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How to recover a penalty and additional charges from a real estate developer who violates delivery terms

Sergey Yerin, the Director of Real Estate Legal Advisory Department at ACIG Group of Companies, comments on a widespread practice by developers who violate delivery terms under an equity participation agreement.

A brief example: in case of 1-year overdue delivery of a 5,000,000 rubles worth apartment, a shareholder is entitled to recover from the developer a penalty of about 1,120,000 rubles and an additional charge of about 560,000 rubles, a total of 1,680,000 rubles for this overdue period 1.

Such a strict incentive for developers to fulfill their obligations is specified under Federal Law No. 214-FZ of 30.12.2004 “On participation in cost-shared construction of apartment buildings” and Russian Federation Law No. 2300-1 of 07.02.1992 “On consumer rights protection”. If an unscrupulous developer violates the rights of a real estate investor in terms of delivery of a shared construction project, the equity investor, having fulfilled the payment obligation to the developer, shall have the right to impose a penalty and charge as a financial compensation.

In which case the penalty is paid?

The developer shall pay a penalty to the cost-shared construction investor, in case of violated terms and conditions for commissioning and delivery of a construction project without agreeing the amended delivery terms under an equity participation agreement (Part Two of Article 29 of Federal Law No. 214-FZ of 30.12.2004).

The penalty for a violation by the developer of the delivery of a constructed project shall double the amount of 1/300 of the Russian Central Bank's key rate (on the day of fulfillment of the obligation) from the agreement price for each day of delay. The developer shall be exempt from payment of penalties (fines) if the breach of delivery period has occurred due to the shareholder’s evasion to sign a transfer certificate or other document on delivering the construction project (Part 2 of Article 6 of the Federal Law No. 214-FZ).

Key rate

Russian central bank lowered key rate to 9.25% p.a. on 28 April 2017.

Penalty may be recovered in both trial and pre-trial (claim, non-judicial) procedure. While pre-trial settlement is not binding on individuals, it may be stipulated in an agreement. In addition, it can help settle a dispute without going to court.

How to recover a penalty using pre-trial measures?

The complaint procedure implies the developer to receive claims to recover penalties and recover losses. How to act?

Stage 1. Prepare a claim for the developer to voluntarily pay a penalty.

Calculate and specify the amount of the penalty (fine) in the claim. Please pay attention that the developer is obliged to fully compensate shareholder due losses exceeding the penalty, such as housing costs incurred during the period of the delay in the fulfillment of obligations (Article 10 of Federal Law No. 214-FZ). The amount of losses can also be specified in the claim to the developer.

A copy of the cost-shared construction agreement, a copy of the document confirming the payment made under the cost-shared construction agreement must be applied to the claim.

Stage 2. Send the claim to the developer along with the copies of the documents.

Send the claim and the package of the above documents in a valuable letter requiring a notice of delivery and including a list of attachments for possible subsequent submission of supporting documents to the court; or submit them personally to the developer's office and receive a mark of acceptance. If within the period specified in the claim such funds are not received by the shareholder, you can proceed to the judicial foreclosure process.

How to recover a penalty using trial measures?

The court procedure implies the developer to receive claims to recover penalties, losses, moral damages and legal costs (state fee and customer service representative compensation).

Stage 1. Prepare a formal statement and documents for it.

The statement essentially contains the same requirements as does the claim for the developer to voluntarily recover the penalty and losses. They can also include the requirements the Russian Federation Law “On consumer rights protection” specifies on compensation of moral damages caused by a developer and on recovery of a penalty of 50% the amount awarded by the court in favor of the consumer. Additional legal costs (state fee and customer service representative compensation) are recovered in favor of the shareholder.

Stage 2. Submit the formal statement to the court and attend a trial.

The formal statement must be submitted to a local court of general jurisdiction or a magistrate (depending on the claimed amount), at the place where the developer is registered or the equity holder resides (stays), or where the agreement was concluded / shall be fulfilled.

The court holds the right to reduce the penalty for violating the delivery period of a shared construction project, having learned that the payable penalty is clearly disproportionate to the consequences of the obligation breached. The penalty shall be cut in exceptional cases and at the request of the defendant with an obligatory indication of the reasons for which the court believes that reducing the penalty charges is valid. If the penalty is reduced, the court takes into account the degree of the defendant's performance of its obligations, the real extent of damage incurred by the equity holder caused because of the said violation and other relevant circumstances. To recover costs, such as housing rentals during the period of delay caused by the developer, it is necessary to provide the court with evidence of housing rental costs.

The court may charge the defendant all or part of the costs for the services in favor of the shareholder upon a written request.

We also recommend to file a claim to recover the moral damage. In practice, when handling consumer rights claims, courts often reduce (but not eliminate) the amount of moral damage subject to recovery by the defendant.

Stage 3. Initiate enforcement proceedings.

After the court decision comes into legal force, you receive a writ of execution. Next, you should submit an application for initiation of enforcement proceedings and the writ of execution to the local bailiff’s office or apply the writ of execution to the bank where the debtor holds a current account.

Thus, only a few steps are left to recover the penalty, fines, losses, moral damages from the developer who failed to meet delivery terms of a shared construction project. At the same time, you can contact professionals who will provide a guaranteed result and save your time.

1The penalty is calculated based on the key rate at 9.25% p.a. as fixed by the Central Bank of Russia on 28 April 2017