Sergei Pivovarchik, managing partner at Consul Group, shared his experience of challenging the cadastral value of real estate with readers of "Arbitration Practice for Lawyers" (issue: January 2019). The article sets out the procedure you should follow if you disagree with the cadastral value fixed for a property.
Cadastral value is used in the taxation of commercial real estate (buildings and premises). It is not only the tax base for property tax, but also a principal characteristic of the property and an important element of cadastral registration.
Who may challenge cadastral value?
The law and the Supreme Court of the Russian Federation have limited the persons who may challenge cadastral value to individuals and legal entities whose rights and legitimate interests are affected by the contested results of determining cadastral value (Article 245 of the Code of Administrative Procedure, paragraph 6 of the Resolution of the Plenum of the Supreme Court of 30.06.2015 No. 28).
A former owner. He may 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, a taxpayer has already disposed of the property but has not yet paid the tax for the relevant tax period. He may then challenge the cadastral value. There are particular features, however. The results of a challenge to cadastral value apply in the tax period in which the challenge was initiated (Article 378.2 of the Tax Code).
Example. The owner filed an application challenging the cadastral value on 31.12.2016. The value had been fixed as at 01.01.2014 (and applied in 2015 and 2016). The owner can apply the results of the challenge to the whole of 2016, from 01.01.2016, but not to 2015 (when the same cadastral value was in force), because the challenge began only in 2016.
Previously, public authorities could bring claims only in respect of properties owned by the Russian Federation or by municipalities (Article 24.18 of Law No. 135-FZ). The Constitutional Court held that provision to be unconstitutional (Resolution of the Constitutional Court of 05.07.2016 No. 15-P).
An administrative claimant challenged the cadastral value of a property he owned. That value had been determined as at 01.01.2016 and was applied in the tax periods 2017-2018. He was able to apply the results of the challenge only to the 2018 tax period, the one in which he initiated the challenge (case No. 3а-3421/2018).
An owner of a part or a share. A proper claimant is any owner (of the whole property or of a part of it, and equally of a share in the ownership of the property) who is himself a party to the tax relationship and therefore exercises, on his own, the right to a review of the cadastral value. The consent of the other owners is not required. Where ownership is shared, the owners of all the other shares in the property must be joined to the case. They will be third parties who do not file claims of their own.
Example. The Moscow City Court joined, as third parties in case No. 3а-1506/2017, all the owners of premises in the building whose cadastral value the administrative claimant asked to have set at its market value. 17 175 is the number of properties whose cadastral value has been challenged, on the ground of unreliable information, since the beginning of 2017.
State authorities and local self-government bodies. Public authorities may challenge the cadastral value of properties located in their territory.
Example. The Administration of the City of Ulyanovsk brought a claim against the Rosreestr Office for the Ulyanovsk Region and the Federal State Budgetary Institution "Federal Cadastral Chamber of Rosreestr", seeking a declaration that a decision of the commission for the consideration of disputes on the results of determining cadastral value was unlawful. That decision had set the cadastral value of a privately owned property at its market value. A court-appointed expert examination carried out in the case found errors in the report on the market value of the property. Taking those errors into account, the commission should have rejected the owner's application as based on unreliable information. The court granted the claims and ordered that the information on the new cadastral value of the property be removed from the Unified State Register of Real Estate (EGRN) (case No. 33а-3538/2017).
The list of proper claimants
A claim challenging cadastral value may be brought by:
- owners of the property;
- former owners of the property;
- persons who hold the property by right of permanent (perpetual) use or of lifetime inheritable possession;
- state authorities and local self-government bodies;
- tenants of real estate that is in state or municipal ownership,
- where the rent is calculated from the cadastral value of the property;
- tenants of real estate owned by individuals and (or) legal entities, if the rent is calculated from the cadastral value of that property and the owner's consent to such a review is set out in the contract or in another written form;
- other persons, if the results of determining cadastral value affect their rights and obligations.
Grounds for reviewing the results of determining cadastral value:
- the grounds for reviewing the results of determining cadastral value differ according to the subject matter of the claim;
- establishing the market value of the property as at the date on which its cadastral value was fixed.
