"Real Estate and Investments. Legal Regulation", the journal

Issue 4 (5) 2000

Formation of the Municipal Property Control System: Some Legal Aspects of the Problem

Sokolov A.V., vice-chairman of Leningrad region committee on state property management, candidate of legal sciences

Municipal property alongside with local finance constitutes an economic basis of local home rule. The problems of creation of an efficient control and management of the municipal property are therefore priority to municipal formations. For the newly founded municipal formations special urgency is acquired with a problem of the prompt and rigorous normative and legal ensuring of the local authorities activity on control over municipal asset. The solution of a problem of creation of the effective municipal asset control system reputes concentration of rule-making, organizational and administrative efforts of local authorities on the following main directions:

1. Ensuring of a suitable (i.e. complete and opportune) registration of municipal asset and support of its registry which includes multivariable (engineering, economic, legal) description of appropriate plants of registration.

2. Ensuring an optimality of administrative solutions on the municipal asset management (keeping of the weighting balance of social, fiscal and investment purposes), including at its disposal, binding in economic support or operating control, transmission to use or fiducial control, importation as a contribution at creation of the economic societies, usage as ensuring the credit bonds (hypothecation).

3. Ensuring a suitable maintenance and effective utilization of municipal asset, including measures on raise of investment attractiveness of the municipal real estate.

4. Ensuring an effective control over safety and usage municipal asset on assigning.

Law-making activity of local authorities in a sphere of regulating of the relations on management and control over municipal asset should be based on an acting federal legislation on the property relations. In law-making activity local authorities should base thus on the constitutional standard establishing their right on self-supporting control over the municipal property (article 132 of Constitution of Russian Federation). Neither the federal legislation, nor local law of the subjects of Russian Federation, regulating the municipal formation, can directly regulate the order of control and order by the municipal property.

According to article 8 of Constitution of Russian Federation municipal property is recognized and defended alongside with private, state and other patterns of ownership. Thus it is necessary to consider, that there are special provisions referring state and municipal property in the civil local law. Differently, a lawgiver establishes definite singularities of the legal regime for state and municipal property. Therefore, the patterns of ownership are equal only by way of ensuring their legal protection. In a wide range of other aspects of the legal regime we can not speak about equality of patterns of ownership. So, depending on a pattern of ownership, the law can establish singularities of acquiring and cease of the property right (item 3 of article 212 CC Russian Federation). For example, the special order within the framework of the special local law is established for a privatization of state and municipal asset (article 217 CC Russian Federation); legal entities having organizational and legal form of unitary firms can be created only on the basis of state or municipal asset (article 113-115 CC Russian Federation); only concerning the state and municipal property there is such real right as the right of economic support (chapter 19 CC Russian Federation); the plants excepted from a circulation, and also plants with a restricted circulation ability (article 129 CC Russian Federation), as a rule, according to the law are found in state ownership; such ways of acquiring as requisition and appropriation are known only for state ownership (articles 242 and 243 CC Russian Federation); the special rules of acquiring of municipal property are established for ownerless property (article 225 CC Russian Federation). These examples can be continued. The singularities of the legal regime of plants of the municipal property established by the civil local law and local law on local home rule should to the full be taken into account by local authorities at definition of management and control over municipal asset.

At developing the normative acts concerning control and management by the municipal property, it is necessary to take into account the provisions of the federal Act "On common principles of organization of local home rule in Russian Federation" of 25.08.95 ¹154-FL. In this law the order of the municipal property creation is established at the expense of state ownership (article 4 and 5), the order of differentiation of municipal property is defined, if there are other municipal structures within a municipal structure (item 3 of article 6), it is established, that the common order of possession, use and management by the municipal property should be defined by the main normative act of municipal structure - by its charter (article 8), it is defined, that only representative body of local home rule has the right to establish the order of control and management by the municipal property (article 15), an important provision is established, that the municipal property privatization incomes go completely in the local budget (article 28), the right of local authorities is defined to realize price and tariffs control for production (services) of firms, establishments and organizations being in municipal property (article 31). The analysis of item 1 and 2 of article 61 of the law displays, that the municipal structures have the right to require on court of transmission in the municipal property of plants finding in the property of the subject of Russian Federation, necessary for a solution of the problems of local value, according to differentiation of authorities between the subject of Russian Federation and municipal structure. At creation of a legal and organizational fundamentals of control and order by the municipal property it is necessary to pay a special attention to standards mentioned in chapter 19 of the Civil Code of Russian Federation "Right of economic support, right of operating control" (article 294300), in paragraph 4 of chapter 4 CC Russian Federation having the title "State and municipal unitary firms" (article 113-115) and in article 120 CC Russian Federations "Establishment".

