Published: The Law Reviews, 19 March 2021
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Introduction to the legal framework
1. Ownership of real estate
Foreign and Ukrainian investors frequently acquire and own real estate in Ukraine. Unlike in the case of contractual lease, which is also frequently used for structuring investments for the terms of up to 50 years, an owner exercises full range of powers, not only to possess and use, but also to dispose of the property.
Some historical forms of possessing and using the property still occur in practice, such as the titles of permanent use, full commercial possession and operational management. They are designated for public entities, but also sometimes happen with already privatised entities. Those should be distinguished from ownership. Because the holders of these titles formally lack the right to dispose of a property and sometimes to lease it out, or need to follow a specific procedure for that, including the target property being held under such a title into an investment structure typically requires additional considerations.
Ukrainian laws differentiate land and other immovable property, which is located on land, such as buildings, premises, apartments and residential houses. Ownership title to land typically exists independently from the ownership title to the immovable property located on it. If the owners are different, they have mutual obligations, some of which arise from law, but can be clearly determined only through an agreement. The purchaser of the real estate usually receives the same title to the land that the former owner had, but separate efforts are required for formalising that title and its registration.
Ownership of land does not include by itself any rights to the subsoils, which could usually be of interest to the investors.
Besides private ownership of private individuals and legal entities, the state public authorities and the municipal authorities exercise powers respectively over the state-owned property and the property belonging to territorial communities. Ukraine is also taking measures to liquidate remnants of a collective type of ownership, which historically was construed as being exercised by the labour collectives of enterprises and still occurs in practice.
Ukrainian legal entities and private individuals may freely own real estate in Ukraine. Foreign private individuals and legal entities may own real estate in Ukraine with some limitations, for example, the ownership of the agricultural land plots.
Two or more individuals or entities may own jointly the same real estate simultaneously. The shares of the co-owners in the real estate can be determined by a proportion in the total area of the real estate. The co-owners can reach an agreement on determining their shares in the property to become sole owners of the different parts of the real estate if the parts can practically constitute valid real estate.
When a private individual is involved, while the private property is registered to that individual, it might be in joint ownership with an existing or former spouse, so that disposing of the property requires spousal consent. This ownership occurs as a result of the marital status, and no shares are pre-determined.
As a special case of joint ownership, the owners of residential apartments and non-residential premises in a multi-apartment residential building co-own all common areas, structural elements and networks of the building. Such owners establish unions or hire a professional organisation to manage that property.
According to Ukrainian legislation, the ownership right to real estate arises and is valid only after its state registration in the State Register of Property Rights to Real Estate (the Rights Register), which is operated electronically. A title to a real estate is confirmed by existence of its record in the Rights Register. An extract from the Rights Register can be obtained electronically through an online service of the Ministry of Justice. While anyone can obtain an extract on any real estate, authorities that might require this information have special access. All documents that form the basis the registration are scanned and can be inspected by the authorities in the event of an investigation, even though they are not publicly available. The public availability of the information in the Rights Register promotes transparency and protects against fraud and corruption.
The registration of real estate ownership in the Rights Register may be performed by a state or private notary or a state registrar employed and provided by the state or municipal authority. The registration fee varies according to the speed of registration that the applicant requests, which can be from two hours to five business days.
The titles that were formalised before 2013, when the Rights Register was introduced, and did not undergo any transactions later may still be missing from the Rights Register. These titles are recognised if they were registered under the laws that regulated their registration at that time. The title holder can register them with the Rights Register or the notary will register them with the Rights Register when notarising any agreement with respect to the real estate.
The rights to real estate in Ukraine are subject to Ukrainian laws. This concerns the scope of the ownership or other title, as well as the procedure for registration of that title. The parties sign contracts with respect to real property in front of a notary in Ukraine who also ensures the state registration of title to it. This means that the contract must be governed by the laws of Ukraine. If the parties have arrangements governed by foreign laws, those are commonly put in a different agreement. To ensure performance of these arrangements, a separate agreement to mortgage the property can be made under Ukrainian laws.
The real estate market in Ukraine is active with both national and foreign investors.
