BGP Litigation partner Dmitry Bazarov speaks with RBC magazine about problems faced by banks in getting back money they invested under agreements on preconstruction real estate

"The bank acts as a stakeholder along with ordinary individuals, and this is a "more risky form of lending" than traditional loans secured by existing real estate, explains Dmitry Bazarov, a partner at BGP Litigation", writes RBC.

Further to his comments given to RBC, Dmitry Bazarov notes that any property, including things and property rights, including rights arising out of agreements on preconstruction real estate, can be used as security. Where such rights are pledged, the pledgee can seek enforcement against if the obligation secured by the pledge is defaulted upon. Under the pledge agreement the pledgee may also keep the pledged right and even the pledged property itself, once execution and levy have been realized through the courts (if the auctions conducted in the course of enforcement proceedings are declared to have failed). If it decides to keep the right, the pledgee becomes a participant in the preconstruction. In such cases the land plot on which the preconstruction real estate is located is not subject to execution and levy.

A legal entity – specifically, a bank – may also become a participant in preconstruction under an agreement on preconstruction real estate, adds Dmitry Bazarov. If the developer default on its obligations to lenders, including those that are participants in the preconstruction project, special provisions of the law on bankruptcy apply.

When a developer goes into bankruptcy, notes the BGP Litigation partner, two lists are kept: a list of creditors' claims and a list of claims for transfer of residential premises. Lenders that are also participants in a preconstruction project may decide to settle their claims against the developer by transferring the developer's right to the construction in progress and the land plot to the housing and construction cooperative or other specialized consumer cooperative established by the project's participants. The cooperative then finishes building the property and transfers the residential premises to its members which the bankrupt entity was unable to. In that case the question of further financing of construction is decided independently by the cooperative, at its own discretion. The lender may refuse to participate in such a cooperative, while retaining its rights of claim in the "pecuniary" list of creditors' claims.

Accordingly, banks that have chosen participation in preconstruction real estate over traditional means of financing construction (execution of loan agreements secured by mortgage of the real estate) have put themselves in a very difficult position, given the unstable condition of many real estate developers. It seems unlikely they will be able to get their money back quickly, let alone fully, concludes Dmitry Bazarov.

The full article (in Russian) is available here: "Крупным заемщиком банка «Пересвет» оказался находящийся в СИЗО девелопер".