Cadastral Value Changes: Rent Adjustments in Russia

July 28, 2022

BRACE Law Firm ©

Legislation allows for changes to the cadastral value of real estate not only by challenging it, but also through the establishment of a new cadastral value by authorized government bodies. When parties determine rent as a percentage of the cadastral value of an object, a change in that cadastral value triggers a corresponding adjustment in rent. Notably, such adjustments typically characterize relationships with public landlords. However, if private entities link rent to cadastral value in a lease agreement, a change in the latter will also lead to a change in rent.

Below, we examine in detail the circumstances and procedures for such adjustments.

Cases Where Rent is Determined Based on Cadastral Value

Generally, rent set as a percentage of cadastral value is characteristic of lease relationships involving public entities.

Russian law provides several options for determining rent when a public entity acts as the landlord. For instance, federal executive bodies exercising ownership powers determine the annual rent for land plots owned by the Russian Federation and located within its territory using one of the following methods:

a) based on the cadastral value of the land plots;

b) based on the results of competitive bidding conducted as an auction;

c) in accordance with rent rates approved by Rosreestr;

d) based on the market value of the lease rights for the land plots in accordance with a valuation report. [1]

Furthermore, legislation establishes the principle of maximum simplicity in rent calculation, which implies the possibility of determining rent based on cadastral value.

According to methodological recommendations approved by the Ministry of Economic Development of Russia, it is advisable to base rent primarily on the cadastral value of the land plot. Since cadastral value information is publicly available, this approach ensures simplicity and transparency in calculations while reducing the time and costs associated with calculating rent and concluding the agreement. [2]

The use of the market value of the land plot or the market value of lease rights as a basis for rent calculation is recommended when:

• the land plot is built-up;
• the land plot is subject to encumbrances or restrictions on rights that are not typical for most land plots in the given territorial zone, meaning the cadastral valuation could not account for these circumstances (for example, the presence of reclamation facilities or an underground gas pipeline, which significantly affects the landlord's rights and, consequently, the rent amount).

Using rent calculation methods not based on the cadastral value of the land plot is advisable when there is a significant discrepancy in rent calculations based on cadastral value for plots with similar characteristics.

At the municipal level, local government bodies may also determine rent according to the above approach and in accordance with the Methodological Recommendations for the Preparation of Municipal Regulatory Legal Acts (prepared by the Federal Budgetary Institution "NTSP" under the Ministry of Justice of Russia).[3] Pursuant to Clause 6 of these recommendations, rent for land plots in municipal ownership is determined as follows:

• based on the cadastral value of the land plots;
• based on the market value of the land plots if the cadastral value is unavailable.

The formula for calculating rent based on the cadastral value of a land plot is:

Ap = Kc x Kz,

where:

Ap is the annual rent amount; Kc is the cadastral value of the land plot, determined based on state land cadastre data; Kz is a coefficient determined by the type of permitted use of the land plot.

Thus, the owner acting as the landlord has the right to determine the rent amount (or the method for its calculation). However, since lease agreements for public real estate are generally concluded through bidding, the following must be considered.

As stated in Clause 18 of the Resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation dated November 17, 2011 No. 73 On Certain Issues of the Practice of Applying the Rules of the Civil Code of the Russian Federation on Lease Agreements, under Clause 4 of Article 447 of the Civil Code, rent for state or municipal property is not regulated if the rent amount is determined by the results of bidding. The rent determined through bidding is not subject to regulation and remains unaffected by changes in the cadastral value of the leased plots. In such cases, a subsequent change in cadastral value — including by a court decision that neither the bidding organizer nor potential participants could have known about — can only be considered when conducting new bidding. For example, reducing rent for an agreement concluded via an unsuccessful auction affects an indefinite circle of people — potential tenants who might have participated had the cadastral value and initial auction price been lower. This rule applies provided the lease agreement does not specify a procedure for amending the agreement upon a change in cadastral value. [4]

Changes in Cadastral Value Triggering Rent Adjustments

Cadastral value may change in the following cases:

• Approval of a new cadastral value following a mass cadastral valuation of real estate.
• Revision of the cadastral value based on an application from an authorized person.
• Change in the characteristics of the object (area, permitted use).

When calculating rent based on cadastral value, federal executive bodies include provisions in the agreement allowing for rent adjustments due to changes in the cadastral value of the land plot. In such cases, the parties must recalculate the rent as of January 1 of the year following the year in which the cadastral value changed. In this scenario, the rent is not indexed for inflation. [5]

If the cadastral or market value of a plot changes, rent indexation for inflation is not performed for the year following the change. [6] Thus, legislation requires lease agreements where the payment amount depends on cadastral value to include a procedure for adjusting such payments when the cadastral value is revised.

Furthermore, the tenant has the right to demand a revision of the cadastral value of the leased real estate, provided the rent amount depends on that cadastral value.

Clause 2 of Article 39 of the Land Code provides that if a lease agreement for state or municipal land is concluded at an auction for the right to lease, the annual rent or the first lease payment is determined by the auction results. Under Clause 14 of Article 39 of the Land Code, the authorized body sets the initial auction price either as the annual rent determined by a market valuation in accordance with Federal Law No. 135-FZ dated July 29, 1998 On Valuation Activities in the Russian Federation (the "Valuation Law") or at a rate of at least 1.5% of the cadastral value of the land plot, provided the state cadastral valuation results were approved no more than five years prior to the decision to hold the auction.

A landlord under an agreement subject to regulated rent may demand payment in the amount established for the corresponding period by the regulatory body.