According to the State Statistical Service of Ukraine,2 the total area of residential buildings at the beginning of their construction for the period from January by September of 2020 is 3,855,870m², where 247,297m² are one-dwelling buildings, 3,606,184m² are two- and multiple-dwelling buildings, and 2,389m² are residences for communities. The total area of non-residential buildings at the beginning of their construction for the same period is 1,665,204m², where significant shares are represented by hotels, offices, wholesale and retail trade buildings, traffic and communication buildings, industrial buildings and warehouses, and real estate for public entertainment, education, hospital or institutional care buildings.
According to the official reports of the Ministry of Justice of Ukraine,3 in the third quarter of 2020, there were 75,746 agreements on land and 130,335 agreements on other real estate. For comparison, the same in the third quarter of 2019 were 57,033 and 122,229 respectively.
The State Property Fund of Ukraine runs a website dedicated to privatisation potential of Ukraine advertising approximately 1,000 state enterprises being potential targets for privatisation4 with associated real estate.
According to the Ministry for Development of Economy, Trade and Agriculture of Ukraine,5 at the beginning of the 2020, there were 187 ongoing contracts under public–private partnership schemes in their broad understanding, including 52 in operation: 34 concession agreements, 16 joint venture agreements, and two of other types. The Ministry of Infrastructure of Ukraine also promoted concession projects in three seaports.6
Overseas investors may acquire ownership rights to non-agricultural land plots within settlements, as well as non-agricultural land plots outside settlements underlying the real estate objects privately owned by them.
Agricultural lands in Ukraine may belong to foreigners only on the right of lease. Foreigners and foreign legal entities are prohibited to acquire agricultural land in Ukraine. In the event of inheritance of agricultural lands by a foreigner, the foreigner is obliged to dispose of the ownership right to the agricultural land within one year.
The land that is designated for individual or collective gardening may belong to foreigners only on the right of lease.
There are no restrictions that apply to the lease of the land plots, or the ownership or lease of buildings and facilities by foreigners and foreign legal entities.
An investment can be structured in a variety of ways, which usually involves either establishing or acquiring a company in Ukraine. While the direct ownership of real estate by foreign individuals is not forbidden, it tends to be less favourable with respect to taxation of proceeds from that real estate or its operation. Limited liability company is the most universal and popular choice of legal form for the company. Some investors who command considerable investments may incorporate an investment venture fund, which is subject to securities market regulations and which profits are generally excluded from corporate profit tax taxation.
When acquiring existing real estate, traditional options are available of either purchasing the real estate directly from the existing owner or by acquiring shares in its holding company.
The most common way to acquire the real estate directly from the owner is executing the sale and purchase agreement. According to the Ukrainian legislation, the sale and purchase agreement of real estate shall be concluded in writing and notarised. For sale and purchase, the valuation of real estate by a certified professional appraiser is performed for determination of the market value of real estate and the correct calculation of the stamp duty amount. It is mandatory for purchasing from individuals. It is optional if the parties are legal entities, but it is still often ordered in practice. The appraiser registers its report in the special database where the tax authorities have access and may compare the prices for similar property.
Instead of purchasing the real estate directly from a company, the shares in this company can be acquired. This usually involves some presale preparation of the company to remove the assets and relocate activities, which the purchaser is not interested in. The company may carry some risks associated with its former activities. In any case, a legal due diligence is recommended for assessment of legal risks whether the company or the real estate is being acquired.
The Law of Ukraine on Investment Activity contains provisions intended to restrict investment mechanisms in residential construction to prevent shifting entrepreneurial risks of construction projects onto the consumers. Investment and financing of residential construction with the use of private funds attracted from individuals and legal entities, may be carried out exclusively through construction financing funds, real estate operation funds, mutual investment institutions, as well as by issuing special purpose corporate bonds, the fulfilment of obligations under which is carried out by transferring the target property or the part of the target property of residential construction.
Investment in property rights to real estate is also a common market option to structure acquisition of real estate under construction. When acquired from the developer, the investor receives the rights to register ownership title to the real estate once it is commissioned into operation. At the moment, this right is not registered, which may lead to collisions in practice.
