Shared Construction Participation: Issues of Legislative Regulation

This article aims to analyze the main problems in shared construction participation in the Kyrgyz Republic, highlight legislative regulations and ways to resolve these issues and formulate brief recommendations to protect the rights and interests of participants in shared construction.

In today's world, the Civil Code of the Kyrgyz Republic (hereinafter referred to as the CC KR) does not provide for a separate type of contract, such as the shared construction participation agreement.

However, the Housing Code of the Kyrgyz Republic (hereinafter referred to as the HC KR) mentions it. Article 66 establishes that during the construction of residential premises, individuals, legal entities, state bodies, or local government bodies have the right to acquire property rights to the residential premises under construction under the conditions of a shared construction agreement.

Additionally, the HC KR sets requirements for the form of the shared construction agreement: the agreement for shared construction of residential premises must be concluded in written form, notarized, and undergo state registration as prescribed by law.

Due to the insufficiency of legislative Regulation, a number of disputes arose, which often led to litigation.

There is no uniform judicial practice: in some cases, when considering such disputes, the courts rely on the terms of the shared construction agreement, while in other cases, they are guided by the norms of the Law of the Kyrgyz Republic "On Consumer Protection," which affects both the amount of the state duty to be paid and the calculation of the amount of damage caused.

Thus, in September 2023, the Supreme Court of the Kyrgyz Republic published a draft Resolution of the Plenum of the Supreme Court of the Kyrgyz Republic "On Judicial Practice in Civil and Economic Cases Related to the Consideration of Disputes in the Sphere of Shared Construction of Apartment Buildings" (hereinafter referred to as the Plenum Resolution of the SC KR).

In this Plenum Resolution of the SC KR, it is stated that within the framework of shared construction agreements for housing, the court considers disputes such as

1. On the termination of the shared construction agreement for housing;
2. On the recognition of the shared construction agreement for housing as valid/invalid;
3. On compelling the developer to conclude an agreement of sale for a share in an apartment building constructed under the shared construction agreement;
4. On compelling the developer to eliminate defects within the agreed contract period;
5. On compensation of expenses incurred by the shareholder for eliminating defects in the constructed shared property;
6. On compensation for damages caused to the shareholder by the developer's delayed commissioning of the shared construction property;
7. On compelling the signing of the acceptance certificate for the shared construction property;
8. On recognizing ownership rights to real estate;
9. On compelling the transfer of premises for finishing works;
10. On compelling compliance with the terms of the agreement;
11. On the demolition of the apartment building;
12. On the compulsory registration of the shared participation agreement;
13. On reducing (increasing) the contract price;
14. On applying the consequences of a null transaction.

The raising of funds from citizens for the construction of an apartment building can be carried out through various transactions: entering into preliminary agreements of the sale of residential/non-residential premises in the construction project, entering into loan agreements, where the obligation to repay the loan is terminated with the transfer of residential/non-residential premises in the apartment building to ownership after its construction is completed, entering into simple partnership agreements for the purpose of constructing an apartment building with the subsequent transfer of residential/non-residential premises in such an apartment building to ownership, and entering into construction investment agreements.

On November 21, 2023, by Resolution No. 614 of the Cabinet of Ministers of the Kyrgyz Republic, the Regulation on the Procedure and Conditions for Attracting Financial Resources from Individuals or Legal Entities for the Construction of Apartment Buildings and Other Real Estate Objects (hereinafter referred to as the Regulation) was approved.

This Regulation clearly sets out the requirements for the content of the contract to attract funds

According to Clause 22 of the Regulation, the contracts must contain the following essential terms:

1. Information about the subject of construction in accordance with the construction project, including the specific subject of the construction to be built and transferred to the client (address, number of residential or non-residential premises), with details of the construction features, area, characteristics of the construction subject, and information on the full or partial completion of finishing works;
2. Bank details and the bank account number of the client (developer);
3. The deadline for fulfilling the obligations under the contract;
4. The cost of the construction subject;
5. The amount, schedule, and method of transferring funds by the client or depositing cash into the client's (developer's) bank account;
6. The warranty period for the usage of the construction project;
7. The rights and obligations of the parties;
8. The procedure for amending the contract terms;
9. The procedure for the acceptance and transfer of the construction subject;
10. The commissioning deadline for the construction project;
11. The client's (developer's) obligation to transfer ownership rights to the clients for the construction subject, which meets the contract terms, the requirements of normative technical documents, the project plan, and other documentation;
12. The grounds for contract termination before the agreed deadline;
13. The procedure for refunding the clients' money in case of non-fulfilment of obligations or contract termination before the agreed deadline (one party's refusal to fulfil the contract);
14. The parties' liability for non-fulfilment or improper fulfilment of contractual obligations;
15. Force majeure circumstances.

At the discretion of the parties, other additional terms may be included in the contract.

The developer may enter into contracts and attract funds only after being included in the register of construction projects, which is a unified electronic database containing information about the construction projects, the clients (developers) attracting financial resources for the construction project, including information about the general contractor, as well as details of the availability of state examinations and problematic construction projects.

In cases where the developer is not the owner of the land plot used for the construction of an apartment residential building, as well as in cases where the developer does not have a municipal land plot under lease for these purposes, a joint activity agreement in construction may be concluded between the developer and the owner (lessee) of the land plot. This agreement must also be notarized and undergo state registration.

At the same time, ownership rights to the land plot do not transfer to the developer upon the conclusion of a joint activity agreement (simple partnership agreement) until the developer fully complies with all the conditions of the agreement. This means that the landowner, along with the developer, carries equal risks throughout the duration of the joint activity agreement, including risks to third parties (participants) who are involved in the construction by the developer company. In contrast, when concluding a shared construction participation agreement, the developer company has the right to dispose of the funds contributed by the participants for construction purposes at its discretion.

It is important to note that, in accordance with clause 51 of the Regulation on the Procedure for Issuing Documents for Design, Construction, and Other Changes to Real Estate Objects and the Assessment of Compliance of Completed Construction Objects Put into Operation in the Kyrgyz Republic, approved by the Resolution of the Cabinet of Ministers dated August 6, 2021, No. 114 (hereinafter referred to as Regulation 2), a positive expert conclusion is the basis for including the object in the register of construction projects and commencing construction. This document is issued based on the results of the examination of the project documentation for the construction of the object.

Thus, when planning to purchase real estate in construction projects, it is necessary to pay attention to the following key points:

1. Whether the construction project is included in the register of construction projects;
2. On which land plot the construction of the project is planned: whether the developer is the owner of the plot, a lessee, or involves a third party who is the owner or lessee of the land plot;
3. Whether there is a positive expert conclusion;
4. The contract for the acquisition of real estate must contain all essential terms as provided by the Regulation;
5. The contract for the acquisition of real estate must be notarized and registered with the authorized body for the registration of rights to real estate.

To ensure that your interests are most protected when conducting real estate transactions, we recommend seeking qualified professionals for legal support in such transactions.

The LEX Law Firm team has specialists experienced in supporting real estate transactions and is always ready to help protect your rights and interests.