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Point of View: Obligation to Pay

Clauses on infrastructure development payments are being included in investment and land lease contracts throughout the country. However debates whether it is lawful to collect these payments are still continuing. Today the fact that developer money go into the budget does not guarantee that the funds are disbursed for city infrastructure development.

In Practice

Payments may be made both in cash and in kind. In Moscow investment contracts often provide for a monetary ‘compensation to the city for utility, transport and social infrastructure’, or an investor obligation to build a school or a nursery, to transfer to the city a certain portion of premises in a completed project, and other similar encumbrances. The same situation is in vicinities of Moscow. For example, in Lobnya an investor was contractually entrusted with construction of a pre-school, regular school, outpatient hospital, fire department, as well as to transfer 5% of apartment area in a residential complex under construction to the city.

By making such contracts entities of the Russian Federation or municipalities in turn usually undertake a commitment to facilitate the project implementation with regard to matters within their competence, e.g. issue of construction permits, approval of area planning documentation, etc.

Municipalities have a requirement of development of social, transport and utility infrastructure in the area of new project construction. Charging the expenses to the investor’s account which in turn will make a profit on implementation of the project that includes components of the infrastructure seems quite reasonable.

However, legal nature (lawfulness) of such payments and the law regulating relations with investors are still debatable.

By Virtue of Law

Disputes are unavoidable, but they are rarely brought to court. It is not favourable to investors to upset relations with the local authorities. Therefore in most cases they take no chances and fully discharge the imposed obligations, as it is directly affects successful project implementation. However, about ten such disputes were settled in Moscow and Moscow Oblast in 2013. Two of them were considered by thePresidium of the Supreme Arbitration Court of the Russian Federation, which shows urgency of this issue.

There exist various opinions on the legal nature of the above payments and the options of legal recovery thereof from investors. They all can be reduced to two basic approaches. The first one provides for infrastructure development payments of fiscal (tax) nature. The proponents of that approach emphasize the fact that investors actually does not act voluntarily, when they undertake the obligation to make such payments, and are on equal terms with a constituent entity of the Russian Federation and municipal government with which a relevant contract is concluded. It seems obvious that public law entities have more influence in negotiating the contract terms than investors.

In fact an investor pays for performance of legally significant acts by a public law entity in its favour, which meets the tax definition. Should one acknowledge that infrastructure development payments are of tax nature, the obligation to make them shall be prescribed by the Tax Code of the Russian Federation. Until this point it is illegal to collect such payments from investors. Arbitrary calculation of such payments without any criteria set is prohibited.

According to the second approach infrastructure development payments are of civil nature. Supporters of this approach refer to the principle of contractual freedom: as investors voluntarily undertake to pay for the infrastructure, they should satisfy this obligation. Opinions differ as to how one should qualify this obligation (as an obligation to make lease payment, gift giving, or a special obligation). At the same time the legal qualification affects enforcement of certain provisions of law to the relations under consideration — in particular, the possibility of application of civil law provisions providing for the investor right to suspend payments in case of violation of a counter obligation to allocate development land.

In Court

The SAC of the Russian Federation repeatedly addressed the problems of interaction between public law entities and investors in course of investment project implementation. Decrees of the Presidium of the SAC (No.5495/11 as of 11.10.2011, No.12444/12 as of 02/05/2013 and No.4606/13 as of 09/24/2013) give a point of view that contractual obligations of investors regarding transfer of funds to the budget stem from the freedom of contracts, such conditions do not contradict to the applicable civil legislation. In other words, infrastructure development payments stipulated by a contract may be recovered through legal proceedings.

Regardless of differences among experts, the uniform case law is now being developed in line with the position of the SAC of the Russian Federation. Arbitration courts of Moscow and Moscow Oblast satisfy claims of authorized government agencies regarding recovery of such payments from investors (Moscow District Federal Arbitration Court Resolution with regard to case No.A40-10496/12-29-92 as of 11/26/2012, Moscow District Federal Arbitration Court Resolution with regard to case No.A40-24376/11-54-159 as of 01/18/2012), the Arbitration Court of St. Petersburg and Leningrad Oblast follows the same practice (Northwest District Federal Arbitration Court Resolution with regard to case No.A56-8984/2012 as of 03/05/2013).

No Gifts

It seems that in the absence of consistent statutory regulation courts attempt to enact infrastructure development payments considering them socially significant. This position, however, raises a string of questions.

Is it permissible to make performance of actions imposed on a public authority by law contingent upon infrastructure development payments of investors? What will constituent entities of the Russian Federation or municipalities give investors in return? These payments are not considered gift giving, as investors are obviously not eager to make gifts to whichever city. This is also acknowledged by the SAC of the Russian Federation by pointing out the fact that payment of money for infrastructure development is conditioned by construction of a real estate project resulting in the increased strain on the city infrastructure and a requirement of generation of municipal budget income, rather than the endeavour to donate funds for socially useful purposes (decree No.4606/13 of the Presidium the SAC of the Russian Federation as of 09/24/2013). However, the SAC of the Russian Federation leaves the issue of consideration open. If the matter in question is not gift giving, the investor undertaking to construct a school or hospital for the benefit of a municipal entity, then, following general provisions of civil law, it should be given something in return. Otherwise it is inexplicable from the contractual freedom perspective and contradicts the current civil regulations.

Furthermore, the amount of additional payments so far is not attributable either to the obligation of local authorities to ensure infrastructure development of certain quality by the fixed date, or to the cost thereof, or to the real estate price increase due to infrastructure development. On top of that the collected payments are often completely unrelated to the implemented project. In practice the amount of additional payments is determined arbitrarily by public authorities and is used for pumping up budgets without reference to the particular activities for infrastructure development or improvement. This is the current situation in Moscow and St. Petersburg, where infrastructure development payments represent a particular item of budget income that is not, however, linked in any way to specific expenses for these purposes.

More balanced solutions were found abroad making it possible to observe both private and public interests. For example, some countries establish special charges imposed on owners of the real estate, if value thereof increases due to infrastructure improvements made by local authorities. Such charges are strictly compensatory in nature, economically feasible and directly linked to implemented investment projects.

We believe that it is reasonable to set up additional charges. They should not, however, exist in their current form.

The views and opinions expressed in Point of View section do not necessarily reflect the position of the editorial board.

Evgeniya Stanislavskaya, Rightmark Group Senior Associate of Dispute Resolution Practice 
Karina Zykova
Source: Vedomosti newpaper, ‘Nedvizhimost. Steny Biznesa’ (Real Estate. Walls of Business) supplement