Real estate ownership
Territorial planning is carried out at the state, regional and local levels by the relevant executive bodies and local governments. The instrument of state regulation of territorial planning is urban planning documentation on paper and electronic media, which is divided into documentation of state, regional and local levels.
Territorial planning at the local level is carried out by developing and approving general plans of settlements, zoning plans and detailed plans of the territory.
The general plan of the settlement is the main type of town planning documentation at the local level and determines the basic decisions of development, planning, building and other use of the territory of the settlement.
The zoning plan (zoning) is developed on the basis of the general plan of the settlement as part of it or as a separate document, the plan of land management and urban cadastre and determines the conditions and restrictions of land use for urban needs within certain zones, and establishes functional purpose and requirements for building and landscaping.
The detailed plan of the territory specifies the provisions of the general plan of the settlement and determines the planning organisation and development of the territory. For settlements with a population of up to 50,000 people, general plans can be combined with detailed plans of the entire territory of these settlements. As part of the detailed plan of the territory, a land management project is also being developed.
The zoning plan of the territory and the detailed plan of the territory as secondary in relation to the general plan type of town planning documentation are not subject to examination.
Change of the purpose of the land plot that does not correspond to the zoning plan of the territory or the detailed plan of the territory is prohibited.
The contamination of land plots is considered as a violation of land legislation. According to the Land Code of Ukraine, for the violation of land legislation, private individuals and legal entities are subject to civil, administrative and criminal liability.
Administrative liability is the most common type of legal liability for land offences. According to the Code of Ukraine on Administrative Offences, contamination of land plot may lead to the imposition of fines to the equivalent of 340 hryvnas to 1,360 hryvnas.
Civil liability consists in the obligation to reimburse the damages caused by the private individual or legal entity, which result from the contamination of land plots.
Criminal liability is the most severe type of legal liability for land offences. The Criminal Code of Ukraine provides for liability for contamination of land plots which may result in a fine in the amount of 17,000 hryvnas to 68,000 hryvnas or deprivation of the right to hold certain positions or engage in certain activities for up to three years.
If the contamination caused the death of people, their mass illness or other serious consequences, the guilty person shall be punished by imprisonment for a term of two to five years.
Ukrainian legislation distinguishes real estate tax and land tax.
Real estate taxpayers are private individuals and legal entities, including non-residents who own residential or non-residential real estate. The main factor that will determine whether a person is a payer of real estate tax is the fact of ownership of real estate, namely buildings. The ownership right to real estate shall be duly registered in the Rights Register. For the leased real estate, the taxpayer is the owner. For the unfinished construction projects the real estate tax shall not be paid. If the residential or non-residential real estate is in shared ownership, the real estate tax shall be paid by each owner proportionally. If the residential or non-residential real estate is in joint ownership, the real estate tax shall be paid by one of the owners, who shall be determined by the consent of all owners.
The object of taxation is the residential and non-residential real estate, including its share.
Legal entities shall calculate the real estate tax independently as of 1 January each year. The calculation shall be made one year in advance, starting from 1 January and ending on 31 December of the same year.
The tax rate is set by the decision of the local municipality depending on the location (zoning) and types of such real estate. The maximum rate of real estate tax is 1.5 per cent of the minimum wage established by law on 1 January of the reporting tax year per 1 square metre of tax base. In 2020, the minimum wage constitutes 4,723 hryvnas. Thus, the maximum tax rate in 2020 shall not exceed 70.85 hryvnas.
The land tax shall be paid by owners of land plots (shares) and permanent land users. Objects of the land tax are:
- land plots that are owned or used; and
- land shares that are owned.
The local governments independently set the land tax rates which shall be paid in the relevant territory.
The annual tax rate for land plots, the normative monetary valuation of which is carried out shall not exceed:
- 3 per cent of their normative monetary valuation;
- for public lands – 1 per cent of their normative monetary valuation;
- for agricultural land – 1 per cent but not less than 0.3 per cent of their normative monetary value;
- for forest lands – 0.1 per cent of their normative monetary value;
- for land plots in permanent use of private legal entities – 12 per cent of their normative monetary value.
