Armenia’s property relations law requires urgent reforms

ARKA: What is your overall opinion of the legal framework regulating property rights? What are the main gaps in legislation?

K. Babalyan: The main legislative act regulating the relations in acquisition, transfer, sale of property and protection of ownership rights is the Civil Code adopted in 1998. Although it has been significantly amended since then, the Civil Code still contains major gaps and contradictions. In particular, I’d like to point out the main problem in Armenia, that is, absence of differentiation between concepts of property, proprietary interest, property rights and personal rights (obligations).

Even back in Roman Law (which is at the base of continental law system among the main examples of which are Germany, Italy, France, Spain, Switzerland, as well as former soviet jurisdictions, including Armenia, pertain to it) the concepts of proprietary rights and personal rights, obligation were clearly differentiated. Here is an example of proprietary right: this is my pencil, it belongs to me and each and every one in the world perceives it as my property. I can defend and claim it against and from anyone. This means I have absolute right to this pencil. On the other hand, there are so-called rights of obligation or personal rights. For example, if you and I enter into an agreement for sale of your pencil, you are obliged to hand over the pencil to me. In other words, as long as the pencil has not been passed to me de jure and de facto, I can claim the pencil only from you. If the pencil has been stolen or taken away from you, I cannot present any claims against those who stole the pencil and claim it from them. Thus, proprietary rights are an absolute right and can be exercised in relation to unlimited number of persons, while right of obligation regulates the obligations undertaken by a person in relation to another person. Proprietary rights and personal rights of obligations collectively are conventionally referred to as material value rights, and property is the object of such rights.

Our Civil Code fails to provide a clear view of this. There is no concept of proprietary interest/rights at all, while section 4 (Right of ownership and other material value/property rights) regulates issues related to the right of ownership, security interest (including pledge agreements) and the rights of construction and servitude. From section 4 of the Civil Code it follows that property rights include the right of ownership and its constituent rights of possession, use and disposal, security interest, as well as the rights of construction and servitude. On the other hand, Article 132, without defining the concept of property, clearly specifies that property includes, among other things, cash, securities, and property rights as specified in section 4. If we follow not the reasonable logics of proprietary and legal relations but the letter and spirit of Civil Code, we can draw arbitrary and ambiguous conclusions and even possibility apply double-standards. For example, we can sell cash for cash, sell the right to dispose property while retaining the rights to use and possess (in that case it is not clear what becomes of the right of ownership itself), and vice versa. There is no provision in the Civil Code which could prohibit us from entering into agreement on transfer and sale of right of ownership in relation towards a right of use constituent of another ownership right. Unlike lease, such sale will not be subject to any term limitations and the provisions of the Civil Code regulating lease relations will not apply to it. We have questions here which have no answers. I believe that the real estate cadastre or notaries will refuse to register such transactions, but I am not sure whether they can legally substantiate such refusals and provide legal grounds for that. This is nonsense, and it is one of the most urgent conceptual problems which, by the way, was raised by leading lawyers back in 1990’s when the Code was being elaborated, but was never considered. In addition, the Civil Code fails to provide a clear distinction between personal rights of obligation with regard to items of property and property rights with regard to the same items. These gaps were partly filled by the practice of cassation court, according to the decision of which, among other things, absence of registration of rights of property and hence absence or rights of property as such does not restrict the rights of claim with regard to obligations related to use of property.

The other problem lies in contradictions in the Civil Code with regard to acquisition of property rights. On one hand, there are articles which clearly define that a person acquires rights to property from the moment of origination of a certain fact or circumstance, for example, after 10 years of continuous good faith possession. On the other hand, for real estate the Civil Code provides for state registration, that is, property rights arise from the moment of state registration. It is unclear in this situation what the proof of origination of right is. In other words, if another person claims its rights to the same property, arises a question: what are the legal grounds of the existence of a property right – the fact of 10-years’ continuous good faith possession or the fact of state registration? Can the act of registration incur rights, and if yes, what are the legal grounds? If no, why connect origination of rights to state registration?

