Unlike in the U.S., in Russian real property law, the title conveyance documents are not divided into a contract of sale and deed. In order to convey the title, a buyer and seller must conclude a contract of sale (or some other type of agreement) and submit it to the title registrar along with the application form, signed by both parties. The title is deemed passed to the buyer when it is recorded by the the title registrar, and not when the contract is signed. However, if the seller evades the filing of a signed contract to the registrar, the buyer may bring a civil action of a specific performance against the seller in a court of law (either general jurisdiction or a commercial court).
The parties may employ a notary for handling all the formalities including filing a contract to the title registrar on behalf of the parties. In some instances, a notarial certification of a contract is mandatory (in case of sale of interest in joint property, sale of property owned by a minor or incapacitated, etc.).
There are numerous risks associated with selling of Russian real estate remotely by means of a power of attorney. Verification of a power of attorney executed in a foreign country complicates due diligence of the deal for both the buyer and regulatory authorities. That is why, from a marketing standpoint, selling real estate remotely is extremely difficult. The parties' legal costs, the length of the negotiation process, and the price of the real estate may all be affected by these factors. Additionally, potential litigation between the parties will be taken as a red flag for future potential buyers. As a result, when structuring the deal, it is crucial to establish and uphold a general balance of each party's interests.
Below is a blueprint for the sale and purchase of a residential property (apartment) located in Russia and owned by a tax resident of the United States of America. This section is focused more on the risk mitigation by a seller. For buyers, use the buyer’s investigation checklist.
Step 1. Selection of an attorney-in-fact and real estate broker
Under the Civil Code of the Russian Federation (CCRF), in general, any capacitated person can represent another person in civil matters if authorized under power of attorney regardless of relativeness status, citizenship, place of residence or other parameters. As a basic rule, civil capacity commences, when a person achieves the age of majority, that is, eighteen years. CCRF, §21(1). Legal capacity of a foreign person is determined under the law of the country, where such person is domiciled. CCRF, §1197. In some instances, legal capacity may be judicially limited due to person’s mental or physical disfunctions as well as in cases of gambling addiction.
A representative under a power of attorney (who is normally called an attorney-in-fact or agent) may not enter into deals with himself on behalf of the person, whom he represents (the principal). This means that an attorney-in-fact will not be able to convey the principal’s real property to himself directly, but there could be some risks of transferring the title to the third-party nominee. Also, the attorney-in-fact cannot make deals with another person, whom such attorney-in-fact also represents under the power of attorney, provided an exception for commercial representation. CCRF §182(3).
CCRF allows that one or more principals may designate one or more attorney-in-fact in the same power of attorney. CCRF §185(1),(6). As fairly common situation, an American owner of a Russia-located apartment has elderly relatives who, due to their senior age, are unable to handle the closing on their own. In this case it is expedient to hire a professional realtor who would do pre-sale.
When using the model of multiple representatives, it is advisable to consider a clear separation of the functions of each attorney-in-fact. It is not recommended empower of an unfamiliar person (including realtor) with the conveyance and payment powers. These authorities shall be vested solely to the people whom the principal fully trusts. The function of the realtor should be limited to listing and showing activities. The closing should be carried out by a "primary representatives" (relative, friend or other person with whom you have a long history of interaction).
As a matter of practice, I recommend empowering primary attorneys-in-fact with controlling powers over realtors and lawyers, namely the right to terminate the representation of the realtors and lawyers at any time for no cause. Although it is not a settled issue, there are all reasons to establish such controlling powers under the provisions of Chapter 10 of CCRF.
In the expert community, there is an opinion that it is advisable to execute a separate power of attorney to each attorney-in-fact in order to limit information about the actual powers of other attorneys-in-fact before the conveyance is consummated. Arguably, it could reduce the risks of professional abuse by realtors. I consider such approach an untenable, since in most scenarios the realtor is able to learn the content of the power of attorney from alternative sources. Secondly, conscientious realtors with a stable reputation are unlikely to handle a sale until fully informed of all details and formalities.
The realtor must be thoroughly investigated. It is recommended to check:
validity of internal passport (via the governmental recourses);
litigation history in all places of residence and registration and under all previous names;
history of enforcement proceedings in all places of residence and registration and under all previous names;
history of insolvency/bankruptcy proceedings in all places of residence and registration and under all previous names.
