| "Letter of the Law": Investments in construction activities: no law – study the court practice |
| Wednesday, 10 November 2010 17:42 |
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What contractual schemes have been developed by the lawyers for the purposes of investments in construction of commercial real estate objects? Will those schemes be supported by the court? What “commonly known schemes” have already been denied by the court practice? What are the legal risks we are to know while concluding the co-investment agreement? These and some other issues were discussed on the air of “Letter of the Law”, the author program of the senior partner of Law Group “Argument” Denis Aleinikov with special guest of the program, the judge of the Economic Court of the City of Minsk Andrey Plotnikov.
Have there any well-known real estate objects come in view of the Economic court of Minsk? The list of construction units is quite big, but the most significant disputes related to the formation of practice and working out unique approaches for settlement of this case category which have got social coloring are disputes on construction of buildings located in Kollektornaya street (developer – Praleska-Service CJSC (ЗАО "Пралеска-Сервис")), in Platonova Street (developer – BelstroyVeturiya LLC(ООО "БелстройВетурия")), construction of townhouses in the territory of township Solnechny in Minsk district (developer – Vigevrostroy Additional Liability Company (ОДО "Вигеврострой")), construction of social and commercial purpose units in the Nemiga street (developer – Parking Additional Liability Company (ОДО "Паркинг")), in the Kulman street (developer – Trivium Additional Liability Company (ОДО «Тривиум»), construction of apartment houses with administrative premises in the Filimonov street district (BelOMO-Story OJSC). It is considered that the disputes on shared construction of commercial real estate objects and construction investments are referred to be the most complicated ones. What are the difficulties associated with them?  БCertainly, the disputes resulting from the shared construction contracts are the most complicated and significant category of disputes. Such a complexity of their consideration is predetermined by the insufficient legal regulation in the sphere of shared construction relations. The most systematic legal act in the sphere of shared construction is the Edict of the President of the Republic of Belarus dated June 15, 2006 No.396 On shared construction of apartment buildings and the adopted Resolution of the Council of Ministers as of September 14, 2006 No.1207. The mentioned normative acts have been issued only for the purposes of protection of investors and improvement of the apartment buildings construction procedure. But they are ineffective in relation to the shared construction of commercial real estate objects. The court practice proceeds from the assumption that these contracts are of mixed nature, they are not particularized and are not stipulated by the Civil Code. The issue which has always been of particular interest of the lawyers: is it possible to apply by analogy the regulations of the Edict No.396 in relation to the commercial real estate objects construction? This viewpoint has already been discussed but it failed to become commonly used in court practice. The current concept is that the provisions of the edict and the resolution of the Council of Ministers may be applied only in relation to some single issues which are not regulated in the contract itself. The key point in consideration of this case category is the contract in particular due to the fact that it is the contract that regulates legal relationship between the parties and stipulates protection of financial interests conditioned by maintaining building construction at the costs of the attracted investments.
If we talk about some contracts which are not named in the laws, then it turns out that the parties shall invent such contracts pursuant to the contractual freedom approach. In the event such a contract shall become a subject matter of court consideration what legal norms shall be applied by the court in relation to this contract? The Civil Code does not contain such a notion like a shared construction contract, but regarding the shared construction contract for commercial real estate objects we do have such a contract which regulates the whole group of relationships between the developer and the investor. The latter does not exclude applying the general provisions of the Civil Code. The Civil Code regulations precisely allocate the contractual freedom approach which allows applying provisions stipulated for regulation of some other civil relationship institutes to this kind of contracts. Regarding relationships between the parties from the mixed contract, the regulation on contracts stipulated by this mixed contract shall be applied if not otherwise results from the agreement of the parties or the essence of the mixed contract. We have just recently faced this relationship scheme, according to which one of the companies (Vigevrostroy Additional Liability Company) acted as the developer, who involved another company as an investor (Joint Limited Liability Company “Hornbacher & Bohl”) and this company in its turn involved some subinvestors. Subinvestors were individuals and legal entities. These relations have been applied for the construction of townhouses in the village Solnechny, Minsk district. We may talk today about the variety of schemes generated by the contractual freedom. Are there any recommendations on the level of court practice? What scheme is more preferable to use and what are the essential contractual terms to be determined? The court is not entitled to give any recommendations in relation to this or that scheme. I would prefer to point out the key ruling of the plenum of Supreme Economic Court of the Republic of Belarus No.16 as of December 16, 1999 On application of the Civil Code regulations relating to concluding, changing and cancellation of contracts. This document fully reflects the general issues characteristic of any relation type connected with entering into contracts. The main point of the