‘Easy money, who would refuse?’: Tatarstan support bill on combating ‘consumer extremism’

When the amount of fines and penalties is equal to the price of the apartment

It is not the first year that attempts have been made in Russia to put an end to “consumer extremism”, especially in the construction industry. Already this autumn, the relationship between the buyer of new buildings and the developer can be changed at the legislative level in order to prevent abuse of the right to obtain material benefits at the expense of the entrepreneur. It is expected the necessary amendments to be adopted on September 1.

As a rule, it is not the shareholders themselves who turn to the courts, but lawyers or entrepreneurs to whom they have conceded the right of claims and for whom claim work with developers becomes the main type of earnings. According to the Institute for the Development of the Construction Industry, more than 70% of the country's developers have faced massive claims and lawsuits from such lawyers, and for almost half of the respondents this is an acute problem.

Before the pandemic, about 3.7 thousand lawsuits were filed demanding penalties for construction defects and non-compliance with housing deadlines. In total, more than 6.5 billion rubles of penalties were collected from developers. Subsequently, the number of cases involving developers increased: in 2020 — 23 thousand claims for 9.8 billion rubles, in 2021 — 33 thousand for 13.3 billion rubles, in 2022 — 37.8 thousand claims for 16.6 billion rubles. The statistics were provided by Susana Kirakosyan, the chairman of the Subcommittee of the Chamber of Commerce and Industry on business development in the field of residential real estate management, referring to data from the Supreme Court of Russia.

Often, lawsuits are aimed not at protecting the rights of new settlers and eliminating defects, but at personal enrichment in the form of monetary compensation. The courts almost always support complaints about the quality of construction, and if the requirements are not met, the developer under the law “On Consumer Protection” still pays a fine of 50% of the penalty amount. It happens that the total amount of penalties and fines collected can be compared with the price of an apartment under a contract or even exceed it.

Who makes money on shareholders

A flurry of such lawsuits occurred in the pre-pandemic years, that is, before the introduction of anti-crisis measures in the form of moratoriums on collecting penalties from developers and fines for late delivery of new buildings. This is clearly demonstrated by the Tatarstan arbitration file — 2018-2019 turned out to be the fattest years for lawyers, when they filed hundreds of such lawsuits against developers.

Among those who appear in these cases most often is the People's Lawyers company (Narodnye Uristy). For example, in 2019, the company filed about fifty (44) lawsuits against Kazan developers demanding a penalty, but lost only five of them. The amount of claims is from 250 thousand and up to 1 million rubles each. Over 30 cases People's Lawyers won with the developer of Pobeda residential complex alone. Although the claims were partially satisfied, they were awarded more than 5.3 million rubles.

Today, a microenterprise with one employee is in the process of liquidation — the tax service decided to exclude it from the Unified State Register of Legal Entities due to inaccurate information. People's Lawyers PLC has been working on the market for 6 years, in recent years it has not shown signs of activity.

Almost all major developers in Kazan have faced the claims of such companies.

“This gives unscrupulous lawyers the opportunity to apply gray schemes, fool new settlers”

Amendments have been proposed to the bill “On shared-equity construction” to change the relationship between the buyer of housing and the developer. A group of authors headed by the chairman of the Duma Committee on Construction and Utility Services Sergey Pakhomov, deputies Sergey Kolunov and Ilya Wolfson, as well as senators Nikolai Zhuravlev and Andrei Shevchenko worked on the document.

According to him, the transfer of all norms into one bill will allow establishing a uniform approach to determining the amount of financial responsibility and will allow the parties to the contract to act reasonably without abusing the right.

Another change concerns the size of the fine — they want to reduce it from 50% to 5% of the penalty amount. Moreover, the money must be received by the buyer of housing. Penalties will be charged for violating the deadlines for eliminating deficiencies, but instead of 1%, it is proposed to set 1/300 of the Central Bank's refinancing rate from the amount of costs for their elimination. If the apartment is bought for personal residence, the amount of the penalty will double, but the rate will be limited to 39% per annum. The same buyer can claim a penalty for failure to commission the housing — 1/150 of the Central Bank refinancing rate from the price of the apartment under the contract for each day of delay.

According to the authors of the initiative, the pseudo-lawyers have the matter on the flow. Having received the signature of the shareholder, they “draw a conclusion allegedly from an expert with a doubtful education” about violations committed by the builders. At the same time, “no one applies for correction, they immediately go to court”. The amount billed mainly consists of legal services and court costs, and "30 percent of this money at best reaches the owner”.