Even if there is the slightest suspicion of the realtor's integrity, it is recommended to search for an alternative. Do not be too lazy to use social networks. Ask direct questions:
have you ever changed your last, first or patronymic name?
how long have you been in the real estate business?
what companies did you work for?
do you have insurance?
do you belong to any associations?
how many closings have you made in the last year?
do you have an experience of representing foreign clients? Do you have clients from USA? If so, can you provide their recommendations?
All relations with the realtor should be documented. Carefully read all the clauses and discuss them with your lawyer. The realtor should make it clear what result he or she is going to provide you, how much it will cost and how the fees are calculated.
After the candidacy of each attorney-in-fact is approved, it is necessary to execute a power of attorney and collect all consents.
Step 2. Execution of a power of attorney
The legal aspects of drafting a power of attorney for the sale of real estate in Russia are detailed in my blog. Here, I would like to review a power of attorney as a tool of a sales strategy. In Russia, a power of attorney is the first official document that buyers prefer to investigate. From the power of attorney, a buyer can garner a lot of information about both the title and the selling authorities of the attorney-in-fact. Sometimes, these authorities can be formulated in a broad form (say, “I trust to sell property for a price and on terms at the discretion of my attorney-in-fact”). But more and more often, sellers prefer to detail the powers. They may establish the selling price of property, the payment terms, other essential conditions right in the text of the power of attorney.
I have always followed the approach of maximum desalinating of the authorities in the power of attorney. A detailed wording of all powers that present importance for the seller will be a good warranty against possible abuses. At the same time, spelling of a fixed price in a power of attorney can significantly reduce of a bargaining leeway, since, as a rule, a price is worked out during negotiations between the parties. Normally, a seller seeks to establish maximally high price, while a buyer tries to get the biggest possible discount. Spelling the minimum price in the power of attorney, in turn, deprives the seller's agents of possibility to sell the property at a higher price. For the same reasons, the spelling of an acceptable price range does not resolve this problem.
I see a way out of this dilemma in drawing up two separate powers of attorney. The first power of attorney authorizes the agents to negotiate, exchange and collect documents and information. This is so-called “pre-closing authorization”. Also, such power of attorney may include the essential terms of a contract between the principal and the realtor. The second (main) power of attorney established closing authorities. That power of attorney is communicated to the buyer after entering into a preliminary agreement. It states the price and reflects all the essential terms of the contract of sale.
Step 3. Preliminary contract
The first and main function of the preliminary contract is to create a roadmap for further actions of the parties. After a buyer receives a power of attorney that establishes an agent's authority to sell, the parties elaborate a certain action plan, which describes further actions, its timeframe and responsibilities of each party.
The need of separating the contractual work into preliminary and main contract is largely due to the desire of each party to approach the closing with the thorough understanding of the process, counterparty, rights of each party and all potential risks. The second function of the preliminary agreement is the legal formalization of due diligence. Since the disclosed information can be used for illegal purposes, it is advisable to establish in the preliminary agreement the mode of disclosure and means of protection of information, as well as liability of the parties and their affiliates for improper use. Also, in the preliminary contract, the parties may spell costs distribution provisions regulating the distribution of closing and termination (in case the parties do not reach an agreement).
As a part of a preliminary agreement, the parties exchange copies of title documents (title certificates, reports from the federal survey system), copies of identifications, bank account statements (from the buyer), certificates from medical institutions (psychiatric dispensary and drug-addiction dispensary) confirming the absence of medical obstacles to conclude the transaction, as well as certificates from the arbitration court confirming the absence of bankruptcy/insolvency proceedings in respect of each party.
Furthermore, at the stage of the preliminary agreement, the parties elaborate on payments terms. For example, the parties may stipulate an escrow opening terms in a preliminary agreement to ensure that the seller will receive his or her money upon transferring the title. Under the escrow rules, the issuing bank acting on behalf of the payer, undertakes to make payments to the recipient of funds (the seller) or take other actions to release the escrow deposit in accordance with the terms of the escrow agreement. CCRF §867(1). In most Russian banks, it is impossible to open escrow account prior the contract is signed (either preliminary or main). That is why the conclusion of a preliminary contract will be appropriate.