shared construction contract today as well as its essential terms are determined through the prism of court rulings on particular cases: any errors committed while entering into contract resulting in arising of a dispute shall be directly analyzed in the course of consideration of a particular case. What are the most frequent claims that are filed by the developers, investors in case of disputes arising out of shared construction contracts? Analyzing this case category we may divide it into two groups. The first one is disputes resulting from conclusion, changing and cancellation of the contracts. We may also single out from this case category the disputes connected with the assessment of eligibility of unilateral refusal of either party from the contract. The second group is disputes related to the execution of the shared construction contract: issues on financing, documents transfer, ownership registration. Curiously enough, the economic crisis has determined two tendencies on this category of disputes. For example, prior to crisis in the conditions of growth in real estate prices, it is the developers who tried to conduct an inspection of relations with investor and to part with investors who entered into contracts and contributed investments in 2005-2006. The goal is to attract new investors on terms of prices of 2007-2008. But after January 2009 another tendency appeared: the investors came to the court with the claims to cancel the contracts with the developers, herewith the drop of prices in the real estate market, increase of credit resources costs were mentioned as the cancellation reasons. The economic court has not recognized these reasons as objective ones to meet the claims on contracts cancellation. The basic principle of entrepreneurship is the independent commercial risk. Did any investor manage to cancel the contract after crisis? Could you give such an example? No, the court has rejected such claims. We may recall a case related to the conclusion of a preliminary sale and purchase agreement which was indirectly connected with the shared construction topic. Under the preliminary sale and purchase agreement the party has contributed a part of money, and in the sequel, when the necessity to make the following payment occurred, the party rejected to finish execution of its money obligation and put a question on cancellation of the contract due to the drop in real estate prices and growth of credit resources. The plaintiff was rejected to meet the claim on contract cancellation subject to the position of the undertaken responsibility for its commercial risk. The lawyers providing legal support in the sphere of construction investments have always been interested in the issue, what are the reasons for money contribution under the preliminary sale and purchase agreement for the real estate facility? According to this agreement no goods (works, services) shall be sold. Taking into account that the subject matter of the agreement is only the agreement on entering into contract in the future, the issue on providing the deposit is open to question. What are the ways to finance the construction? You have correctly mentioned that under the preliminary agreement it is quite problematic to provide the developer with own cash assets. In a number of cases it is the preliminary agreement containing the obligations to provide the cash assets to the developer for particular purposes that was actually recognized as the shared construction contract with applying respective consequences. The issue on providing cash assets in the form of a deposit is disputable one and I would not dare to undertake the responsibility to give hundred-per-cent recommendations. What can investors/developers appeal to in order to cancel the contract or to withdraw from it? The general grounds for cancellation of investment contracts shall be determined by the general rules for termination of obligations and cancellation of contracts. So, by virtue of article 420 of the Civil Code the contract may be cancelled upon mutual agreement of the parties or by court; the unilateral withdrawal from the contract is also acceptable, if it is stipulated by the contractual terms and the laws. As far as it goes to cancellation of the contract, the violations affecting it and making its execution impossible shall be recognized as essential breach of it. Particularly, in the event the developer fails to begin the construction in due time and it results in delayed completion of construction, it shall be deemed as substantial breach; the breach of contractual terms in relation to the obligation of obtaining the construction documents and some other licensing documents from the local executive authorities. The developer may raise a question on cancellation of the contract in case the investor fails to make payments: non-payments are the key ground for cancellation of such contracts. I suppose that a non-payment is rather an issue of evaluation. A year- delay might be recognized as non-payment, so might a day-delay. Has the economic court of Minsk ever experienced such cases when applying with the claim on contract cancellation the developer was formally right but worldly speaking – not? Let’s assume that there was a day- or a two day-delay according to which the claim on contract cancellation is quite legal. But in terms of the essence of economic legal relationships you may see that his will was directed at a different goal: to cancel this contract and to sell the finished facility to another person. What will the reaction of the court be in such a situation? Absolutely. The economic court shall make its evaluations based on the weigh of each and all circumstances and its assignment is to settle the dispute taking into account the interests of both parties. If we see such a conduct of the developer assuming that the delay makes a month or two, but during the period of contract execution there were no any complaints from the developer and payments were done on demand, then the economic court may reject a suit and deny cancellation of the contract. In this case the developer may use some other mechanisms of influence upon the investor, for instance, getting