“It would seem there is no problem. But maybe this serves the developers right, they will better monitor the quality. But here it must be understood that the “conclusions” are written under carbon paper, they may not correspond to reality at all. But the house actually has a conclusion from Gosstroynadzor, which conducted an examination and accepted this residential complex. But the shareholders then get bogged down in the courts and cannot get an apartment until the litigation is completed. Some proceedings can last for years, and all this is additional expenses for people, which are not even always covered by compensation, because lawyers take the lion's share of the money for themselves," explains Ilya Wolfson.

Often, families with children who have sold the only apartment, temporarily live in a rented one and pay rent with a mortgage, at the same time, find themselves in such a situation, the deputy said. To compensate for these costs, people “agree to such an adventure, but they find themselves trapped and waste a lot of money, instead of finishing and furnishing their new housing and moving.”

“In principle, it is for such cases that a reservation is provided for the purchase of an apartment for personal purposes. The bill primarily protects families who seek to really improve their living conditions, rather than earn money. We remove double responsibility from developers — we follow the principle that there must be one punishment for one offense. This bill in no way absolves them of responsibility. If there are reasonable complaints about the quality, be kind — correct and pay a fine, once you messed up," the speaker believes.

“Mailboxes are full of ads: “We will send you on vacation at the expense of the developer”

In the current version of the bill, according to its authors, “actually offered to chop off a hand for stealing a chocolate bar”, and due to the payment of fines, there were cases of bankruptcy of developers. “People were losing their jobs, is such a draconian approach better? Let me remind you that the construction industry accounts for 13% of GDP and 16% of all employed in the country. Therefore, we remove the guillotine and bring the threatening sanctions to the form when they are both proportionate to the violation and tangible for the developer," the legislator explained.

The first reading of the document has passed, now the authors of the project are working on feedback from other deputies, the government and colleagues from the regions. “There are no conceptual changes, there is a more detailed adjustment, which is focused primarily on protecting the interests of bona fide shareholders. The only objections we hear are usually from those who have used such a scheme and from whom we take away the opportunity to profit at the expense of naive shareholders," Wolfson said.

Real estate market participants in Tatarstan support the initiative, knowing firsthand about enterprising businessmen who, under the guise of protecting the rights of a shareholder, simply earn easy money.

According to him, the company openly works on customer comments. In case of claims, he goes to the place with a commission, checks and eliminates violations. But as for outright consumer extremism, it is high time to stop its manifestations, the interlocutor of the publication believes. Therefore, he fully supports the initiative: “The bill is not directed against respectable consumers. If there are any shortcomings, we go and fix them. But there are people who say, “We don't even need to change the windows, you'll pay us the money and that's it.” Of course, there are people who cannot resist such things. Don't do anything, sign the trust, the money has been brought to you. Well, you know, yes, who would refuse? It's such an easy way to earn money, so lawyers are also guilty of that.”

Novastroy Group also supports the announced initiative. According to Antonina Darchinova, the commercial director of the group, minor flaws are a frequent and normal phenomenon during construction. For example, the most frequently voiced drawback is scratches on double glazing windows. They appear during the installation of facades. According to her, the company eliminates such remarks within 60 days. During this period, the owner can already accept the apartment and start using it, this in no way frees the developer from eliminating comments.

“In practice, the buyer receives a third of the compensation or even less”

Maxim Nikolaev, the founder of BMP Brands Group, agrees with the authors of the bill that the proposed changes will help reduce risks for home buyers and make the real estate market more attractive to investors. If the the bill is adopted, it can have a positive impact on the construction industry in general and on the development of the real estate market in particular.

A separate story, according to him, is “lawyers who promise shareholders mountains of gold” for the acceptance of housing from the developer. In practice, he said, the buyer receives a third or even less of the compensation that lawyers will be able to get from the developer.

At the same time, if the legislator's goal is to control unscrupulous law firms, it is necessary to resolve this issue without making concessions to developers, but by strengthening control over such organisations, the expert believes: “Developers are interested in adopting the bill, and I don't see anything wrong with that. But I would like them to have fewer mistakes and more pleasant bonuses for shareholders who accept apartments. I don't think that such a bill, if it is adopted, will radically affect anything, but maybe there will be fewer lawsuits and issues will be resolved faster in a pre-trial manner.”

As it is stated in the explanatory note to the document, the proposed changes will not unreasonably reduce the established guarantees of the rights and legitimate interests of participants in shared-equity construction, and all applicable liability measures of the developer will be established at the level of industry legislation. The authors of the initiative are confident that the innovation will simplify the recovery of losses to the buyer of housing and give a real character to the obligations of the developer.