Step 4. Necessary consents and approvals
Spouse consent. If a seller was married at the time of the acquisition of a title to real property, in addition to a power of attorney the seller must obtain a consent for sale from his or her spouse. If the marriage was entered into after the acquisition of the property, then it is expedient to prepare a statement that the property was acquired before the marriage and is not held in jointly ownership. In case of exchange of one real property for another, each party to the transaction must provide such consent or statement.
The consent of the spouse must contain information about all prenuptial contracts entered into by the seller with its copies attached, or contain a statement that the seller did not conclude marriage contracts. The Consent must be notarized and apostillized.
Permission from the guardianship authorities. If the seller is a minor or an adult but incapacitated person, the sale of real property is possible after obtaining a consent from the guardianship authorities.
Rejection of the pre-emptive right, CCFR §250. When selling an interest in joint ownership to an outsider, the other co-owners have the pre-emptive right to purchase the share being sold at the price for which it is being sold, and on other equal terms. This situation is most common when selling rooms and shares in communal apartments, as well as when one of the heirs sells his share of the inheritance to a third-party buyer. It is advisable to start processing the refusal only after the parties to the transaction reach an agreement on the price and other essential terms. The refusal must be notarized, and if the person making the refusal lives abroad, it is also subject to apostillization.
Step 5. Investigation of a buyer and termination of residence registration
Undoubtedly, a buyer is exposed to significantly greater risks when purchasing real estate from a seller, represented by an agent under a foreign power of attorney. Nevertheless, here I would like to mention the essential risks of the seller. They are
possibility of forgery of title documents, provided to a buyer;
waste of time;
spoiling the title history with records of litigations.
It is expedient for a seller to check the following documents and information regarding a buyer:
passport: its validity shall be checked on the website of the Ministry of Internal Affairs, and compared with other identity documents (foreign passport, driver's license, others);
information about judicial, bankruptcy and enforcement proceedings against a buyer and his or her representatives;
public data check: social networks, information on the Internet;
buyer's networks: research on buyer's employer, business partners, neighbors;
no-records certificate from neuropsychiatric and narcological dispensaries from all places of residence.
bank account statement (shall be obtained in bank in person by both parties).
Carefully check the stamp in the passport of a buyer and his or her representative. It must show the date of registration of the residence. If the date is within a three-year period, ask where the person previously lived. Perform your check on all identified addresses.
Don't shy to ask for and verify referrals. As in the case of choosing a realtor, any doubt, even intuitive, about the identity of the buyer and his or her good faith should become the basis for discontinuance of further dealing.
After a full check of the counterparty and reaching an agreement to proceed to the conclusion of the main contract of sale, the seller should deregister all persons registered in the housing for sale.
Step 6. Openning escrow
After the parties have investigated each other, they normally proceed to opening an escrow account. As many other activities of estate contracting, an escrow account should be opened in the presence of both parties.
There are several types of escrow. Generally, I recommend setting up an irrevocable covered (deposited) escrow account. Presently, all escrow accounts are irrevocable. Covered (deposited) is an escrow account, the amount of which is transferred in full to the coverage account in the beneficiary's bank at the expense of the payer or loan provider (a financial institution).
An escrow mechanics is as follows:
the parties enter into an agreement on payment terms (such agreement may be a part of either preliminary or main agreement);
the buyer deposits money on a savings account and opens an escrow;
the seller conveys the title to the buyer and then provides the proof of conveyance to the bank where the escrow is opened;
the bank verifies the conveyance documents and releases the money to the seller.
Due to the legal restrictions in the Russian law on currency regulation and currency control, at present, an escrow deposit may not be released directly to an account, opened with a foreign financial institution. Therefore, if the seller does not have a bank account opened with a Russian bank, the seller's representative should also open such account. It may be opened either in the same bank where the escrow account is opened, which is preferable in most instances, or any other bank.
The seller should make inquiries in advance about the rules for the execution of an escrow at the bank servicing the it, and request an exhaustive list of documents required for opening an escrow. The seller should also check the wording of the main power of attorney pertaining the banking powers on escrow (the text of the main power of attorney should be negotiated with the bank in advance).
