In practice, the real estate requires the following steps to be completed. So, the investor should keep them in mind when planning to deploy production facilities.

• Letter of Intent

This step is optional but very important in practice. The investor and the real estate owner execute a letter of intent, in which they agree on material terms and conditions of the transaction and lay down key rules for subsequent interaction. More specifically, the investor and the real estate owner agree on the list of documents and steps that each of the parties shall make and take. Besides, it should be noted, that Russian law sets liability for conducting negotiations in bad faith and/or for cancelling negotiations. Such liability may be limited by a letter of intent.

• Due Diligence in regard to the Real Estate to be Acquired

When acquiring real estate, it is very important for the investor to ensure that the title to the real estate can be duly transferred and that it will be able to use the land plot, buildings and structures for the anticipated business purposes. To that end, the investor instructs consultants to conduct a due diligence, during which the following key issues will be checked in the first place:

• whether the seller acquired the real estate legitimately;
• third-party rights to the real estate;
• the type(s) of permitted use;
• town-planning restrictions and restrictions imposed by land law; and
• any pending judicial disputes or violation elimination orders issued by governmental authorities following violations committed in the course of use/operation of the real estate.

• Entering into and Structuring the Agreement

The real estate lease or purchase agreement is made in writing, as a single document signed by both parties. Generally notarization of the transaction is not required and is rarely used in practice.

In real estate transactions, the essential elements of the agreement are, according to law, the subject matter of the transaction and the price; those must be agreed by the parties. At the same time, in practice the parties also agree on other conditions to protect their interests.

The agreement shall contain the exhaustive description of the real estate so as to eliminate any possibility for a dispute between the parties regarding the subject matter of the agreement. It is usually enough to include into the agreement a cadastral number of the real estate of the plot, assigned to it in the state cadastral register.

In some cases, the parties conclude a preliminary agreement, which is binding upon them. Under the preliminary agreement the parties undertake to enter into the principal agreement by a certain date and to satisfy conditions precedent to concluding the principal agreement (such as releasing any encumbrance, changing the type of permitted use, cadastral registration of the real estate, or structuring the upcoming transaction in a certain manner).

• State Cadastral Registration/Registration of Title to Real Estate

The land plot, building or structure may not constitute the subject matter of a purchase or lease transaction unless they have undergone the State cadastral registration procedure and unless title to it has been entered into the Unified State Register of Real Estate (hereinafter the Register).

Therefore, if title passes to another person under a purchase agreement, this fact shall be entered into the Register. Lease agreements with effective period of more than one year shall also be registered with the state. State registration does not affect the validity of a lease agreement if the parties implement it properly. However, in the absence of State registration of a lease agreement the lessee may not invoke before interested parties its pre-emptive right to renew the lease agreement, nor may it retain the agreement upon the passing of title to the leased property.

The state cadastral registration and entry of title into the register are carried out in accordance with clause 1of article 16 of the Law on Registration[1] and completed within the following time periods:

• State cadastral registration: 5 to 7 business days;
• entry of title into the Register: 7 to 9 business days;
• concurrent State cadastral registration and entry of title into the Register: 10 to 12 business days.

[1] Federal Law No. 218-FZ dated 13 July 2015 “On State Cadastral Registration of Real Estate”.

The process of acquiring real estate from the state (or a municipality) has the following specific aspects:

• acquisition of title to land plots for construction purposes is prohibited. However, land plots may be acquired for purposes such as farming. Neither foreign individuals or entities nor Russian entities with more than 50 % belonging to foreign persons or entities may own agricultural lands. In acquiring agricultural lands, the acquirer should bear in mind possible pre-emptive rights of the State;
• the passing of title to, and the lease of, buildings and structures are carried out using a special bidding process or auction.

Insofar as the acquisition of title to real estate by way of an auction or bidding process is quite complexe, in practice foreign investors rarely acquire real estate directly from the state or municipalities.

A more common way to acquire title to, or to lease, land plots with support from the state is to enter into the respective transactions with managing companies of industrial parks partially owned by the state, or in special economic zones.