Unreliable information about the property used in determining its cadastral value
What the claim concerns: an error that was made.
Result of the claim: a finding that the cadastral value previously in force was unreliable, invalid and erroneous.
Example. The Supreme Court of the Republic of Mordovia held the results of the state cadastral valuation invalid. They were challenged because unreliable information about the type of actual use of the property had been used in the state cadastral valuation, and that had a material effect on the value determined (case No. 33а-1012/2016).
Establishing the market value of the property as at the date on which its cadastral value was fixed
What the claim concerns: the owner exercises his right to have the cadastral value of his property set at a different amount, namely at its market value.
Result of the claim: cadastral value is fixed, as at a specified date, at the market value.
The two figures (cadastral value and market value) for one and the same property often differ substantially. That follows from particular features of how the institution of cadastral value is regulated (2). In particular, when the cadastral value of a property is determined, its individual features are not taken into account, even where they may have a material effect on its market value. In some cases the cadastral value and the market value diverge several times over, because a state cadastral valuation cannot take account of the property's actual condition, or of wear and tear, or of a change in its purpose (for example, the start of reconstruction), and so on. Such examples are especially common in the city of Moscow, and by challenging the cadastral value, right-holders avoid an unjustified increase in mandatory payments (for example, cases No. 3а-1200/2017 and 3а-2084/2017).
The proper administrative defendant depends on the subject matter of the administrative claim chosen by the administrative claimant and on the ground on which the result of determining cadastral value is challenged. If the administrative claim seeks to have the cadastral value of a land plot set at an amount equal to its market value, the proper administrative co-defendants are:
- the state body or local self-government body that approved the results of determining cadastral value;
- the state body that performs the functions of state cadastral valuation.
If the administrative claim challenges decisions, actions (omissions) of the commission for the consideration of disputes on the results of determining cadastral value, the proper administrative defendants are that commission and the state body that performs the functions of state cadastral valuation and under which the commission was established.
The pre-trial procedure for challenging the cadastral value of a property
Unreliable information. A challenge to cadastral value on the ground of unreliable information is made by application, on the basis of documents confirming the error (the defect in the information used). If Rosreestr refuses to correct the error voluntarily, the claimant may go to court.
Establishing market value. First, estimate roughly what the corporate property tax (land tax, rent) would have been if it had been calculated from the market value of the property. Then find the difference between that amount and the tax calculated from the current cadastral value. Next, decide whether that sum justifies a court claim, and whether the proceedings are economically worthwhile, bearing in mind that, besides the time spent on the project, there will be the cost of a valuation and legal costs. It may well be more advantageous to leave things as they are.
If it turns out that the cadastral value is significantly overstated, and treating the market value of the property as the tax base would substantially reduce the property tax, the challenge should be started.
Step 1. Preparing the documents to have the cadastral value set at the market value
Obtain a cadastral certificate showing the current cadastral value of the property and the date on which it was determined.
1) Many people do not pay enough attention to identifying correctly the date as at which the cadastral value was fixed, and the results are unsatisfactory. For example, owners of commercial properties often fall victim to a template approach: a market-value report is usually prepared as at the date on which the results of the state cadastral valuation in the region were approved, and a dispute begins. After a refusal by the commission for the consideration of disputes on the results of determining cadastral value, the owner prepares and files the corresponding administrative claim with the court. The court grants the claim, but the owner then faces a surprise: the results of the challenge can be applied only for a limited, short period. The point is that cadastral value approved as at 1 January of the relevant year may change during the tax period. Often, two or three months after the tax period begins, the cadastral value changes because the characteristics of the property have changed, under the procedure laid down in Order of the Ministry of Economic Development of 18.03.2011 No. 113. The owner can therefore apply the results of the challenge only during those same two or three months, from the start of the tax period until the cadastral value changes. The result:
- the costs incurred exceed the saving achieved;
- the new cadastral value has to be challenged again (with further time and cost).
2) Order from a valuation firm the documents confirming the market value of your property:
- a report on the market value of the property;
- a disc with the report, signed with an enhanced digital signature.