ARKA: How effective is Armenia’s current state registration system?

K. Babalyan: Our legislation sets forth too absolutized requirements to registration of rights to real estate. According to the Civil Code, any right to real estate should be registered which is absurd from legal point of view. For example, if you are walking or driving along a street, and the street is the property of the state or a community, it follows that you are exercising your rights of use, and the rights of use, according to law, should be registered. Certainly, this is absurd. Or another example: you book a hotel room and while you stay there you possess and use the room. According to the Civil Code, your agreement on use of the room and consequently your rights of use of the room are not valid since any rights to real estate should be registered. So, theoretically, if you book a room and pay for it in advance, but later it turns up some other who is willing to pay more, the hotel from legal point of view will not be breaching your rights if it gives your room to the other and returns the money you paid. In reality hotels, of course, are anxious for their reputation, and such situations do not occur, but this is what law and lawyers are for: when normally applied conventional and market logic based state of affairs do not work.

There are also contradictions in situations when a company owning real estate allows other entities to operate business or conduct other activities within its premises. Let us take one of the most common examples – installation of POS-terminals at merchants and retail and leisure centers. It is absurd, both economically and technically, to execute a lease agreement and register the rights for half a square meter, to say nothing of possible change of location of terminal in which case you would be required to each time register again your rights to the new area for another half a square meter. Anyway people by default choose economically reasonable way of doing business avoiding this requirements and the things work until a court dispute arises. And in the court not the economic reason but the Civil Code is being applied.

As for the registration system itself, in my opinion it leaves much to be desired, though in January there were some reforms implemented. Many issues still remain unsolved. For example, there are items of real estate which are not land or building, such as posts, walls or underground cables, which are rather vertical than horizontal. According to law, these objects are real estate, and consequently, any rights with regard to them should be registered. But the current system does not regulate the procedure, rules, legal mechanisms and consequences of such registration.

ARKA: What about registration of movable property?

K. Babalyan: Here, too, there are problems, which, among other things, affect the investment climate. Suppose I want to acquire a business in Armenia, whose most vital assets are movable property (machinery, equipment, servers, etc.). What shall I do first? I would request my lawyer to check whether the assets are really owned by the company. The company can at the best present the agreements on acquisition of the assets, but there is no guarantee that the company has no agreements on sale of the same assets. Here arises a problem which in case of real estate was partly solved by introduction of the state registration institute.

But in Armenia we have no adequate system of registration of rights to movable property, except vehicles. You can register security interest and right or leasing to movable property, but not the right of ownership or its components. Again this is absurd: cadastre and notaries verify and register security interest without any chance to check if the pledgor really owns the property. This means that you can pledge property you do not own, despite that the law says that you can only pledge property you own.

Anyway of course, the registration of movable property should not be mandatory but shall be allowed to be registered.

One of the positive developments here was introduction of required registration of rights to vehicles in 2011. But the problem is that this is the duty of Road Police, not cadastre, and Road Police technically is not prepared to properly conduct all these procedures.

There is another major problem – absence of differentiated approach to different types of property in the Civil Code. Land, potatoes and securities: each requires different approaches of legislative regulation. Moreover, given today’s level of development of information technologies, there are types of property which are not covered by the Civil Code at all.

Armenia’s Civil Code is stuck on the level of trade of the 19th century. For example, the provisions of the Civil Code regulating transfer of rights to registered (nominal) shares and bonds are the same as in the 19th and early 20th centuries. The whole procedure is to be conducted manually, by means of a written agreement, while in modern world practically all major securities markets are automated.

In addition, the Civil Code is static in terms that it cannot be adapted to modern technologies. Just consider e-commerce in terms of transfer of rights of ownership. Trade worldwide is shifting to electronic or automated commerce, but our legislation is not prepared to face this challenge. There are no provisions regulating transfer of rights electronically, and it will be ultimately hard to prove the transaction in court. On the other hand, traders will not wait for the legislation to change, and I believe that such electronic transactions are already being conducted in Armenia. But again, in case of dispute arises in a court the parties to such transactions and the court will be facing hard times to prove the transaction has been entered into.