Acquiring the land for industrial construction purposes or acquiring completed industrial facilities in industrial parks and special economic zones (SEZs) has become the trend of the recent years. It has the following advantages:

• certain tax benefits;
• offering the land plots for industrial construction purposes; and
• the availability of engineering infrastructure, including transport infrastructure.

However, in order to deploy his manufacturing facilities in a SEZ or part, the investor has to obtain the resident status and enter into an investment agreement with the SEZ or local authorities, whereunder the investor assumes certain investment obligations, generally concerning the amount of investment, construction timeframes, and creation of new jobs.

Preparation of a construction design is conditional first of all on collecting source data for designing.

According to the Town-planning Code of the Russian Federation, design documentation is prepared on the basis of the developer’s technical design assignment, results of engineering surveys, and information contained in the area development plan of the land plot, subject to requirements of technical regulations and to technical conditions.

Therefore, the most important activities at the pre-project stage are:

• to draft a technical design assignment; the assignment is drafted by the developer or technical authority by engaging a design office;
• to conduct engineering surveys on the land plot;
• to obtain an area development plan of the land plot; and
• to obtain technical conditions for connecting the to-be-built facilities to utility lines.

The quality of source data is crucial to complying with the timings and ensuring the quality of the design. The agreement with the design office shall state the exact composition of source data, the party to the contract that is to collect them, and collection timeframes. The designer and technical representative of the client play the key roles at this stage.

• Requirements Imposed on the Designer

Design documentation is required to obtain the construction permit, which is a prerequisite to start the construction.

As a rule, design documentation for industrial facilities is prepared by contractors that are members of a self-regulated organization (SRO) working in the area of architectural and construction design. If the customer prepares design documentation itself, it shall be a member of such an SRO. However, it should be borne in mind that in certain cases (depending on the legal status of parties to the project) the design can be done by an entity that is not a member of an SRO. For instance, membership in SRO is not required for an entity that performs architectural and construction design as a subcontractor.

• Expert Review of Design Documentation

Design documentation for industrial facility is to be reviewed by experts. The main task is to verify its compliance with technical regulations. Design documentation may be reviewed by public authorities or private entities. In certain cases, for instance, if the facility is of sophisticated or unique character, the review shall be conducted by a State authority only. Construction works shall be performed only according to the design documentation that has obtained a positive opinion of experts and has been approved in writing by the client (technical representative).

The review period depends on the complexity of the facility but shall not exceed 42 business days.

A construction permit confirms that design documentation is in line with requirements laid down in the town-planning regulations, the area planning design, and the area demarcation plan, and that the capital facility may be deployed in the land plot in accordance with the permitted use of this plot and in accordance with other restrictions set applicable land and other legislation of the Russian Federation.

A construction permit grants to the developer the right to begin construction. Until a construction permit is obtained, construction is prohibited.

A construction permit is issued within 10 business days after submitting an application and all necessary documents (including a positive expert opinion on the design documentation).

Construction shall be performed only by an entity that is a member of an SRO working in the area of capital facilities construction. Alternatively, the investor may become a member of such a SRO itself to perform construction works using its own efforts.

Membership in an SRO is not required if total cost of construction works is less than 3,000,000 roubles.

Similar to the design phase, there is a number of exceptions: for example, if the contractor is a public entity, it does not have to be a member of an SRO.

• Construction Supervision

Both the construction project owner and the contractor are to carry out construction supervision over the works. A breach of technical standards requirements may entail administrative or criminal liability.

In practice, investors often engage dedicated engineering entities, that carry out construction supervision at the designing and construction stage. The technical representative shall be a member of an SRO specializing in the works that it is to supervise, i. e. engineering surveys, architectural and construction design, and construction. Unless the investor engages a technical representative, it will have to perform construction supervision functions itself; to do that, it has to become member of an SRO.

• State Construction Supervision

During the construction, competent state authorities exercise construction supervision by conducting scheduled and random inspections at the construction site.