The following timelines apply for the application of a new cadastral value:

1. Cadastral value data is used for the purpose of determining cadastral value from the date of its entry into the USRN.

Regulatory legal acts may establish the procedure for adjusting rent for a land plot due to a change in its cadastral value resulting from a state cadastral valuation. For example, under Clause 9 of the Rules for Determining the Amount of Rent, as well as the Procedure, Conditions, and Deadlines for Paying Rent for Land Owned by the Russian Federation, approved by Resolution of the Government of the Russian Federation dated July 16, 2009 No. 582, rent must be recalculated as of January 1 of the year following the year in which the change occurred. Therefore, when determining the date of a rent adjustment, one should follow the provisions of the relevant regulatory legal acts. In particular, under Clause 3 of Article 39.7 of the Land Code, the following entities establish the rent calculation procedure for state or municipal land plots leased without bidding:

• the Government, for federal land;
• the state authority of a constituent entity of the Russian Federation, for land owned by that entity or land where state ownership is not demarcated;
• the local government body, for municipal land.

Pursuant to Article 24.20 of the Valuation Law and clarifications in Clause 18 of the Resolution of the Plenum of the Supreme Court of the Russian Federation dated June 30, 2015 No. 28 On Certain Issues Arising during the Consideration by Courts of Cases Challenging the Results of Determining the Cadastral Value of Real Estate, cadastral value data is used from the date of its entry into the State Real Estate Cadastre (since January 1, 2017 — the USRN). State cadastral valuations and the approval of their results are not exceptions to this rule. Consequently, if the regulatory act governing rent does not specify a procedure for rent adjustment upon a cadastral value change under the Valuation Law, the rent for state or municipal land changes from the date the approved cadastral value is entered into the State Real Estate Cadastre (since January 1, 2017 — the USRN).[7]

2. If the cadastral value changes by a decision of a commission or a court, the value established by such decision applies from January 1 of the calendar year in which the corresponding application for revision was filed, but no earlier than the date the challenged value was entered into the USRN.

Thus, the cadastral value established by a court applies from January 1 of the year the revision application was filed until the date subsequent cadastral valuation results are entered into the USRN.

Under Clause 1 of Article 4 of the Civil Code, civil law acts do not have retroactive effect and apply to relationships arising after their enactment. A law applies to relationships arising before its enactment only when explicitly provided by law.

Law No. 269-FZ [8] contains no specific instructions regarding its temporal application (concerning the above provisions) or its extension to relationships arising before the amendments. As courts have noted, this means that the cadastral value established by a commission decision cannot be applied retrospectively (for a past period). [9]

When rent depends on cadastral value, the tenant’s rights are affected, granting the tenant the right to demand a revision of the cadastral value. [10]

In granting this right to tenants, the Supreme Court of the Russian Federation, in overturning lower court acts, stated that because rent for a land plot (including from bidding) depends on cadastral value, lower courts were premature and unjustified in ruling that the tenant's rights were not affected and that the right to challenge the cadastral value was absent. Thus, a tenant has the right to challenge cadastral value upon proving that their rights were violated (where rent is linked to cadastral value).

Specifically, courts hold that when calculating rent for land plots with an approved individual cadastral value, there are no grounds to use the average specific cadastral value indicator for the cadastral quarter. Consequently, a tenant's demand to apply a specific indicator based on the current cadastral value of the plots is justified.

The legality of adjusting rent based on a change in cadastral value depends, in judicial practice, on whether the lease agreement contains a procedure for such adjustments. When a change in the intended use of a property leads to a change in cadastral value, the landlord must adjust the rent. Otherwise, the tenant may sue to establish the rent based on the cadastral value calculated for the new intended use. [11]

In conclusion, concluding a lease agreement linked to the cadastral value of an object can have both positive and negative effects, as cadastral value may change in either direction.

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References

[1] Resolution of the Government of the Russian Federation dated July 16, 2009 No. 582 On the Basic Principles of Determining Rent for the Lease of Land Plots in State or Municipal Ownership, and on the Rules for Determining the Amount of Rent, as well as the Procedure, Conditions, and Deadlines for Paying Rent for Land Owned by the Russian Federation.

[2] Clause 17 of the Order of the Ministry of Economic Development of Russia dated December 29, 2017 No. 710 On the Approval of Methodological Recommendations on the Application of the Basic Principles of Determining Rent for the Lease of Land Plots in State or Municipal Ownership, Approved by Resolution of the Government of the Russian Federation dated July 16, 2009 No. 582.

[3] The text of the document is provided in accordance with the publication on the website of the Ministry of Justice of Russia as of June 4, 2019.

[4] Resolution of the Arbitration Court of the Volga-Vyatka District dated October 5, 2020 No. F01-12999/2020 in case No. A29-16203/2019.

[5] Resolution of the Government of the Russian Federation dated July 16, 2009 No. 582 On the Basic Principles of Determining Rent for the Lease of Land Plots in State or Municipal Ownership, and on the Rules for Determining the Amount of Rent, as well as the Procedure, Conditions, and Deadlines for Paying Rent for Land Owned by the Russian Federation.

[6] Question 6 of the Review of Judicial Practice of the Supreme Court of the Russian Federation No. 2(2015) (approved by the Presidium of the Supreme Court of the Russian Federation on June 26, 2015).

[7] Review of the Supreme Court of the Russian Federation No. 1 (2017) approved by the Presidium of the Supreme Court of the Russian Federation on February 16, 2017.

[8] Federal Law No. 269-FZ dated July 31, 2020 On Amending Certain Legislative Acts of the Russian Federation.

[9] Resolution of the Arbitration Court of the Urals District dated June 16, 2022 No. F09-3260/22 in case No. A60-46082/2021.

[10] Ruling of the Supreme Court of the Russian Federation dated January 16, 2019 No. 53-KG18-31.

[11] Resolution of the Arbitration Court of the Moscow District dated December 25, 2020 No. F05-21439/2020.