Any buyer of real estate (the "Buyer") entering into a transaction with the seller (the "Seller") wants to protect themselves as much as possible from adverse consequences. For this it is not enough simply to check an extract from the relevant register, since relying on such information alone can lead to significant financial losses, the need to pay off the Seller's debts, lengthy litigation, the inability to make full use of the property acquired and even the loss of title to it. The property needs to be examined thoroughly through comprehensive due diligence, which can be broadly divided into 3 stages:

• Analysis of the property;
• Checking the Seller;
• Technical review.

Checking the legal status of the property

Before acquiring the property itself, it is necessary to establish, among other things:

• that ownership is registered in the Unified State Register of Real Estate ("USRRE").

Please note: since 01.03.2023, the personal data of property owners (full name, date of birth) is not shown in USRRE extracts obtained by third parties (Article 36.3 of Federal Law No. 218-FZ of 13.07.2015 "On State Registration of Real Estate"). For a comprehensive check, we therefore recommend requesting the extract from the Seller;

• that the actual characteristics of the property match the USRRE information;
• the purpose of the property (residential/non-residential), its permitted use and other characteristics (as applicable);
• whether the property may be used for the intended purposes;
• whether there are encumbrances on the property (mortgage, attachment, easement, lease, ban on registration actions, etc.).

For example, long-term leases may significantly affect the Buyer's ability to use the property.

Other information may also be subject to legal review, depending on the characteristics of the property, its location and the intended use.

Checking the seller's rights

When buying real estate, it is important to make sure that the Seller really is entitled to dispose of the property; otherwise the risk of losing it in future, of the transaction being challenged and of additional costs increases. In any case, regardless of the Seller's legal status, general information about the Seller should be analysed, for example:

• the grounds on which the Seller acquired ownership (sale and purchase, gift, etc.) and the history of transfers of title from other persons;
• the Seller's actual ability to dispose of the property (no bans, attachments or title disputes);
• litigation involving the Seller (including disputes relating to the property being sold or the Seller's other property).

Some of the information to be checked depends on whether the Seller is an individual or a legal entity. If the Seller is an individual, the following should be checked, among other things:

• whether the Seller is married, the status of the property being sold (personal/joint property) and whether the spouse has consented;
• whether the consent of other third parties (co-borrowers, co-owners, guardianship authorities) has been obtained;
• the Seller's legal capacity;
• the Seller's credit and banking history (overdue debts, active enforcement proceedings, blocked accounts).

If the Seller is a legal entity, the following should be checked, among other things:

• whether corporate approvals have been obtained (decision of the management bodies, consent of the members);
• the authority of the person signing the contract (position, power of attorney, order/decision on appointment);
• whether there are bankruptcy proceedings or signs of pre-bankruptcy.

Even if the formal requirements of the law are met, the Buyer may lose the property in future or suffer other property-related losses (for example, if the Seller goes bankrupt and sold the premises when it already showed signs of insolvency). Preventing such consequences requires an even more thorough review, since it is necessary not only to check all the information the Seller provides about the property but also to request all the necessary additional documents.

Technical review

A technical analysis of the property should check, among other things:

• compliance with town-planning regulations;
• the permitted use of the land plot;
• building and commissioning permits;
• the absence of unauthorised alterations.

The Buyer should therefore inspect the property and compare its actual layout with the plans and diagrams in the documents, and analyse whether the property is suitable for their future purposes (especially if the Buyer plans construction or reconstruction).

If inconsistencies or violations are found for any reason, this may make it impossible to operate the property, lead to the Buyer as the new owner being held administratively liable, or result in a demand to demolish the property or bring it into line (for example, in terms of alterations) with the plans and diagrams in the USRRE.

In light of current practice, the risks for the Buyer (including the transaction being declared invalid, loss of title, additional costs and the inability to use the property for its intended purpose) can be divided into 2 categories:

• "Visible" risks (risks expressly mentioned in the documents provided by the Seller that are "on the surface");
• Deferred risks (risks the Buyer knows will materialise but only after some time, or that the Buyer does not suspect on an initial inspection).

Conclusion

Buying real estate must always be accompanied by comprehensive due diligence on the property, which will allow the Buyer to identify hidden risks, assess the lawfulness of the transaction and minimise the likelihood of litigation and financial losses in the future.

Skipping any stage of the review significantly increases the risk of losing title to or the ability to use the property and/or of incurring additional obligations.

C Cases recommendations

To reduce these risks, the C Cases team recommends that the Buyer:

• send the Seller a request with a list of documents needed for review, taking into account the property itself, its planned use and other factors;
• carry out a legal review of the property itself: reconciling USRRE data with the actual condition, assessing encumbrances, analysing permitted uses, etc.;
• check the Seller according to its status (individual or legal entity);
• carry out a technical review and inspection of the property, analysing town-planning restrictions, whether the layout matches the actual condition, etc.

A Buyer carrying out due diligence on their own may miss significant risks that are not always obvious from a basic set of documents, so we recommend involving specialists when buying a property. The C Cases team can help carry out comprehensive legal due diligence on the property and propose the best transaction structure for the specific circumstances.

Sources

• Civil Code of the Russian Federation;
• Federal Law No. 218-FZ of 13.07.2015 "On State Registration of Real Estate".