Whereas now practically all municipal asset is found either in economic support of municipal unitary firms, or in operating control of municipal establishments (the mechanism of transmission of goods in municipal treasury is not created yet and the order of a of this asset maintenance is not defined), the standards of CC RF defining the legal regime of economic support and operating control are a normative - legal basis of all management system of the municipal property. The rights of the municipal asset owner (on behalf of municipal structure these rights are realized by local authorities within the framework of their competency - articles 215 and 125 CC RF) concerning asset being in economic support are enumerated in article 295 CC RF. Two categories of rights are indicated in the article.

One group of rights concerns the rights, which the owner realizes concerning directly the asset itself: à) the right on making a decision about creation, reorganization, liquidation of a firm; b) the right to define a subject and purposes of activity of created or reorganized firm; c) the right on appointing a principal of firm; d) the right on a control over the usage on assigning and safety of asset, owned by a firm; e) the right on receiving of a part of the profit from usage of asset, being in economic support.

The rights permitting to the owner to exert influence on the decisions on order by the real property are in another group of rights, which a firm has the right to accept. We talk of the owner's right to prohibit or to agree to commitment by a firm of the following agreements: sales and purchase, rent, deposit etc. Thus the owner has the right to stipulate his consent by definite demands, for example, transmission to him of a part of the rent charge, part of the purchase price. Thus acts a common limitation - an owner should not misuse with the rights (item 1 of article 10 CC RF). A lawgiver has rather rigidly limited authority of the owner on the order by asset being in economic support of a firm. Actually an owner does not have such rights. Only a firm accepts the decisions about the order by asset. To use this asset it is necessary to the owner at first to withdraw it from a firm. However the law does not establish a criterion of valid exemption of an asset, though it mentions such possibility in item 3 of article 299 CC RF. A court will apply the gap in the local law for the benefit of a legal holder - i.e. a firm, with the reference on article 305 CC RF ("Protection of the rights of the holder who is not an owner"). The sole real way to withdraw an asset is the liquidation of firm. This situation, certainly, is not normal and should be amended by a lawgiver.

The authorities of an owner are quite restricted concerning control of municipal unitary firm as well. The matter is that any legal entity acquires civil rights and takes up civil duties through its bodies (article 53 CC RF). Different from other commercial organizations, a firm according to article 113 CC RF has a sole (and besides privately owned) body, what is the principal of a firm. A firm according to the law has no other bodies realizing control over the activity of the privately owned executive board, and also defining a development strategy of a legal entity. A problem on the forms of strategic control over the activity of a firm, admissible from the point of view of the current legislation, is therefore extremely acute on the part of its owner - municipal structure. The most perspective shape of such control and monitoring is the creation of the so-called supervisory councils at local authorities. The creation of supervisory councils does not contradict the current legislation, since the indicated councils do not refer to bodies of a firm (as it was noted, according to the law a firm has only one body - its director). The supervisory council has no right to interpose with operational - economic activities of a firm, has no right to define a character of its liabilities to the third persons. As it is represented, the circle of authorities of the supervisory councils can be outlined as follows:

à) Definition of a development strategy of a firm, including reviewing of the business - plans and plans of perspective development, filed by the director of a firm;

b) Affirmation of the annual reports about activity of a firm;

c) Calculation of main economic indexes of activity of firm for a forthcoming year;

d) Control over usage by a firm of the means given to it from the local budget or credits, granted to it under the guarantee of a municipal structure;

e) Development of proposals for the next year about a size of the profit share of a firm transferred in a local budget;

f) Development of proposals about fixing of prices and tariffs for production and services of a firm being the monopolist on the local market;

j) Decisions about assigning the auditor check of a firm;

h) Development of proposals about reorganization, liquidation or privatization of a firm;

I) Decisions about installation of a size of the premium to the director of a firm on the base of the financial-economic activity results of a firm;

k) Reviewing a problem about calling to account the director of a firm according to the contract, concluded with him;

l) Reviewing the candidates on a position of the director of a firm;

m) Matching of the local normative acts of a firm:

• Provision about the order of scheduling of activity of a firm;
• Provision about the control and auditing committee of a firm;
• Provision about the order of awarding.

n) Development of proposals on raise of an overall performance of branch bodies on coordination, regulating and control over the activity of firms, subordinated to them.