Step 7. Execution of a contract of sale
At this stage of the transaction, the main goal is to enter into an agreement precisely on the terms agreed during the negotiation process: first, terms established in the main power of attorney, then on the terms of the preliminary contract, and finally, on the terms agreed upon in the process of further negotiations.
The place, time and conditions under which the contract is signed are of great importance. Unfortunately, there are thousands of ways to make the final version of the contract (the one that will be signed by your representative at the closing) different from previously agreed version. All smallest details are important, even the question on whose printer it was printed out. In the law enforcement practice, there are cases when in the last minute the buyer replaced the page containing the description of real estate and its price. The unsuspecting sellers did not consider it necessary to re-read the text of the contract in its entirety. As a result, the property was sold for a ridiculous sum. It is extremely difficult to challenge such illegal actions in court, since the courts for the most part rely on the principle of freedom of contract, which allows the parties to conclude a contract on any terms including inadequate consideration.
If the material terms of the contract are spelled out in the power of attorney and the preliminary contract, it will significantly reduces the risk of fraud. Although the notarization of the contract is not required, it may be helpful since Russian notaries are authorized to make legal expertise of all the formalities, as well as the legal capacity of the parties. Moreover a notary may file a title transfer application to the registrar office for registration.
When signing a contract not in the pretense of a notary (even if the agreement is signed in a bank or in a realtor's office), I recommend making a full video recording of the signing.
Step 8. Registration of title conveyance
If a contract of sale is notarized, then the application for title conveyance registration is filed by the notary. Otherwise, the parties are obliged to do it by themselves by jointly submitting an application to the multifunctional center or the territorial office of Rosreestr.
When submitting an application by the parties, as well as at the signing stage, make sure that the text of the contract you are filing is the text that was actually signed (without any modification). Also, approaching this stage, I recommend sellers to check if the power of attorney to a representative contains the authority to suspend and terminate registration actions - in case it is necessary to urgently suspend the execution of the transaction.
Step 9. Release of escrow funds
In order for the escrow deposit released, your representative needs to submit the necessary documents to the issuing bank (executing bank). As a rule, this is an extract from the title registry and a copy of the contract marked by Rosreestr. Approaching this stage, the seller should check the wording of the powers of attorney regarding the escrow, the authority of the representative to stipulate the account to which the escrow deposit to be released.
In the absence of a trust relationship between the seller and his representative, I do not recommend establishing in the power of attorney the authority of the representative to stipulate a bank account for releasing the escrow deposit. If such a need arises, the appropriate authority may be given separately.
Step 10. Tax compliance & double taxation
The tax consequences of selling real estate located in the territory of the Russian Federation vary depending on two key factors:
the status of a tax resident of the Russian Federation;
duration of ownership of real estate.
Starting January 01, 2019, individuals who are non-residents of the Russian Federation for tax purposes, do not have to pay personal income tax when selling real property that was in their ownership for more than the minimum established period of ownership. Currently, this period is five years, but if the property was acquired before January 1, 2016, then three years (§217.1(4) of the Tax Code of the Russian Federation). As a general rule, property acquired during marriage is joint property, unless a different regime of ownership is established by an agreement. Therefore, it does not matter if the property is registered on the name of one or both spouses, and also which spouse contributed money when acquiring the property.
If the taxpayer sells the property before the specified period, then the income from the sale of real estate will be taxed at a rate that depends on the status of a resident / non-resident of the Russian Federation. For a resident, it is subject to taxation at a rate of 13%, and for a non-resident - at a rate of 30% (§ 224(1-3) of the Tax Code of the Russian Federation). According to the position of the Federal Tax Service, a non-resident is not entitled to apply a property tax deduction, as well as reduce the income received by him from the sale of property by the amount of expenses associated with its acquisition, if he owns real estate for less than the period indicated above.
For a person who is a US tax resident, the sale of Russian real estate means that such person must:
1) pay tax in the Russian Federation;
2) obtain a copy of the tax return for the year in which the real estate was sold;
3) obtain a certificate of absence of tax deficiency for the relevant tax period;
4) file Form 8833 with the IRS stating that the taxpayer is entitled to have preferential tax treatment under the Treaty between the Russian Federation and the United States of America. Keep in mind that the tax benefits provided for in US international treaties, with few exceptions, do not work automatically. To use them, a US resident taxpayer must go through a declarative procedure.