By means of construction supervision the State is to ensure that materials used during building/renovation of a capital facility, the works performed, and the result of these works conform to requirements of the design documentation, including but not limited to energy efficiency requirements.

The state construction supervision results in an expert opinion on whether the built or renovated capital facility conforms to design documentation requirements. This document is issued by the construction supervision authority after the construction is completed and is a prerequisite to commissioning the facility.

• Obtaining a Commissioning Permit for the Facility

Commissioning permit for the facility confirms that the construction was completed in full and in accordance with the construction permit and design documentation, and that the completed facility conforms to requirements existing as of the date when the area development plan was issued, to the permitted use of the land plot, and to restrictions imposed in accordance with land and other legislation.

The commissioning permit for the facility is issued within 10 business days after an application and necessary documents are filed.

The commissioning permit is a mandatory document that serves as basis for State cadastral registration and State registration of the title to the built/renovated facility. A capital facility may not be used unless and until a commissioning permit is obtained.

Depending on the features of a specific facility, and the type of the manufacturing activity and equipment used, the following special permits/registrations and/or licenses may be required to operate the capital facility.

Licences:

• A licence to operate explosive-flammable and chemically hazardous industrial facilities, for instance, if the heat supply system uses gas equipment or if manufacturing involves storage of toxic substances;
• a licence to manufacture products, such as medical equipment and pharmaceuticals.

Permits/Special Registrations:

• A permit to operate power receivers. A business requires this permit in order to operate electric-power-generating equipment and power grid facilities;
• registration of lifting devices, such as cranes, with authorities of the Federal Environmental, Industrial and Nuclear Supervision Service; and

other special permits/registrations depending on equipment used at the industrial facility. For a list of necessary permits please contact lawyers and engineers.

Before discussing specific matters concerning a supply or purchase agreement, the governing law shall be determined, because many legal matters depend significantly on the legal order used. If the parties come to defining the governing law only at the final stage of negotiations, many matters may have to be renegotiated.

There are the following options to choose the governing law from, if the Russian market is concerned.

• Foreign law. Very often the foreign partner’s goal is to subject the Russian/foreign agreement to foreign law. This option is possible, but one should bear in mind imperative rules of Russian legislation that apply even in cases where the agreement is governed by foreign law. Such rules include but are not limited to rules of foreign exchange and anti-monopoly legislation.
• Russian law. This approach is often preferred by the Russian partner. Russian law is equally suitable for transactions made in the Russian market. However, in certain cases (for example, the guarantee regarding goods quality and liability) Russian law is less flexible and more focused on interests of the buyer. Therefore, the decision regarding the choice of governing law should be made only after a careful assessment of the particular case.

No matter whether you select foreign or Russian law, you should remember that foreign and Russia are parties to the UN Convention on Contracts for the International Sale of Goods. Therefore, this Convention is incorporated into national legal systems and prevails over domestic Russian and foreign law. If the only reference in the agreement is to the choice of Russian or foreign law, then the UN Convention on Contracts for the International Sale of Goods shall apply. To avoid this, you should select national law and exclude application of the Convention.

• Or, the agreement may be subjected to a third country law as a ‘neutral solution’. In practice, parties often opt for Swiss or Swedish law. Nevertheless, to choose this option a party has to engage additional experts in law and, therefore, incur additional expenses.

If no decision on governing law was made, then the governing law shall be selected according to the private international law (PIL), which is applied by the court competent to solve the case. For supply or purchase agreements that means that the governing law shall be the law of the party whose performance is crucial to the essence of the agreement. For supply or purchase agreements this is usually the law of supplier (seller).

Once the decision on governing law is made, the next step is to select the competent court to solve possible disputes.

• National Courts

Unless the jurisdiction issue has been provided for in the agreement, the general principle both in foreign and Russian law is that the competent court is the court at the respondent’s location. Therefore, in respect of claims against the Russian partner a Russian court will be competent. In Russia, economic disputes between entities are within the competence of arbitration courts, that is, state-run economic courts. A lot of foreign companies would prefer jurisdiction of foreign courts. Now, in the absence of international or bilateral treaties, the general rule is that the decisions of foreign courts are not recognized or enforced in Russia; nor are decisions of Russian courts in foreign. Therefore, in most cases jurisdiction of foreign courts is impractical.