ARKA: What do we have with level of ownership rights protection in light of the problems you pointed out?

K. Babalyan: First I should like to point out the problems in protection of rights of ownership by means of state intervention.

Consider just one example. You leave for a trip and return to find that your neighbor’s family has moved into your apartment and claim it to be their own. You can call the police and court. Note that all police actions are to be terminated if a court action arises. So imagine that while you explain the situation to the police your neighbor goes to the court and files a suit claiming the apartment after which you remain homeless. And the proceedings can last for months, and even years.

In countries with advanced legal systems in such cases the starting point is the presumption of truthfulness and accuracy. This means that if you present a document or claim, the court takes it for granted, and all further actions are based on your documents and presentations as long as your proofs and evidence appear to be prima facie and reasonably credible and trustworthy . If the documents and proofs turn out to be false or counterfeited, you will incur relevant applicable penalties afterwards. In our example the court would take the side of the presumably and reasonably honest party. Just present the prima facie genuine certificate of ownership and the police and court will restore you to your apartment while the court proceedings still continue. This means that a law-abiding and honest person – that is 95% of population, if not more – is protected. This means that the majority does not suffer from the dishonesty of the minority. In Armenia the situation is different. It may take long time (taking into account all instances) for courts to tackle the case, to check whether the certificate of ownership or purchase agreement is genuine, whether there is no forgery of documents, signatures, stamps, find out the circumstances of moving into, etc. That is, authorities are governed not by the principle of efficient identification of violations and falsehood and unavoidability of punishment and thus prevention, but (mostly of course also following the applicable procedural norms) by the principle of nipping the almost inexistent possibility of such violations or falsehood in the bud, asking themselves: “Yeah, it appears genuine, but what if this document is indeed forged and I proceed with that? So, better to postpone the litigation until expert opinion is received”. As a result, it is law-abiding citizens who suffer from this seemingly effective preventive system, while law-breakers actively make use of it.

The same problems are present in the private sector. For example, in Armenia we do not practice such traditional negotiable instruments like checks, promissory notes … Why? Because we fear abuse and forgery and do not really believe that the guilty will be punished, first of all by civil penalties. If the bank spends so much time and efforts to check if a note or check or a signature on it is genuine, the promissory note as a fast and efficient payment instrument will lose its sense.

In short, imperfect legislation and practice of applying it is a serious problem which hinders the economic development of the country.

ARKA: What solutions do you see?

K. Babalyan: Many problems here are caused by general financial and political problems, lack of efficiency of public administration, etc. Certainly, there are purely legislative problems as well which can be solved by ad hoc actions such as adoption of laws or amendments targeting a specific issue (which is what is being done till now). But if we do not thoroughly reform the legislative system, starting from the most conceptual issues, we will constantly be facing problems like contradictions between provisions of different laws or even different provisions of the same law.

ARKA: So what solutions does Ameria offer, as a law firm advising and protecting the interests of its clients?

K. Babalyan: Basically, the legal framework would benefit more if this or that issue is not regulated at all than in case it is regulated wrongly. Fortunately, our legislative problems refer mostly to the first case. Overall, the legal framework is a flexible system enabling to utilize its positive side for protection of the legitimate interests, including those of our clients. Just imagine there is no Civil Code and the only norm regulating proprietary rights is the Constitution which says that each person at his own discretion possesses, uses and disposes of his own property. We will make use of the constitutional norm to protect the clients. A good lawyer always can find solutions using various loopholes and systemic norms contained in the law and offer the most secure options for their clients. For example a transaction of acquisition of property may be structured and drafted in a way that allows avoiding as many risks identified above as possible. Of course, no one can guarantee everything. There are some fundamentally unsolvable problems, but clients can be at least warned against them by a good lawyer. Our services are based on these principles. Our clients know what they pay for, and we strive to protect them, to the most possible extent, from legal and related problems, thereby adding value to their business.