A new risk for a buyer of property abroad

On 22 July the State Duma passed a law on temporary restrictive measures in respect of citizens who are abroad and are evading the serving of a sentence. On 24 July the Federation Council approved the law. It now awaits the President's signature.

For the real estate market it contains an important novelty.

If an owner is entered in a special register of the Ministry of Justice, Rosreestr will not suspend registration of the transaction. It will simply return the documents without considering them.

In addition, notaries will not be able to certify transactions, or to draw up powers of attorney, in the interests of such a person.

What this means in practice

An example:

The owner has lived abroad for a long time. The property is sold by his representative under a power of attorney. The buyer transfers the money before registration.

The documents are filed with Rosreestr.

In the meantime the owner is entered in the register of the Ministry of Justice.

As a result Rosreestr returns the documents without considering them. Title does not pass. The money has already been paid.

Formally it can be recovered through the courts, including out of frozen assets. That, however, is a separate court case and a separate set of enforcement proceedings, and it is far from always a real possibility of recovering the whole sum.

In other words, instead of the property the buyer receives a dispute in court.

What should be done now

1. Check one more register.

Besides bankruptcy, enforcement proceedings and pledges, the register of the Ministry of Justice now has to be checked as well. And not only the seller himself, but also the principal, if a representative signs the transaction.

2. Do not check only once.

A person may be entered in the register after the contract has been signed, but before the transaction is registered. The check should therefore be repeated immediately before registration.

3. Do not transfer the money before registration.

If the seller is abroad, the safer options are a letter of credit, an escrow arrangement, or a notary's deposit, with the funds released only after the registered transfer of title.

The corporate risk

The entry of a participant in a limited liability company in the register may block a sale of real estate: the notary will not certify a decision on a major transaction. And a transaction that has already taken place may be challenged as a withdrawal of assets in circumvention of the restrictions.

The law was passed in order to deal with a quite specific task. Its consequences, however, will also affect the ordinary real estate market. One further mandatory stage is therefore now added to the standard legal check of a property.

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