Creation of the supervisory councils will somehow allow indemnifying the oversights internally intrinsic to such organization-legal structure of legal entities as unitary firms. Nevertheless, local authorities should not be guided by creation of municipal unitary firms. It is expedient to create firms in cases when the managing subjects of other organization-legal structures can not realize the social - significant purposes and problems, for the sake of which they are created. The decision about creation of a firm can be accepted also when on the territory of a municipal structure there are no commercial services, necessary for the population. After the appearance on the appropriate market of services of private commercial organizations, the firm is subject to privatization in a due order.

The rights of the owner of a municipal asset concerning asset being in operating control of municipal establishments, are defined in article 296 and 298 CC RF. Essentially important is the fact, that the Civil Code directly has pointed out cases of valid forced exemption of asset owned by an establishment (as it was already noted, it was not made concerning asset owned on the right of economic support) - the owner "has the right to withdraw redundant, unused, or used not on assigning asset" (item 2 of article 296 CC RF).

Different from a firm, the possibilities of an establishment on the order by the property are extremely restricted. According to the general provision stated article 298 CC RF, the establishment does not have the right to dispose in any way of this asset. Only the owner disposes of asset on behalf of the authorized bodies. A lawgiver, however, is not sequential in this respect. So, according to article 608 CC RF the lessors of asset (including being in operating control of establishments) can be not only owners, but also other entities, "authorized by the law or owner to give an asset in rent". According to the current legislation, authorities on giving in rent an asset, owned by them on the right of operating control, have, for example, educational establishments (item 11 of article 39 of the federal Act "On education"), establishment of culture (article 47 of the "Fundamentals of legislation of Russian Federation on culture").

It is important to mark, that according to article 296 CC RF municipal structure "has the right", but is not obliged to withdraw redundant, unused, or used not on assigning asset. The expediency of exemption is defined for each particular case separately. There is no such expediency, for example, in cases, when an establishment does not use the asset owing to temporal character. In this case it is more expedient to transmit an asset in rent to the interested third persons. In practice the expediency of exemption of asset arises only in cases, when it is either redundant, or will be used not on assigning. In these cases it is usually transmitted not in rent, but fixed in economic support or operating control of other municipal organizations (transmitted from a balance to a balance).

It is necessary also to take into consideration that the fact that the legal and organizational mechanism of isolation of an asset in municipal treasury is not created today. The holder of this asset, who will be obliged to maintain it, is not defined. Before creation of this mechanism we can not talk about any exemption of asset in the treasury. The today's realities are that the excepted asset has to be as soon as possible fixed behind other organization, and in practice it is not always possible. The indicated circumstance is also a constraining factor when municipal structure makes a decision about exemption of asset.

The legal fundamentals of involvement of municipal structures in the economic societies are defined by the Civil Code, federal acts "On joint-stock companies", "On the societies with limited responsibility". It is necessary to stipulate that the municipal structure has no right to be the founder of the general partnership and to be the general partner in the limited partnership. This exclusion is stipulated by standard fixed in item 2 of article 7 of the Law of Russian Federation "On a competition and limitation of monopolist activity on the commodity markets". According to this standard it is forbidden to bodies of the local home rule to combine its functions with functions of the managing subjects. In correspondence to article 69 CC RF the general partners can be only persons occupied with enterprise activity. The significant limitation on involvement of local authorities in the economic societies is contained in item 4 of article 66 CC RF. Their involvement in the economic societies according to this standard is forbidden, however, a stipulation is made, that the law can stipulate the elimination of this rule. The indicated elimination can be seen already in the Civil Code - in article 125. The bodies of local home rule can acquire and realize the property and personal non-property rights and duties within the framework of their competency on behalf of municipal structures. It means, that the local authorities have the right to appear as rigorous participants of the economic societies only on behalf of municipal structure (provided that they are vested such authorities by the charter of municipal structure).

