Office for Sell... And 1/258 of Elevator

SAC RF changes rules of the game for commercial real estate market.

Elevators, attics, basements, halls, stairways and stair flights, roofs, building facades, heating, power and water systems – all of those are properties intended to serve all the apartments in an apartment building or all the premises in a non-residential buildings such as office, commercial and industrial buildings. And if the law explicitly provides that in an apartment buildings these properties are owned by all the owners of the apartments in the building as tenants in common, there is no such provision made for commercial real estate. Often these properties are registered as separate properties owned by particular title holders. In July 2009 the Presidium of the Supreme Arbitrazh Court of the RF cardinally changed this practice: from now and onward elevators, halls and other properties can not be owned by one person and must be jointly owned by all of the owners of the premises.

What are the owners of the commercial real estate to expect in connection with the changes in the judicial practice?

Differences in approaches to common property in a residential buildings and non-residential buildings. Which way it was before 2009?

The Russian legislature makes a lot of fundamental differences in the legal regime for residential buildings and that for non-residential ones. One of them relates to common property in these buildings.

For residential premises (more specifically – for apartment buildings), the law specially provides that property in common use in such buildings is owned by all of the owners of the apartments in this building as tenants in common (Art. 289, 290 of the Civil Code of the RF, Art. 36 of the Housing Code of the RF). Load-bearing structures of a building, mechanical, power, sanitary-engineering and other types of equipment serving more than one apartment and common premises of the building: halls, stairways and stair flights, technical basements and attics, elevator shaft – all of those are common property. Furthermore, it is impossible to dispose of a share in the common property apart from disposition of an apartment.

There are no such rules provided for non-residential premises. Until mid-2009 the arbirtazh practice was unambiguously supporting the point of view according to which in non-residential buildings the regime of tenancy in common does not apply by default to property in common use, as opposed to residential buildings. This property can be owned by one particular person. Therefore, it was a common situation when some premises in a non-residential building (offices, warehouses) were owned by one person while the common property, including halls and stairs were owned by other persons. Moreover, the right of ownership in such serving space was registered in the Unified State Register of Rights to Immovable Property and Transactions therewith. They were objects of purchase-sale and other transactions. The owners of such premises usually were charging other owners for use of halls and stairs, as well as their maintenance, including cleaning, lighting, etc.

Apparently, such difference in legal regime for residential premises and that for non-residential premises is unassignable to the difference in the intended use because the owners of of both non-residential and residential premises are facing the same problems related to use of the common property in the building regardless of whether the premises are intended for intended for dwelling purposes or not. The common property both in residential and non-residential real estate needs to be maintained (operating repairs, capital repairs, cleaning), and the profits from its use need to be distributed (for example, profit from advertising on the building facade).

Premisses for change in the regime of common property in non-residential real estate

It is clear that just like for any other case the conflicts are inevitable in operating non-residential real estate. The owners of particular offices, warehouses and production spaces considered that the owners of the common property are charging too much for use and maintenance of the common property. Moreover, when disposing the common property objects (roofs, walls) to use of the third persons, for example, positioning of advertising, they are lining their pockets. In their turn, the owners of the common premises also were discontented that the owners of particular premises were refusing to pay for the use of the common property, they asserted that they are incurring losses from maintaining this property.

Dwellers of an apartment buildings decide on all the issues related to administration of the common property on general meetings of owners. The housing legislature provides that decisions of the general meeting are obligatory for all the owners, including those who voted against.

Owners of a non-residential building may build normal relationships by concluding agreements concerning the common property. As appropriate it could be the premises lease contracts and easement agreements (agreements concerning restricted use of real estate property with or without fee provision).

However, the possibilities for building normal effective relationships between the non-residential real estate owners are not obvious even for some lawyers. Thus, the leading Russian lawyers – authors of the Concept of Development of Civil Legislation on Real Estate Property (adopted on December 15, 2003 at the meeting of the Advisory Council for Codification and Improvement of Civil Legislature at the Seat of the President of the RF) – assert that the only admissible solution which could ensure the interests of the building premises owners, would be introduction of the regime of tenancy in common for common property.

However, at all events, even making allowance to this position the following should be admitted. It is up to the rule-maker to opt for the solution in this issue, by amending the law the legislator could equalize the regime of common property for residential and non-residential buildings.

New regulation for non-residential real estate property regime

Nevertheless, ahead of the legislator, the Supreme Court of the RF on his own initiative decided to "improve" the law by available means and on the same page reverse the entire practice established in the field of application of legislation on non-residential real estate property. In subpara. 4, para. 1 of its Ruling № 64 of July 23, 2009, the Plenum of the SAC of the RF in imperative manner and without making any reserves declares that the owner of a separate premise in a building always is a tenant in common of the building's common property.

The statement of this motivation is quite curious, it is provided under subpara. 3 of the same paragraph. The highest judicial instance has considered that in view that in this situation there is an absence of of rules regulating relationships concerning title to and use of common property in non-residential buildings, there is a legal deficiency which can be filled by application by analogy of the rules provided for residential buildings.

This motivation is unsound from the two points of view at the same time.

First, there is no a gap in law in this case: general rules on grounds for emergence of the right of ownership shall apply in absence of special rules. And these rules do not provide for a grounds for emergence of the right of ownership in non-residential building common property. Furthermore, since the adoption of the Part I of the CC of the RF, the absence of special rules has never obstructed the courts to consider cases concerning common property in a non-residential building, and all at once, after 15 years, the SAC finds a legal deficiency. Unfortunately, we do not dispose of the preliminary materials of the Plenum, therefore, we are unable to say what was the information which made the Plenum conclude there is a gap in regulation.

