3 March 2013: obligation does not establish liabilities for third parties not involved in it as parties. By the logic of the authors of the draft of the Regulation an obligation, which does not pass state registration, i.e. which does not become public can not be opposed to third parties: a lessee under contract from 2 or 3 March does not have a preferential right to conclude contract for a new term; a right to lease is also not retained at transfer of property right for a subject of lease from the lessor to a third party.

In addition, other federal statutes saved norms that do not fit into the generated registration system including those relating to the following transactions:

  • mortgage contract;
  • contract of joint construction;
  • water management contract.

All three of these types of contracts as well as lease contract are the basis for encumbrance of the main property right. Therefore, a requirement of registration of these contracts does not violate logic created to date of the system of state registration of rights, which provides public information.

Grounds for finding transactions invalid and the consequences of the invalidity of transactions

Federal Law of 07.05.2013 № 100 -FZ, which entered into force on September 1, 2013 has radically changed provisions of the Civil Code on invalidity of transactions. Previously, presumption of invalidity was applicable in relation to transactions, which did not conform to the requirements of law. Only in cases specifically mentioned in the law such transaction were acknowledged voidable when to invalidate it was possible only by court order. The new version of article 168 of the Civil Code fixes opposite rule - a transaction is voidable unless the law provides otherwise. This measure is aimed at strengthening stability of transactions in order that the will of the parties expressed in transaction could not be acknowledged as false on formal grounds. However, we should not assume that the establishment of the presumption of voidable transaction gives court unusually broad powers in the matter of establishing invalidity of transactions and application of consequences of such invalidity. According to the new rule power of the court to apply such measure is limited - before the court was entitled to apply consequences of invalidity of transaction on its own initiative. The Concept criticized such broad powers of the court as inconsistent with the nature of civil relations, based on freedom of will of the parties. Requirement to apply consequences of invalidity of transaction is a subjective right of the party to the transaction and such consequences should be applicable only at the request of parties to the transaction.

Therefore, the Civil Code as amended by Law № 100-FZ limits powers of the court to apply consequences of invalidity of transaction to those cases where it is necessary to protect public interest.

May amendments to the Civil Code paid great attention to the principle of good faith in determining consequences of invalidity transactions. A norm was introduced stipulating that a person who knew or should have known of the grounds for invalidity of a voidable transaction after finding such transaction invalid is not considered not to be acting in good faith. If a person declares of invalidity of transaction and when his behavior gives rise to other persons rely on validity of transaction, his application of invalidity of transaction has no legal significance. In international law this rule is called the rule of estoppel and is one of the universally recognized legal principles governing commercial circulation. Moreover, innovation was a provision for recovery of transactions: validity of transaction can not be disputed by a party which is evident from its behavior of its will to keep power of transaction on the grounds, which the party knew or should have known at manifestation of its will.

The law substantially revised provisions on invalidity of transactions committed under influence of delusion. A criterion of materiality delusion was introduced that allows dissociate delusion having legal significance for validity of transaction from those not having any. Those delusions are considered to be significant, where a party to the transaction reasonably and objectively assessing the situation would not have effected the transaction, if it had known about the actual state of affairs. It was stated in details what exactly mistakes can be found to be significant:

1. a party made obvious lapsus linguae, clerical, typographical errors, etc.;
2. a party is mistaken concerning the subject-matter of transaction, in particular those of its qualities, which in circulation are considered as significant;
3. a party is mistaken about the nature of transaction;
4. a party is mistaken concerning a person with whom it enters into the transaction or a person associated with the transaction;
5. a party is mistaken as to the circumstances which it mentions in its will or from the presence of which it clearly to the other party comes from, making the transaction.

It was separately stated that delusion regarding motives of the transaction is not significant enough for invalidation. In addition, the transaction may not be invalidated if a party to a transaction, which was in delusion, expresses its consent to preserve the transaction.

Due to the fact that general part of the Civil Code was supplemented with a provision about consent to make transactions previously sporadically enshrined in special laws a set of uniform rules for determining the consequences of non-compliance with rules on consent to enter into a transaction. A transaction made without proper consent is voidable, except in cases where the law implies that it is a void transaction. Persons whose consent to make the transaction had to be requested have a right to submit a claim to find such transaction invalid, i.e. persons whose rights have been violated due to effect of the transaction without necessary consent. Finding the transaction with such a base of depravity invalid is conditional upon evidence of the fact that the other party to the transaction knew or should have known there was no consent at the time of the transaction. A person who consent under law to commit voidable transaction is not entitled to dispute it on the grounds of which such person knew or should have known at the time of expressing consent. The above described principle of good faith has found expression in the two latter provisions of the Civil Code.

An innovation was the norm on invalidity of transaction in respect of property, disposing of which is prohibited or restricted. There are numerous examples of prohibition or restriction of civil turnover of things in legislation. For example, collateral requirements inextricably connected with personality of creditor are not allowed, in particular claims for alimony, compensation for damage to life or health and other rights, assignment of which to another person is prohibited by law . A person who made unauthorized construction does not acquire right to it and has no right to dispose of construction - to sell, grant, lease, and execute other transactions. A concessionaire is not entitled to alienate and pledge a subject of concession contract. The logic of the legislator is that these restrictions constitute publicly available information, therefore, party to a transaction may freely consult with it and is not entitled to rely on its ignorance at entering into a transaction. Due to these considerations the transaction under specified grounds of depravity are considered to be void under law regardless of the parties’ will.

A norm of voidable transactions made by representative or person acting on behalf of a legal entity without a power of attorney to the detriment of the principal was introduced. Finding of such transactions void also depends on proving that the other party to the transaction knew or should have known about the apparent damage to the represented person or legal entity. The law № 100-FZ does not contain criteria for classifying damage to the explicit; however, this matter is left to the discretion of the court. One of the versions of the draft of amendments to the Civil Code represented by the Council for codification and enhancement of civil legislation under the President of the Russian Federation in December 2010 contained a provision, under which extremely unfavorable conditions of the transaction are assumed (until proven otherwise) if the price or interest rate other compensation transferred to the injured twice or more exceeds to what provides the other party to the transaction. Chances that this approach will be used in law enforcement are great. A right to dispute transaction with such a base of depravity has a represented person or a legal entity in court to which the damage had been made and only in cases expressly provided by law; this right applies to third parties acting on behalf of the represented person of the transaction.

In general the rule, which limits range of persons, empowered to litigate the transaction on the basis of their legal flaws is typical for provisions of Law № 100-FZ. As mentioned above, the purpose of these changes – to increase stability of civil turnover.

Editorial changes were made to article on transactions made under influence of fraud, violence, threat . It was clarified that deliberate omission of the circumstances, which the person was to report about bona fide, which was required of him under terms of turnover is also considered a deception for the purposes of this article. Level of responsibility of the guilty party was significantly reduced. Previous version established that if the transaction is found invalid the injured party shall be returned by the other party all it received under the transaction; and the property received under the transaction by the injured shall becomes income of the Russian Federation. As amended by Law № 100-FZ the Civil Code does not contain such a rule: instead a reference was made to article 167 as a consequence of invalidity of transactions referring to bilateral restitution, i.e. return of everything resulting from the transaction the parties received to each other. By this the Law implements provisions of the Concept of the need to limit exemption into the state income of everything received under the transaction to those cases where a particular publicly unacceptable act of property does not receive adequate sanctions in criminal or administrative law.