Step 2. Applying to the commission for the consideration of disputes on the results of determining cadastral value (if a commission has been formed in the constituent entity)
Companies have a choice: they may apply to the commission first, or prepare an administrative claim at once.
The time for applying to the commission with a claim challenging cadastral value runs from the day information on the cadastral value of the property is entered in the register until the day information is entered in the register on the cadastral value of that property as determined in a new state cadastral valuation or following a challenge to the cadastral value.
An application to the commission is drawn up, and the following must be attached:
- an extract from the EGRN on the cadastral value of the property;
- a copy of the title document or the document confirming title to the property (a certificate of ownership / a lease);
- a report on the market value of the property, on paper and in electronic form. The market value must be fixed as at the date on which its cadastral value was fixed.
Step 3. Attending the commission's hearing and its decision (if a commission has been formed in the constituent entity)
The time for considering an application to review cadastral value may not exceed 30 days from the date the application is received by the commission. Information on the place, date and time of the hearing is published on the commission's official website. On the application, the commission decides either to review the cadastral value or to refuse a review.
Mistakes at the pre-trial stage of the dispute
1. When filing an application with the commission, the applicant does not attach all the required documents. Most often, the valuation report in electronic form, signed with an enhanced digital signature, is not attached.
2. The valuation report is not prepared by reference to the true market value. It is based on the valuer's view of the figure most likely to satisfy the members of the commission. For example, the true market value of the property is 300 million roubles, but the valuer, at his own discretion (in order to close the project more quickly), states 400 million roubles in the report. At a rate of 2 per cent, the tax on 100 million roubles is 2 million roubles. Because the valuer hoped to "get by with as little trouble as possible", the right-holder lost a substantial sum.
Court proceedings to challenge the cadastral value of a property
If no commission has been formed in the constituent entity, or the commission has refused to review the cadastral value, the matter may be taken to court.
Step 1. Drafting the administrative claim and preparing the necessary documents
An administrative claim may contain the following relief:
- establishing the market value of the property;
- a change to its cadastral value because unreliable information about the property being valued, used in determining its cadastral value, has been found, including the correction of a technical error and (or) a registry error (that is, a claim for a review of the cadastral value).
Documents substantiating the relief sought must be attached to the administrative claim.
Step 2. Going to court
An administrative claim for a review of cadastral value is filed with the court at the location of the customer of the work to determine the cadastral value, or of the state body that determined the cadastral value.
The claim may be filed from the day information on the cadastral value of the property is entered in the EGRN until the day information is entered in the EGRN on the cadastral value of that property as determined in a new state cadastral valuation or following a challenge to the cadastral value. Starting a challenge to cadastral value in time is essential, because missing the time limits set by law leads to a refusal of judicial protection.
For example, in case No. 33а-4499 the Moscow City Court explained that missing the time limit for a challenge is sufficient grounds for refusing to accept an administrative claim.
An administrative claim may be filed no later than five years from the date on which the contested results of determining cadastral value were entered in the state real estate cadastre.
Court-appointed expert examination
Most cases challenging the results of determining cadastral value are brought in order to establish the market value of a property where the cadastral value exceeds the market value. In such cases the key evidence is the report determining the market value of the property.
The Plenum of the Supreme Court, in paragraphs 20 and 22 of its Resolution of 30.06.2015 No. 28, directed the lower courts to be procedurally active in identifying defects in the documents submitted by the administrative claimant.
The expert examination must be directed at establishing the market value of the property and must include a check that the report complies with the requirements of the legislation on valuation.
Courts of first instance order an expert examination in almost every case in which they are asked to set the cadastral value of a property at its market value. As a rule, the court puts the following questions to the expert.
1. Does the valuation report comply with the legislation on valuation and with the federal valuation standards?
2. If it does not, what is the market value of the property?
Experts almost always find breaches in the market-value report, so the court-appointed expert determines the market value again. The main problem for applicants in that situation is that 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 of poor work by the valuer or by the court-appointed expert.
If the right-holder of the property finds himself in that situation and is satisfied that the market value calculated in the valuation report is reliable, he should prepare a critical review of the court-appointed expert examination and seek a finding that the market value calculated in the examination is unreliable.