From our point of view other federal acts can not contain standards limiting rights of local authorities farther than those limitations, which are stipulated by the Civil Code of Russian Federation. Nevertheless such limitation is present in the federal Act "On joint-stock companies". In item 4 of article of this law it is defined, that the societies, the founder of which is a municipal structure, can be only open societies. This limitation is, from our point of view, not only in the contravention with the Civil Code of Russian Federation, but is also not logical - it is possible to participate in the societies with limited authority, and impossible in enclosed joint-stock companies, more open on their legal nature. According to item 2 of article 3 CC standards of the civil right inclusive in other laws should correspond to the Civil Code. Establishing own procedures of a decision making on the order by municipal asset, municipal structures should use competitive procedures in the greatest possible measure. However, if at a privatization of municipal asset the demands of competitive order by asset were initially stipulated in imperative demands of a federal legislation, by grant of the municipal real property to the third persons in temporal possession and use till August 2, 1997 (effective date of the federal Act "On privatization of the state-owned property and bases of privatization of municipal asset in Russian Federation" ¹123-FL) the federal legislation practically blocked competitive grant of asset. The problem is that according to item 26 of the State program of privatization affirmed by the Decree of the President of Russian Federation of 28.12.93 ¹2284 and items 4.5 of Substantive provisions of the State program of privatization of state and municipal firms in Russian Federation after July 1, 1994 affirmed by the decree of the President of Russian Federation of 22.07.94 ¹1535, the rented plants of uninhabited fund received in rent on competition or vendue, could be redeemed by the leaser for a moderated board (cost of the redemption did not exceed three annual rent charges). It is clear that the perspective of redemption of the uninhabited fund plants caused local authorities to use mainly the procedures of not competitive grant them in rent (so-called target grant). In article 16 of Federal act "On privatization of the state-owned property and bases of a privatization of municipal asset in Russian Federation " have not pointed such way of privatization, as the redemption of the leasehold received in rent on competition or vendue. In article 26 of the indicated law the unscheduled redemption of only the leased property complexes (firms) is stipulated. Thus a condition is made, that the rent contract of a redeemed property complex is concluded before entry into force of the Law of Russian Federation "On privatization of state and municipal firms in Russian Federation" (i.e. till July 17, 1991), and in the agreement the size of the redemption, periods and order of its importation is defined. Thus, after August 2, 1997 municipal structures can use to the full all the potential in the competitive order of grant in rent of the municipal property.

The special legal reasons exist concerning conditions and grant of plants of the real estate being in municipal property, to third persons (investors) for the purposes of investment activity, for example, for completion of construction, reconstruction or capital repairs. A legal basis of such grant is constituted by the Civil Code of Russian Federation, Federal act "On investment activity in Russian Federation realized in the form of capital investment" of 25.02.99 ¹39-FL, the Law of RSFSR "On investment activity in RSFSR" of 26.06.91 ¹1488-1 (acts in a part which does not contradict to the federal Act ¹ 39-FL), Federal act "On valuation activity in Russian Federation" of 29.07.98 ¹135-FL, Federal act "On privatization of the state-owned property and bases of privatization of municipal asset in Russian Federation" of 21.07.97 ¹123-FL.

The mutual relation between municipal structure and investor is built under the following scheme. The municipal structure transmits to the investor a plant of the real estate for realization of the investment project according to conditions of the investment agreement. Thus the market valuation of the transmitted plant cost is effected. After completion of an investment project appears a common property of the investor and municipal structure on a reconstructed (finished by construction, repaired) plant. The share of parties in this plant will be defined outgoing from a market project cost, defined at a stage of its transmission to the investor and market cost of non-separable improvements in a plant effected by the investor. The relations of parties of the investment agreement concerning a plant finding in the common property will be built on a basis of other agreements between them. Whether the suggested scheme contradicts the current legislation on privatization in Russian Federation? To what extent it meets the legal ways of privatization mentioned in article 16 of the federal Act ¹123-FL? Here there are two important questions: 1) whether the transmission of municipal asset to the common property with individuals or legal entities is possible? and 2) whether such transmission is the act of privatization of asset? The answer to the first question is univalent - yes, it is possible. The answer to the second question - not always. The transmission of a municipal asset to the common property is the act of privatization only in the case, when in a private property is transmitted a share in the right of the municipal property on an object of privatization (as such we regard here a plant of the real estate), instead of all plant as such.

At transmission of a plant of the real estate a whole plant is transmitted to an investor, not in his property, but for the purpose of realization of the investment draft, stipulated by parties. The transmission of a municipal asset to the investor for realization of the investment draft (at the expense of an investor) is not an act of privatization. The common property of the participants of investment activity in this case arises not by virtue of the act of privatization, but by virtue of the law. The plant of investment activity lays in the common property of the participants - see item 3 of article 7 of the Law of Russian Federation "On investment activity in RSFSR" (indicated standard does not contradict the federal Act ¹ 39-FL). After completion of investment activity two participants remain shareholders- municipal structure and investor. The joint owners now have the right to select the following legally possible options of actions concerning a plant of investment activity:

1) A municipal structure sells the share according to the local law on privatization (a third person can become a buyer in this case);

2) An investor sells the share to a municipal structure or a third person by rules established in chapter 16 CC RF;

3) An investor disposes his share to a municipal structure, with the liability of the latter to transmit a plant of investment activity in rent or fiducial control to an investor releasing an investor for a definite time interval from the rent charge or from the liability to transfer a part of the income to the beneficiary;

4) The common property is saved, and the joint owners built their relations concerning a plant of investment activity, on a contract basis;

5) The joint owners according to the local law on privatization create an economic society by importation of the share in its authorized capital.

