Constraction Scam

Relations Refinement Registration with the Builder. Part I

The market of the capital real estate offers several options of documentary registration  relations with the builder to the interested in construction objects capital  investment investor. Each of builders has “his” scheme of investment attraction.

Universal offers

The most widespread schemes of  relations registration with builders are the following (the risk degree is given in process of decrease):

  1. agreement on share participation;
  2. provisional agreement of purchase and sale;
  3. security purchase;
  4. acquisition of property rights at the Fund of Financing of a Construction (FFC).

The builder choice is one of the above-stated schemes which depends generally on financial opportunities of the builder, his budget on lawyers.

Agreement on share participation (1)

Generally, the small builders, who don’t have experience in a construction, volume and steady financing, with the limited budget on legal services,  have  a serving cooperative form of business , have concluded such document.

In behalf  of justice, it is worth recognising that sometimes skilled builders create the serving cooperative. However,it is an exception to the rules under a certain construction object.

Share participation, the economy option

As practice shows, “newbies’s signed the similar agreements  in construction business. The construction object of similar builders has, as a rule, the following characteristics:

  • the small number of storeys (to 5-6 floors), and respectively and lower category of complexity;
  • the serving cooperative acts as the builder;
  • is under construction on the land which is  belonging to one of the owners of cooperative;
  • sign agreements on share participation with investors, after its acceptance by associated members of cooperative;
  • the builder can’t “brag” the  examples of similar ready objects;
  • lack of stable sources of financing.

From above-mentioned characteristics, the biggest risk is  the lack of stable sources of financing. The investor shall be ready that the construction could not have  finished in time (though, the deviation in 6 months from the works schedule at builders is a regulation) because financing of a construction directly depends on the number of already purchased apartments.

The second essential risk is the status of the investor of similar constructions. To sign the agreement on a share the investor is obliged:

  • to become the member of cooperative;
  • to pay the admission fee;
  • to receive the decision of the cooperative general meeting   on acceptance in its members;
  • to sign the basic agreement at the end.

Remember that when you are entering to cooperative, you receive the status, not as the member of cooperative, but the associated member only. It means that you:

  • can’t affect  the  decision making on general meeting of cooperative;
  • have only the right of an advisory voice;
  • The charter of Cooperative is established your rights and obligations;
  • the charter of cooperative also may establish other obligations on participation in economic activity of cooperative;
  • The administration could exclude from members of cooperative without your participation.

The builder gives provision of the status of the cooperative associated member with the purpose to avoid possible capture of a construction object (which undoubtedly would occur if investors could influence into decision making by the builder).

Why  is  the legal maintenance important

A common story is the majority of legal documents  of such builders have the enormous quantity of legal mistakes because of the small budget on legal maintenance of a construction by cooperative of some object. For example, the template of the agreement on share participation of one of the builders (of cooperative) of our capital has contained information that the cooperative works for the accomplishment of the purposes which  the charter has approved and builds the 5-storey house.  It was mentioned in the charter of the same cooperative that the 2-storey house is under construction.

The charter of the legal entity is the main document  on the basis which it performs the activities . It posses first place with ranking.

Such banal discrepancies in agreements and charters testify to negligence in legal issues. It finally negatively affects to the expected investor. Protecting the interests, the cooperative builder most often doesn’t even try to pretend that the rights of the investor are important to its protection and works by the principle “buy or leave”. That’s why the cost of the square meter can be lower than at “neighbours”.

We don’t impose opinion that all builders are unfair.Nevertheless, the documents  should be checked very carefully.  Nobody cancelled the fact  that “the small legal oversight creates  a big problem”.


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