How to challenge the cadastral value of real estate

Companies pay tax on their real estate on the basis of cadastral value. Its amount, however, sometimes differs greatly from the market value, and not for the better. We set out three simple steps that will help you challenge the cadastral value.

Who can challenge the cadastral value?

The owner of a part or a share. Any owner of the property as a whole, or of a part of it, or of a share in the right to the property, may be the claimant in a dispute to change the cadastral value. The consent of the other co-owners is not required in that case. If the property is held in shared ownership, the owners of all the other shares must be brought in when questions of value are decided. They will be third parties who do not submit independent claims.

A former owner. A former owner is entitled to apply for a review of the cadastral value that was used as the tax base during the period when he owned the property. For example, if the taxpayer has already sold the real estate but has not yet paid the tax for the relevant period.

State authorities and local self-government bodies. State bodies may challenge the cadastral value of properties located on their territory. Previously they could bring claims only in respect of real estate owned by the Russian Federation or by municipalities (Article 24.18 of Federal Law of 29 July 1998 No. 135-FZ). The Constitutional Court, however, held that provision unconstitutional (Resolution of the Constitutional Court of 5 July 2016 No. 15-P).

How to replace cadastral value with market value?

First, calculate what the corporate property tax, the land tax or the rent would come to if you calculated them on the basis of the property's market value. You need a clear view of whether that saving is worth filing a claim in court, because a great deal of time and money will have to be spent on the valuation and on legal costs. It may well turn out to be more advantageous to leave everything as it is.

Start the challenge if it turns out that the cadastral value is significantly overstated, and that recognising the market value of the real estate as the tax base will substantially reduce the payments.

Step 1. Prepare the documents

1. Obtain an extract from the Unified State Register of Real Estate (EGRN) with the data on the current cadastral value of the property and the date on which it was determined.

Correctly determining the date as at which the cadastral value was determined is very important. A mistake can lead to unpleasant consequences.

Owners of commercial properties often fall victim to a template approach: a market value report is, as a rule, drawn up as at the date on which the results of the state cadastral valuation in the region were approved. The owners start the dispute and file an administrative statement of claim with the court using the information from that report. The court grants the claims, but a surprise awaits the owner later. It turns out that the results of the challenge can be applied only for a short period of time. The cadastral value approved as at 1 January of the relevant year may change during the tax period. Not infrequently, two or three months after the start of the tax period, the cadastral value changes because the characteristics of the property have changed, in the manner provided for by Order of the Ministry of Economic Development of the Russian Federation of 24 September 2018 No. 514.

For example, during 2019 the data recorded in the EGRN were verified and harmonised for a large number of properties in Moscow. In the middle of the year, therefore, certain characteristics of the real estate changed not in reality but in the Rosreestr data. Because of that, the cadastral value of the properties changed as well.

The result is that the outcome of the challenge could be applied only during those same two or three months: in the period from the start of the tax period until the change in cadastral value. As a result:

• the costs incurred exceed the saving obtained;
• the new cadastral value has to be challenged again (with further costs in time and money).

2. Commission from a valuation company the documents that will confirm the market value of your property:

• a report appraising the market value;
• a disc containing the report, signed with an enhanced digital signature.

Step 2. Draw up the administrative statement of claim

In the administrative statement of claim you must set out your demand that the market value be established for the property. Attach the following additional documents to the claim:

• copies of the administrative statement of claim (one for each person participating in the case);
• copies of the title documents confirming the claimant's property rights to the real estate;
• confirmation that the state fee has been paid;
• an EGRN extract on the cadastral value of the real estate;
• the report determining the market value (the original on paper, with copies for each person participating in the case, and also as an electronic document on a CD-R);
• copies of the papers confirming the authority of the claimant's representative.

We recall that, under Article 55 of the Code of Administrative Procedure (the CAP), a claimant's representative in administrative proceedings may be not only an advocate but also another person. They must have full legal capacity, must not be under guardianship or custodianship, and must hold a higher legal education or an academic degree in law. Claimants themselves, and persons who have the right to represent their interests without a power of attorney, also have an unconditional right to take part in the administrative proceedings. That may, for example, be the sole executive body of a limited liability company. Other persons who wish to represent the interests of the administrative claimant under a power of attorney must provide the court with a document confirming a higher legal education or an academic degree in law.

Step 3. Apply to the court

An administrative statement of claim for a review of the cadastral value may be filed with the court at the location of:

• the customer of the work to determine the cadastral value;
• the state body that determined the cadastral value.

It is very important to start the procedure for challenging the cadastral value in time: missing the time limits laid down by law leads to a refusal of judicial protection. A claim may be filed from the day on which information on the cadastral value of the real estate was entered in the EGRN. The final deadline is the day on which information is entered in the EGRN on the cadastral value of the real estate determined after a new state cadastral valuation, or following a challenge to the cadastral value.

In general, an administrative statement of claim may be filed no later than five years from the date on which the contested results of the determination of cadastral value were entered in the state real estate cadastre.

What will the court examine?

Owners usually challenge the cadastral value when it exceeds the market value. In such cases the key evidence is the report determining the market value of the real estate. The courts treat this document very carefully and always try to find shortcomings in it.

Particularly close attention is paid to whether the report meets the requirements of the legislation in force. Because the judges have no specialist knowledge of valuation, they appoint a forensic examination. Several questions are put to the expert.

1. Does the valuation report comply with the legislation on valuation activity and with the federal valuation standards?
2. If it does not comply, what is the market value of the property?

In almost every case the experts find breaches in the market value report. That leads to the market value being determined afresh by the forensic expert himself. A problem may await owners here: the market value calculated by the expert turns out to be close to the cadastral value of the property. Such situations are common, and may be the result either of poor work by the valuer or of poor work by the forensic expert.

If you are confident that the market value calculated in the valuation report is reliable, and that it was the expert, not your valuer, who made the mistake, prepare a review of the forensic examination. The market value calculated as a result of the examination has to be shown to be unreliable, by identifying in the expert's opinion the errors that affected the result. The appointment of a repeat forensic examination is rare in practice. That happens because the right holder is unwilling to dispute the value calculated by the expert, or because the right holder's representative is insufficiently prepared in court. In that situation the court is not on the right holder's side, because it has no interest in the lowest possible cadastral value. It is therefore necessary to prepare weighty arguments that the expert's opinion is erroneous, and to present them properly at the hearing (when the forensic expert is questioned).

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