A repeat court-appointed expert examination is ordered quite rarely in practice. That is either because the right-holder does not wish to dispute the value calculated by the expert, or because the right-holder's representative is insufficiently prepared in court.
In this situation the court is not on the right-holder's side, because the right-holder has an interest in the lowest possible cadastral value. The right-holder must therefore not only prepare substantial arguments showing that the expert's opinion is wrong, but also present them properly to the court at the hearing (when the court-appointed expert is questioned).
Orders for a repeat or an additional court-appointed expert examination are few, because each such order points to errors in the work of experts "accredited" by the court. Where the errors cannot be concealed or excused, however, a repeat or additional examination is still ordered (for example, cases No. 3а-0001/2017, 3а-1055/2017, 3а-1123/2018, 3а-0739/2018, 3а-1744/2018 and 3а-2186/2018). In some cases, where errors are also made in the additional or repeat examination, obtaining yet another repeat examination is twice as difficult, but it is still possible (case No. 3а-2706/2018).
The allocation of legal costs
The question has now been settled of whether costs incurred in gathering evidence before a claim is filed with the court are recoverable. Those costs include the cost of preparing a valuation report and a positive expert opinion on it from a self-regulatory organisation of valuers.
The Judicial Chamber for Economic Disputes of the Supreme Court held that these costs cannot be classified as legal costs. A person who goes to court incurs them before the date on which the proceedings are commenced. A year later, however, the Plenum of the Supreme Court treated costs of this kind as legal costs.
In practice the position is somewhat different: an administrative claimant cannot always count on recovering legal costs even when the decision is in his favour. Refusing to award costs, the courts point to the administrative defendant's justified doubts about the reliability of the valuation report submitted by the administrative claimant, because in the course of the dispute the court-appointed expert prepared an opinion that the valuer had breached the federal standards of valuation activity.
The Constitutional Court gave the courts an exceptional ground for rejecting claims for the allocation of legal costs in cases challenging cadastral value: "It is not ruled out that, in deciding questions of the allocation of legal costs in cases challenging the results of determining cadastral value, account may be taken of the fact that a divergence between the cadastral value as fixed and the market value may fall within a range of deviation acceptable under the existing standards of state cadastral valuation and, accordingly, is not evidence of an error which, contrary to the objective economic content of the relations involved in forming the tax base for land tax and other property taxes, leads to a violation of the constitutional rights and freedoms of citizens and organisations as taxpayers."
Because the range of acceptable deviations is a matter of evaluation, the question of whether legal costs are to be borne by the administrative defendant is, in each particular case, in effect left to the judge. In practice this leads to the burden of legal costs being placed on the administrative claimant.
Disputed points
There are many disputed points in the use of cadastral value as an instrument for regulating tax relations. That is due to the novelty of this approach in tax law and to the absence of a necessary transitional (adaptation) period for introducing the changes into the existing tax system.
Among the most pressing are the retrospective application of the results of correcting cadastral errors (corrected on the initiative of the authorities), and the use of cadastral value as the tax base for corporate property tax without an adjustment for VAT.
In the first case, having found errors in the determination of cadastral value (the use of unreliable information about the property), the Moscow Government in 2016 considered it possible, after reviewing the cadastral value during the year and approving new results of the state cadastral valuation on 26.12.2016, to apply that value to legal relations from 01.01.2016. The result was a retrospective additional tax assessment of 12.5 billion roubles. The lawfulness of that decision has already been considered by the Moscow City Court, by the commercial courts of the Moscow Circuit, and by the Supreme Court. Of all those courts, only the Supreme Court sided with the taxpayer, although the question has not yet been finally resolved.
Turning to how the tax base for property tax is determined, the wording of Article 375 of the Tax Code deserves attention: it requires cadastral value to be used as the tax base. The problem is that in Moscow, for example, cadastral value is determined taking VAT into account (VAT is included in the results of determining cadastral value approved by a regulatory legal act). At the same time, it is doubtful whether corporate property tax may lawfully be calculated and paid on the amount of another tax which, under Article 168 of the Tax Code, is not structurally a component of the value of the property. The Supreme Court has yet to decide that question on the merits.
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