contractual sanction for delay in payment. But the court shall have a substantive reason for such a rejection. What have you used as legal ground? Objective and overall evaluation of the parties’ conduct. Article 7 of the Civil Code has fixed that the ground for civil rights and duties to arise shall also be actions of the parties. The situation around “Terrastroyinvest” has already set the teeth on edge, when different persons were involved in double sale of apartments through conclusion of several shared construction contracts for one and the same facility. Are there any double sale precedents in the practice of shared construction of commercial real estate objects? The economic court turned out not to be away from the double sale issues on the real estate market. These problems have appeared from time to time to this or that extant in the court during the last 15 years. Let’s look back at the dispute in relation to the apartment building at Miroshnichenko street, 21 in Minsk, where almost each and all apartments have gone through the scheme of double sale to the legal and natural persons. The recent case is connected with the company “Vazor Stroy” («Вазор Строй») which as the Customer has entered into relations with the company “ARS Invest” («АРС Инвест») for the purpose of shared construction of six apartments in the apartment building at Odintsova street. In the course of construction execution the Customer unilaterally put the question on increase of the construction cost, but due to the fact that the investor has not accepted his offer, he has made a unilateral statement on withdrawal from the contract and has sold four apartments (which are the part of the subject-matter of the shared construction) to natural persons. The court, by the way, has determined the illegality of the unilateral withdrawal from the shared construction contract with the investor. The court has met the claims to compel execution of the shared construction contract, including actual transfer of apartments to the investor. The dispute has been finished when in absence of opportunity to transfer the apartments in dispute the developer has consequently provided the investor with other apartments. The economic court is dealing with the issues between legal entities arising from construction relations. As far as we understand, the individuals may stand behind the legal entities as investors. How frequently have the interests of individuals have suffered or could have suffered due to the court squabbles between the legal entities participating in the shared construction? There are some issues in the practice of the economic court which are connected with the interests of individuals and this category of cases acquires the status of socially significant. The economic court is estimating these or those consequences of the adopted resolutions for the purpose of avoidance to cause damage to individuals’ interests. Each and all steps shall be taken into account. What example can you make in order to make the individuals understand what situations took place and what situations shall be treated with special caution? As an example, there is the last series of cases which is connected with the relations on construction in the village Solnechny in Minsk district. It is the individuals who turned out to be left in these relations because during the time of dispute between two organizations the construction failed to go on, the terms of handing over of the facilities to the individuals who contributed their own money have also been postponed. Are there any situations when the creativity of lawyers based on contractual freedom is resulting in the situation when after signing the contract and getting in conflict upon this contract, the parties come to the court, and the court says: this contract shall be deemed as not concluded, or shall this contract be null and void? We do not have a separate category of cases on declaring the contract void. These circumstances may be determined by the court today only in case of settlement of other disputes with applying of consequences for void contracts. The issue of contract voidance appears in the circumstances of insufficient determination of the subject-matter of the contract, of what the parties beard in mind and what they were willing to get as the result, as well as what real estate object should have been transferred to the investor’s ownership. That means that the precise preliminary data have not been stipulated in the contract from the very beginning. First of all, it is important to be governed by the current construction documents, and it is perfectly all right if they are available at the moment of concluding the contract, and it is possible to vividly determine the real estate object on the basis of construction documents. In case the construction documents have not been worked out, the questions in connection with the definition of the subject-matter of the contract may arise in relations between the developer and the investor in that stage. That is why if this shared construction contract shall be concluded without construction documents available, it may further predetermine the possibility of disputes related to the conclusion of the contract. Sometimes the creativity of the parties results in non-compliance with the current laws and by virtue of article 169 of the Civil Code it shall be the ground for recognition of the contract voidance irrespective of whether it was the subject of independent claim or not. For example, there was a case when in the course of consideration of the issue in cancellation of the shared construction contract it came clear that the Customer has transferred the Customer’s functions to the investor. The contract was concluded for the purpose of construction of the attic floor in the hostel, and by virtue of the law on architectural and constructional activity the local executive committee, according to the public order, may provide the developer with the respective functions related to the construction documents, obtaining the permit for design and survey works. Transfer of functions which can not be implemented upon the agreement of the parties, have predetermined