Second, even if there is a legal deficiency, it can be filled by application by analogy of just those rules which in their nature do not exclude their application to other relationships. It should be admitted that from the substantive point of view the rules providing for the regime of tenancy in common for common property in building are not in conflict with the nature of the relationships concerning the use on non-residential buildings. At the same time how was it possible to ignore the expressed will of the rule-maker to provide the regime of joint ownership for the common property in residential buildings solely? The literal wordings of Art. 289 and Art. 290 of the CC of the RF are evidencing the legislator's intent to limit the scope of these rules to residential buildings only. It is the common property in apartment buildings they are concerning, and they are placed in Chapter 18 of the CC of the RF titled as "Right of Ownership and Other Rights in Rem in a Residential Premise".

Finally, the ruling of the Plenum reverses all the practice established by the arbirtazh courts themselves, which, without any doubt, authorized the registration of a particular person's right of ownership in common premises in a non-residential building, even though this person did not have any right of ownership in any other premises in this building. Neither the possibility for civil circulation of such premises was causing any argument: assignment for use to the third persons, mortgage, etc. The same could be said of the Federal Registration Service.

There are some doubts as for the expediency of the decision chosen by the Plenum from the economic point of view. Thus, for the purpose of sale of a separate apartment in an apartment building, the cost estimate of the common premises and other common property in a non-residential building was initially included in the value of a separate apartment. On the other hand, for the purpose of sale of a premise in a non-residential building, the cost estimate of the common property in a non-residential building was not taken into consideration when computing the value of a separate premise. Accordingly, without paying anything the owners of such separate premises overnight have become joint owners of the common property in a building. Therefore, the Plenum of the SAC has created the situation in which the owners of separate premises are unjustly enriching in an amount equal to the cost of the respective share in common property.

What are the owners of a non-residential real estate property to expect?

Whatever the case, however with all the ambiguity of the decision chosen by the Plenum of the SAC we cannot ignore it, therefore we need to understand what are the consequences of its materialization.

1. Reciprocal claims of the owners of separate premises and former owners of common property.

First of all, even now some of the premises owners intend to bring lawsuits claiming refund of the sums they have already payed to the owners of the common property and managing companies as common property maintenance fee, since as it follows from the Ruling of the Plenum, they do not have right to charge such fee. Moreover, the owners of separate premises may claim a portion of revenues incurred from granting the common property to the third persons, for example, grant of use of roofs and walls for advertising.

On the other hand, it is well to bear in mind that according to Art. 249 of the CC of the RF all the co-tenors in common are bearing its repair and maintenance costs. As far as formally these costs were borne by the person registered as the owner of the premises, this person may claim the owners of separate premises to refund the respective portion of his costs.

Also it is possible to expect unjust enrichment claims filed by the persons registered in the Unified State Register of Rights to Immovable Property and Transactions therewith as the owners of the common property against the owners of separate premises to collect the amount equal to the value of the common property being owned by those persons. Nevertheless, the prospect for such claims to be awarded would seem quite phantasmic. Technically, the SAC did not set a new rule (although as a matter of fact it is what it did), it just gave interpretation to the rule which already existed. And if so, it is reasonable to expect that the court considering such case would pronounce something like the following: when selling separate premises in the past, the parties had to purport that the common property would be transferred to joint ownership, and if so, the value of share in joint ownership in such property had been already included in the value of a separate premise. Notwithstanding that such reasoning is fairly sophistic because every one knows that the previous practice was not assuming the transfer of common property to joint ownership of the premises owners, the probability it would be applied by the court is more than sufficient. Due to this reason the chances to win a case in Russian courts are rather few, and probably for compensation of losses it might be necessary to apply to the European Court of Human Rights.

There might be one more negative consequence for the owners of common property, being more specific, the transfer of the right of ownership in common property to all the premises owners means automatic invalidity of all mortgage agreements which were secured by such property. Invalidity of mortgages is preconditioned by the following. First, the person who mortgaged the property and the owner of property are not the same person; second, such common property being jointly owned by the premises owners, is withdrawn from circulation, it is not subject to disposition and, therefore, mortgage separately from the premise in this building. Loss of securing will entail invalidity of the mortgage contract which was secured by such property. In its turn, it may cause devastation of the persons registered as the owners of common premises.

2. New procedure for property administration.

If previously the issues of management and renovation of the building common property were handled by the owner only, from now and onward this system of administration of the building common property is no more applicable, and if there are more than one separate premises owner, they should address these issues conjointly.

In para. 6 of the Ruling the Plenum of the Supreme Artbitrazh Court pointed that the usage regime for the common property (without reservations to residential or non-residential building) is determined according to the procedure provided under Art. 44-46 of the HC of the RF. Therefore, henceforth the rules of the housing legislation on general meeting of the premises owners in an apartment building apply to non-residential buildings, incredible though it may seem.

3. Registration of rights to commercial real estate property.

The owners of the separate premises and the owner of the common property as particular owners appeared in many cases because the developer who constructed the building often was registering the right of ownership to it, and later, when there was a necessity to sell a particular premise, the developer was allotting the respective premise as a separate property and selling it. At the same time the building as a separate real property continued to exist. As a result, there could be a situation when the owner was actually holding only the building common property – common spaces, walls, roofs, etc. Now, when the common property is deemed to be jointly owned, such preservation of building as a separate property when allotting premises does not make sense anymore. Accordingly, the Plenum of the SAC in para. 8 of the Ruling points that allotment of any premise within the building terminates the right of ownership to building as a separate property, and rights of ownership to separate premises in a building should be registered. And inversely, in case if the same persons purchases all the premises within a building he is authorized to consolidate the premises by registering the right of ownership to the building as a whole. And as follows from para. 3 of the Ruling, tenancy in common rights to common property within a building arise irrespective of any registration.

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