These variants of activity the parties can discuss at a stage of the investment agreement conclusion. What is a legal nature of the investment agreement?

By its legal nature an investment agreement (including the one where a municipal structure participates), is closest to agreement of the special partnership (agreement about joint cooperation). The complete identity is not certainly present. This agreement is mixed (item 3 of article 421 CC RF), as elements of other agreements -rent, gratuitous temporal possession (being a mixed agreement as well), labor contract, use of an appropriate land lot are also present in it. Such obligatory attribute of the agreement of special partnership, as conditions on support of common causes of the comrades is not present in it (article 1044 CC RF): "... An investor concludes any agreements with the third persons linked to construction, reconstruction or capital repairs on its own behalf, instead of on behalf of a municipal structure, and also without any references on an appropriate letter of attorney or investment agreement ".

It is necessary also to pay attention at the fact that the agreement of special partnership can consist not only in the purposes of receiving of the profit (in this case according item 2 of article 1041 CC RF a municipal structure can not be a party under such agreement), but also in achievement of other purposes, not contradicting the law, (item 1 of article 1041 and item 1 of article 1047 CC RF). In this situation it is important, that investment activity, realized in a form of a capital investment, during realization of the investment draft (the duration of the investment agreement is restricted to this phase) is not accompanied by extraction of the profit. In this phase parties (primarily an investor) bear extremely the expenditures. After completion of the investment draft the mutual relation of parties will be defined by different agreements. In the investment agreement only the conditions of the preliminary agreement (article 429 CC RF) can be expressed. We have already spoken about these conditions. The construction of an integrated management system of the municipal property reputes development active of law-making efforts on the part of municipal structures. In law-making activity municipal structures use today the way of adoption of the particular normative acts on separate areas of activity on control and order by municipal asset. The definite experience of application in practice of such normative - legal act is already accrued.

It is represented that this experience can be used for engineering of a complex normative - legal act, where all aspects of activity on control and order by the municipal property will be arranged practically. At engineering of a complex normative - legal act it is necessary to use the experience of law-making and law-application activity in a sphere of asset control of such subjects of Russian Federation as St.-Petersburg and Leningrad area. It is necessary also to take into account last engineerings made at a federal level (Ministry of Property). Particular sections of the complex normative - legal act can be dedicated to the following problems:

1) Registration of municipal asset;

2) Control over the usage of municipal asset;

3) Creation and reorganization of firms and establishments;

4) Liquidation of firms and establishments;

5) Control over firms;

6) Involvement in economic societies;

7) Control over the real estate assigned to a firm;

8) Sale of a municipal housing fund;

9) Transfer of goods in use under the agreement;

10) Offset of cost of the capital repairs on account of the rent charge;

11) Transfer of goods in the sublease;

12) Fiducial control of asset;

13) Involvement in investment activity by transfer of goods to the investor;

14) Deposit of municipal asset;

15) Writing off of municipal asset.

Despite of its complex character, the indicated document will nevertheless make references to other normative - legal acts. So, the authorized bodies of local home rule should develop and receive extra following normative - legal acts:

• Provision on a commission on the order by municipal asset;
• On the order and conditions of insurance of municipal asset;
• Provision on the order of conducting of contest for vacancy of the principal of a municipal unitary firm (municipal establishment);
• On the affirmation of the exemplary shapes of the charters of municipal unitary firms and municipal establishments;
• On affirmation of the exemplary shape of the contract with the principal of a municipal unitary firm;
• Provision on the supervisory council;
• On the order of establishing and changing of an amount of a part of the profit of a municipal unitary firm transferred in the budget;
• On agent representatives of a municipal structure in noncommercial organizations;
• Provision on the order of material inducing of the municipal structure representative activity in control bodies of the economic societies;
• On competitive assigning of the sellers of a municipal asset;
• On the order of privatization of a municipal housing fund;
• On the order of tendering on the right of inference of the agreements on transmission of municipal asset to temporal possession, use and order;
• On usage of the means received from rent of uninhabited premises;
• On organization of maintenance and usage of plants of municipal uninhabited fund being in municipal treasury.

It is also necessary to take into account, that the complex normative - legal act will not be spread to the order of control over such municipal asset as the land lots and other natural plants, means of the budget, extra-budgetary and currency funds of municipal structure, and also securities (except for the shares). The order of control over the indicated municipal asset will be established by other normative legal acts as well.