the further transaction nullity. The transaction nullity does not generate any legal effect apart from the restitution which means bringing to the initial state. What other defects may result in recognition of the contract void? These are the issues that sometimes do not have accurate and clear regulation in the contract itself: construction financing, facility cost, fee amount payable to the developer. These conditions shall be recognized by the parties as essential while signing the contract, but in the future some misunderstandings in terminology interpretation may arise: the parties may have different will orientation which predetermine the defectiveness of this or that conditions and impossibility of their definite and clear interpretation. This may be also applied to the part of the contract: for example, if you fail to agree upon the contractual sanctions terms then it may result in the absence of the separate agreement on contractual sanctions and will not affect the implementation of the whole project. Generally, the issue connected with the conclusion or voidance of the contract is concerned to the subject of the obligation because other conditions may be determined to this or that extent. Let’s assume that according to the construction contract the administrative building was to be constructed, the area of which amounted in 5200 m. We know that in the course of construction these measurements and real life do not coincide with the AutoCAD programme. After the competent authority has made its measurements the building turned out to be 5000 m. May there any problems occur in connection with conclusion of that contract?  Indeed, it may be stipulated in the contract that there will be 5200 m constructed, but it turns out to be just 5000 m in the effect. The court shall determine the reason of this difference. It may be very simple: while signing the contract the developer and the customer are governed by the norms to be applied in construction where the other procedure for area measurement stipulated. The cadastral agency is governed by its own regulations and it may cause difference in the area. As a rule such a difference is insignificant, about three or four meters. The current contracts going through the economic court do determine such a situation and the parties stipulate in the agreement that neither the amount of financing nor the area to be transferred shall be changed in the end: the party is getting a particular premise in accordance with the acceptance certificate and shall have no complaints in connection with the change in area or with the change of the area cost. Upon one of the cases in which the problem at issue in respect of the difference in area size has been put cardinally, the parties came to an agreement: in order to avoid the situation when the contract could be recognized as void, they have settled their dispute in pais in the out-of-court way. The most frequent dispute category for today is disputes arising out of delay in putting the facility in operation. Different questions arise there: on recovery of damages, on recovery of contractual sanctions, and on recovery of interests. What cases of uncompleted construction in Minsk do you come across today? First of all, it is construction of the facility in Nemiga Street (“Parking” Additional Liability Company) (ОДО "Паркинг"), construction of the administrative building in Internatsionalnaya Street (the developer is “Sulona” LLC) (застройщик ООО "Сулона"), construction of the building in Solomennaya Street (PC “Amir-S”) (ПК "Амир-С"). These objects were subject to economic court considerations with a big number of claims from investors on recovery of contractual sanctions for delay in putting facilities in operation. The shared construction contracts have stipulated the mechanism for the investor’s rights protection through recovery of contractual sanctions. In each particular case the court was estimating the nature of the committed violations, and the reasons of delay in putting the facility in operation. The right of choice is at each investor’s disposal. Along with the recovery of contractual sanctions the parties may withdraw from the contract and to seek its cancellation in court. What is more, it is not only the investors who may raise a question on recovery of contractual sanctions, but also the town which controls the construction and may demand contractual sanctions. Today the town may withdraw a land plot from the developer’s possession: if the developer fails to start the implementation of the construction project, fails to order or to work out the construction documents, then over a period of several years all his activity is coming to digging of foundation pit, then the town shall put a question on withdrawal of the land plot. The precedents do exist already. May the town withdraw the land plot if the developer has started working but very slowly, if he is doing a teaspoon in an hour and in a year it comes to one construction activity and formalizes it on paper? It is obvious that it is abnormal: if keep to such a tempo then the construction may last for 30 years. But has the town the right to withdraw the land in such a case then? There is an example when a person failed to start working out construction documents having been entitled the right of construction of the apartment building in the center of Minsk in Mogilevskaya street. The land plot was withdrawn. The fact of withdrawal has gone through the court verification, so the correctness of the town executive committee position was proved in the end. If the investor failed to timely occupy the facility in view of delay in putting it in operation and had to continue renting the premises needed for conducting his business (and as a consequence make rental payments) can he recover from the developer the expenses on such a forced rental payments? Our laws are oriented not only towards the execution of obligations on transfer of the facility in kind, they also stipulate the possibility of full recovery of damages. Paying to investor for renting premises which he is forced to rent in case of delay in putting it in operation, may be attributed to his direct