High Commissioner’s address on the issue of equity construction

24 July 2017

Today, equity construction is the most profitable way for citizens to purchase housing on the primary market, but at the same time the most risky one.

Numerous appeals coming from people allow asserting that violations of equity holders’ rights are caused by common economic problems (bankruptcy of real estate developers) and imperfection of the legal regulation of housing construction with the attraction of citizens’ money.

In 2016, the High Commissioner for Human Rights in the Russian Federation received more than 700 complaints (about 11% of the total number of complaints about housing rights’ violation) from citizens affected by participation in shared housing construction.

The presence of collective appeals indicates massive violations of citizens’ housing rights.

Problems existing in this vital sphere were reflected in the 2016 Annual Report of the High Commissioner for Human Rights in the Russian Federation.

Currently, about 80% of housing is built with the participation of co-investors. According to various sources, there are 100,000 to 120,000 participants in the share construction problem with developers, and only 16,000 of them are included in the regional registers of deceived co-investors.

Unfortunately, previous attempts to protect the rights and legitimate interests of equity holders, as practice shows, were not successful.

The existing mechanism of covering insurance of developers’ liability to co-investors proved to be unviable. Insurance companies accumulated about 24 billion rubles of insurance premiums on their accounts, but the interest holders are practically not paid the insurance settlement.

Thus, the need and importance of minimizing the risks for citizens who have become participants in shared construction to solve their housing problems is obvious.

On July 3, 2017, the State Duma hosted the Parliamentary hearings on «Elaborating effective legislative mechanisms to protect the rights and legitimate interests of equity holders», within the framework of which the parliamentarians discussed draft federal law No. 139186–7 «On Amending the Federal Law ‘On Participation in Equity Construction of Apartment Buildings and Other Real Estate Units and On Amendments to Certain Legislative Acts of the Russian Federation’», which was considered by the State Duma in first reading on June 14, 2017, and received a significant number of fair comment.

The current Federal Law «On Participation in Equity Construction of Apartment Buildings and Other Real Estate Units and On Amendments to Certain Legislative Acts of the Russian Federation» allows the creation by the Government of the Russian Federation of a special fund formed at the expense of compulsory contributions of developers attracting equity holders’ money.

This provision is supported by the draft law which introduces mandatory payments by developers to the compensation fund.

As follows from the Explanatory Note to the draft law, the proposed mechanism for protecting the rights of equity holders together with the amendments to the law on shared construction, which provide for more stringent requirements with respect to developers, will establish serious barriers for unscrupulous developers and ensure proper protection of the rights of shared construction participants.

However, the presence of a significant number of blanket rules in the bill does not allow assessing the real effectiveness of the measures it prescribes to protect the rights and legitimate interests of equity holders.

There is also no information on the authors’ assessment of the fund effectiveness in terms of help to the affected equity holders. Have preliminary calculations of the amount of money that would flow into the fund been made and is there any danger that most of them will be used by the funds for their own needs?

Directly with the aim of protecting the rights and legitimate interests of the affected equity holders, the bill provides for the fund to pay compensation to the shared construction participants under contracts and to provide a loan or donation to a housing cooperative or other consumer cooperative or to provide a loan to the developer to complete the construction of the apartment building and to fulfil the commitments to transfer of residential premises to the equity construction participants.

These very important issues are under close scrutiny by the High Commissioner for Human Rights in the Russian Federation, however, the bill does not establish the grounds and conditions for receiving these payments and the provision of loans and donations.

Analysis of the draft law provisions reveals the possibility of the fund’s money misuse, that is, various abuses and corrupt practices.

The corresponding remarks were directed by me to the State Duma with a request to take them into account when preparing the bill for the second reading.

It should also be noted that a significant number of affected equity holders, including those on rosters, are «overboard».

Far from all the subjects of the Russian Federation take effective measures to help them.

The Government of the Russian Federation intends to take the current negative situation under its control. Government order as of May 26, 2017 No. 1063-р obliges the subjects of the Russian Federation to prepare «roadmaps» for the situation with defrauded co-investors.

They should include lists of problems and unscrupulous companies, lists of citizens affected by their actions; Governors will have to specify what legislative, organizational and financial measures are planned to be taken, and the results to be achieved.

Quarterly reports on the implementation of the «roadmaps» will be received by the Ministry of Construction of Russia.

This urgent issue continues to be monitored by the Commissioner for Human Rights in the Russian Federation.

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