• Arbitration

In international relations, arbitration proceedings are often preferred over proceedings in a court of law. Arbitration may be provided for in the arbitration clause in the agreement.

The advantage of arbitration courts over courts of law is that disputes are generally solved promptly, efficiently, and confidentially. Besides, arbitration courts usually employ arbitrators with vast practical experience.

However, there are some disadvantages as well. In arbitration, there is but one judicial instance: appeals or cassation are excluded. Besides, arbitration is quite expensive, and arbitrators and the parties are to gather at one venue. In case the parties do not voluntarily comply with the arbitral award, such an award is to be recognized, so as to be enforced, in foreign countries or Russia.  The general rule is that arbitral awards from member countries are recognized as parties to the 1958 New York Convention on Recognition and Enforcement of Foreign Arbitral Awards. State authorities may review only the formal aspects of the award.The majority of arbitration courts have developed standard arbitration clauses that may be included into an agreement. Usually these clauses lay down the number of arbitrators, the venue, and language of the proceedings. As a rule, there are three arbitrators, with each party appointing one arbitrator. These two arbitrators then agree on the third arbitrator, who will preside over the proceedings. In minor proceedings, one arbitrator is recommended if possible, so as to optimize expenses. Arbitration proceedings are not necessarily conducted at the location of the arbitration court. In certain cases, a neutral venue may be reasonable. Any language of the proceedings may be defined. However, it is advised to select the same language as the language of the agreement; otherwise there will be extra expenses and possible errors in translation. In selecting the language, one should also bear in mind that the agreement may be drawn up in any language. Nevertheless, in practice international agreements are typically drawn up in two languages (English and Russian). One should always lay down, which version prevails in case of conflicts.

Contents and essential terms and conditions of the agreement are agreed by the parties depending on the particular project. It should be noted that the agreement will also serve as the basis for import and custom clearance of products and equipment. For that reason, the subject matter of the agreement and performance under the agreement have to be defined as clearly and precisely as possible. As a rule, this is done by referring to a specification and other technical descriptions, annexed to the agreement. Besides, the agreement should describe the packaging, state whether the special package is required, and list the documentation to be delivered. Needless to say, a delivery to or from Russia entails more costs and difficulties than a delivery within the EU because in the former case a customs border is crossed. However, these difficulties can be avoided if the agreement defines exactly the objectives and obligations of each party. If the importer undertakes to complete importing formalities, the agreement should state exactly what certificates and documents shall be provided to him for that purpose.

Apart from performance under the agreement, it is important to state exactly the delivery timeframe and procedure. To further define the scope of delivery, the use of already-existing clauses (Incoterms or General Terms of Business) is possible and reasonable. Incoterms are used as a standard clause in international legal relations. They were prepared by the International Chamber of Commerce in Paris and govern issues of liability, transportation, and insurance. The actual version was presented in 2010.

General Terms of Business may be agreed under foreign law. The use of such Terms is not excluded under Russian law but is untypical in Russia. No legal framework is defined for them, and their contents usually do not undergo judicial review. Therefore, General Terms are not widely used in agreements governed by Russian law.

The agreement shall also include the purchasing price and the procedure for calculating and paying it. Accuracy in this matter will help to avoid many possible disputes. Russian foreign exchange legislation shall also be taken into consideration. Besides, it is important to define who is responsible for paying specific taxes (the VAT and other possible taxes and charges).

Other important provisions of the agreement are warranty and liability issues. Besides, the agreement shall contain provisions concerning delays (penalties, damages, etc.). In Russia and abroad alike, consumer goods are regulated by consumer protection legislation. As the respective liability may not be excluded under Russian law, it is recommended to include provisions on risks allocation or conclude a separate insurance agreement in this respect.