expenses, to his damages connected with improper execution of obligations. There are some court decisions according to which the rental payments as damage have been enforced in favor of some organizations. One of portal users has asked the following question in relation to charging the developer organization with damages: “Let’s assume that the investor as the future Lessor has a priori made a preliminary agreement with the future Lessee and have agreed upon that the investor shall be obliged to rent out the constructed premises”. The Lessee shall be obliged to rent the constructed premises after the construction has been completed. By the way, the rent rate is being determined in the preliminary agreement. Will the investor’s claim on recovery of damages and loss of expected profit by the customer be sustained in accordance with Article 14 of the Civil Code, i.e. the compensation of the supposed income from renting out the facility, after the construction has been completed? The court has a hard-line approach towards the issue on assessment of the preliminary rental agreements. The preliminary rental agreements shall be recognized as void and the recovery of the loss of profit in the form of the not received rental payments shall have almost no chance. One more question from the user: “There is a shared construction contract for commercial real estate made between the natural person (the investor) and the legal entity (the customer). The developer has dragged out the contractual terms for construction to be completed. Shall the court sustain the investor’s claim on recovery of investor’s damages in amount of the refinancing rate from the amount paid for the period of delay in accordance with the Civil Code, after the construction has been completed? What complications may occur in this case? “ There is only one problem here. Applying provisions of Article 366 of the Civil Code of the Republic of Belarus today determining the issues on applying the refinancing rate of the National Bank, is determined in the court practice as independent responsibility type. The developer has no financial obligations before the investor; he has property obligations – to transfer the facility to ownership. Applying provisions of article 366 of the Civil Code of the Republic of Belarus is connected with the issues of financial nature, i.e. with proper execution of financial obligations. That is why delay in putting the facility in operation can not result in applying provisions of article 366 of the Civil Code. But there is a range of peculiarities that are to be taken into consideration in this case: cancellation of shared construction contract may involve in the future charging of interests on the discount rate of the national Bank. Within the frames of article 14 of the Civil Code of the Republic of Belarus applying the discount rate of the National Bank as a separate damage recovery means has not been provided for by the current laws. What shall the investor do if the facility has been constructed and put in operation, but the developer refuses to transfer to the investor the documents needed for registration of ownership rights? Yes, such a situation has already got a clear court practice and the court prospective as well. The court proceeds from the fact that, as a rule, transfer of documents needed for ownership registration has been stipulated by the terms of the contract itself, which is why we speak about the default of contract. The court is considering the investor’s claims on forcing the developer to transfer the required documents for the purpose of registration of ownership title to the facility. The court shall force the developer to execute the contract in that part. The court has made a decision and forced the developer to transfer the documents to the investor. Nevertheless, the developer fails to transfer them. What shall be done in this case? There is a stage of the enforcement proceeding, within the frames of which the administrative responsibility of particular developers for non- execution of court decisions shall be effective. The economic court ensures actual execution of its decisions. Taking into account the absence of special legislation and the variety of schemes applied by the lawyers in practice, and taking into consideration that all the schemes (contracts) shall be frequently recognized by the court as null and void, it is rather difficult to foresee on the stage of signing the contract, whether this contract be stable in court, don’t you think that from the legal point of view the shared construction of commercial real estate today is a lottery in a way, where the winner shall be determined by the court? The issue is a philosophical one, but I would basically disagree with it. The court is not a wheel of fortune. The task of the judicial procedure is to arrive at the truth. Applying to the court for protection the party shall initially know what basic principles and approaches shall be effective in applying the norms of the substantive law and the assessment of actual fact pattern in order to settle the dispute; it shall exclude random decisions. The decision shall be predictable. Taking legal actions, the party may make predictions in relation to the final decision on the dispute knowing initially the principles of applying the norms of substantial law through the rulings of the Plenum of the Supreme Economic Court, through the practice surveys and having at its disposal a definite amount of facts in evidence. So, the lawyers drafting the contract shall a priori know what approaches shall be applied by the economic court for consideration of these or those contractual aspects of shared construction or investment and shall develop the contracts in a way to satisfy the requirement of the approaches applied by the court? The professional competence of a lawyer is being a master of a particular field of law. While working out the terms of the shared construction contract it is necessary to take into consideration both the general provisions of the contract determined by the Civil Code of the Republic of Belarus and the applicable court practice. |
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