Some problems of construction in progress plants legal status in the Kyrgyz Republic

Marina Lim

Article 33 of the Constitution of Kyrgyz Republic guarantees to all citizens of the Kyrgyz Republic the right to housing. This right is ensured by the development of state, municipal and private housing stock, housing stock of organizations, and assistance for citizens to acquire housing on the conditions and procedures established by legislation.

Unfortunately, the existence of legislation not always a guarantee of their implementation, for many reasons, among which is lack of financial capacity. In such situation one way to exercise constitutional right is the so-called construction on equity basis.

In recent years this method of acquiring real estate is widespread in our country. Despite the fact that the equity based construction may be used not only in the construction of apartment building, this exact kind found the greatest application in our country.

However, as any phenomenon, it can have both positive and negative aspects. Certainly, the positive side is the fact that the future owner of the apartment is not required to momentarily find the necessary funds and pay the cost of the apartment. It is this fact that allows construction and investment companies to obtain equity holders (investors) funds, and to build apartment buildings on these funds. Furthermore, in terms of growth of property prices this is certainly the way to invest money. At first it seems all clear and not without some economic advantages. However, it is necessary to keep in mind the relevance of the legal component of this issue, because ignorance of such it will entail a number of negative consequences, in particular the recognition of transactions void, defaulting parties, etc. What is the legal regulation of share construction and what challenges faced in practice by investors, contractors, future owners of the apartment? One of the main issues arising in this context is the question of compulsory registration of equity participation agreements, as well as the registration of rights on construction in process plants in the State Agency for Registration of Rights on Immovable Property under the Government of Kyrgyz Republic (the “State Register”), given that prior to building subject of the agreement does not exist as an immovable property.

Addressing these issues is fundamental due to the fact that the legislation of Kyrgyz Republic, in particular the Civil Code and the Law “On state registration of rights to immovable property and transactions with it” (the “Law on State Registration”) put in a direct dependence of the emergence of immovable property rights as well as the validity of real estate transactions whether the rights and transactions are registered in the State Register. To make decision on compulsory registration of the equity participation agreement it is necessary to determine what is the subject of the agreement.

The subject of the equity participation agreement is the performance of construction works (services), under which one party agrees to provide the construction of an apartment building services with the subsequent transfer of the result and the other party agrees to accept and pay for performance. Furthermore, when deciding whether to register the equity participation agreement must be remembered that in accordance with the Law on State Registration rights to a unit of property, which refers to land, buildings, apartments or other real estate, which has established border under the legislation of Kyrgyz Republic should be registered in the Unified State Register. Given that the legislation does not provide registration of rights and transactions with immovable property, until the property is does physically exist the equity participation agreement cannot be registered in the State Register. Unfortunately, the legislator did not define clearly whether construction in process plants could be considered as real estate, which is why following issues remained unresolved: whether construction in process plants could be considered as real estate or only the completion of construction and commissioning of the object will be the basis for attributing it to the category of real property, and who will be recognized as the owner of construction in process plants before it will be commissioned. Article 24 of the Civil Code does not include directly in the list of real estate construction in process plants. On the other hand, construction in process plants can be considered as real estate as objects permanently attached to the land and the movement of which will cause damage. Consequently, in respect of construction in process plants the legal regime of immovable property should be applied, with all the ensuing legal consequences.

Article 252 of the Civil Code specifies that ownership right to the newly-created buildings, plants and other newly formed real estate arise from the moment of such registration from which we can make conclusion that only the fact of registration allows to consider construction in process plants as real estate. Judicial practice, unfortunately, is also inconsistent.

For example, some courts in disputes where the subject were the real property rights, including construction in progress, considered such plants as real estate and therefore obliged the State Register bodies to register rights and transactions with them (the decision of the Chui region arbitration court dated November 5, 2002 on case of the special administrator of JSC “North PMK” to Alamudun State Register, case No. Ч07-357/С6pr02).

Several courts recognized construction in progress plants as real estate depending on the existence of fact of registration in the State Register, e.g. the decision of the Supreme Arbitration Court of Kyrgyz Republic dated December 14, 2001 year  it is specified that according to Article 252 of the Civil Code ownership right to newly-created real estate, subject to state registration, arises from the moment of such registration. Construction in progress plants represent a set of assets and funds invested in its construction.

The question of who is and at what point becomes the owner of the apartment in shared construction also does not have a sufficiently clear legal regulation. Article 251 of the Civil Code states that as grounds for acquiring rights to the property, along with other bases may be considered the alienation of property transactions, as well as full payment of shares. The equity participation agreement is not considered as alienation of property transaction, which is why the conclusion of the equity participation agreement cannot be considered as the grounds for entitlement of share holders. Full payment of shares, as the grounds for entitlement of share holders is also questionable. In particular, can we consider the payment of fees in equity construction as share accumulation (in this case share accumulation we see as a continuing, default on an obligation), if the answer is “yes”, then the question of who is the owner and, therefore, whose rights must be registered in the State Register solved in favor of the contractor, as the holder, who did not fully contributed share has not fulfilled all the obligations for him to acquire ownership of the apartment, as required by Article 251 of the Civil Code.

If we consider the position of notary bodies on this issue, which is legally required by the Regulations on the order of notarial acts of notaries of the Kyrgyz Republic, approved by the Decree of the Ministry of Justice of Kyrgyz Republic dated July 7, 2004 No. 106 (the “Regulations on Notary”), it can be concluded that before signing by the subjects of legal relations on joint construction agreement on the transfer of real estate ownership, built on principles of equity, the ownership belongs to the contractor and only the signing of this agreement entitles a person who made payments under the equity participation agreement (share holder) to be considered as the owner of the apartment.

Probably the State Register also holds the view that ownership of the construction in progress plants belongs to the contractor. Conclusion in favor of this position can be based on analysis of the standards set out in the Practical Guide on state registration of rights and encumbrances (constraints) of immovable property and transactions with it (the “Practical Guide”), approved by the Order of the State Register No. 107 dated July 27, 2005.

So, it is stated in the Practical Guide that the ownership of the construction in progress plants is registered on the basis of documents confirming the ownership of this land, building permits and documents containing the description of the construction in progress plants.

Of course, there is no direct reference to the fact that ownership must be registered on the contractor, however, based on the fact that in this norm it’s said that as a title document requires a building permit and the documents containing the description of the facility under construction rather than the equity participation agreement as a single document, which regulates legal relations of share holders and the contractor, then we can assume that the subject to registration are property rights of the contractor.

Another confirmation of this approach is the fact that the Practical Guide provides that the registration of ownership of the newly created unit of real property based on the Act of of admission to operation or the Decision of the local government body or local self-government bodies on the approval of the Act of admission to operation (if such decision is available).

When deciding whether register or not to register the rights we should proceed from the fact that the registration would help to protect the rights of investors and contractors in the event of a dispute to greater extent. The absence of registration gives more reason for conflict resolution not in their favor.

In this paper we consider only one problem, which solution is not always possible within the existing legal framework. Recommendations in this situation are as follows: it is necessary to eliminate discrepancies and contradictions between the laws and regulations, as well as the contradictions arising in the course of their enforcement in respect of construction in progress plants, and perhaps follow the example of Russia and Kazakhstan, where were adopted special legislative provisions governing the equity relationship in house building.

(Article published on the website of
the International Business Council:
www.ibc.kg in the “Analysis” section)