Annual land tax rates for land plots, the normative monetary valuation of which has not been carried out, are set:
- for all land plots – in the amount of not more than 5 per cent of the normative monetary value of a unit of arable land area in the region;
- for agricultural lands – not less than 0.3 per cent and not more than 5 per cent of the normative monetary value of a unit of arable land area;
- for forest lands – not more than 0.1 per cent of the normative monetary value of a unit of arable land area.
Any person may finance the acquisition of real estate in Ukraine and become an investor. Investors can be both private individuals and legal entities. Financing of real estate can be carried out also by banks. Usually, financing is done through a loan.
As a general rule, investors intend to provide a loan when there is a high probability of its repayment with the appropriate interest. The loan security may be introduced by the real estate mortgage.
Mortgage is a type of security for real estate, which remains in the possession and use of the mortgagor, according to which the mortgagee has the right in the event of default by the debtor secured by the mortgage obligation to obtain satisfaction of claims at the expense of the mortgage prior to other creditors.
The mortgage may be established over real estate, land plots, unfinished construction, property rights to it and the right to lease or use real estate, which gives the tenant or user the right to build, own and dispose of real estate. The mortgage may be established over the part of a real estate only after its allocation in kind and registration of ownership right to it as to a separate real estate item.
The mortgage is established by the mortgage agreement. The mortgage agreement shall be executed in writing and notarised. Ukrainian legislation provides for the possibility of transferring the subject of the mortgage to the next mortgage but with the consent of the previous mortgagee. The previous mortgage has a higher priority over subsequent mortgages.
Commercial premises shall be leased based on a lease agreement. The essential terms of the commercial premises lease agreement are: object of lease, which should include composition and value of the property, taking into account its indexation; term of the lease agreement; rent taking into account its indexation; procedure for using depreciation deductions; restoration of the leased property; and conditions of its return or redemption. If the essential conditions are not met, the lease agreement shall be considered as unconcluded, which may be the ground for eviction of the tenant, creating obstacles for the tenant's accessing the property and issues with regulatory authorities. The other conditions may be included in the lease agreement by agreement of the parties.
The commercial premises lease agreement shall be executed in writing. Leases agreement may be concluded for a short-term period (up to three years) and a long-term period (more than three years). Long-term lease agreements require notarisation, and the lease right is subject to state registration in the Rights Register.
The leased property shall be described in the lease agreement accurately and completely in accordance with the title documents in order to prevent further disputes.
The fact of transfer of commercial premises into lease is certified by the transfer and acceptance protocol. It indicates the property condition at the time of transfer to the tenant.
An essential condition of a lease agreement is the specified amount of rent. If the amount of rent is not set out in the lease agreement of commercial premises, the agreement is considered as not concluded. The rent rate may be changed within the period specified in the lease agreement, but not more than once a year.
The commercial premises lease agreement may provide for insurance by the lessee of the leased property against the risks of accidental destruction or damage.
Termination of property lease is possible either by agreement of parties, on the grounds expressly provided in the agreement or by court decision.
Developments in practice
1. Construction reorganisation
The State Architectural and Construction Inspectorate was the state authority that provided permitting and registration services, as well as advice on the construction, reconstruction and commissioning of facilities.
In March 2020, the reform of the State Architectural and Construction Inspectorate (the Inspectorate) has begun. The essence of the reform was to liquidate the Inspectorate and create three new state authorities. The main reason for this reform was the multifunctionality of the Inspectorate. Thus, the Inspectorate combined the functions of licensing, control, supervision and permits.
The new state authorities are:
- the State Service for Urban Development, which shall perform registration functions in construction;
- the State Agency for Technical Regulation, which will update state building codes and introduce a parametric system in the construction industry; and
- the State Inspectorate for Urban Development, which will perform supervision and control functions in construction industry.
This state reform is still ongoing.
A new Register of Building Activities and the Public Portal have started operating in Ukraine.
Each object will be entered in the Register with a unique identifier. This will allow to link to the object all permits, urban and project documentation, information about construction participants, photos and other information. This will prevent incorrect data in the Register. It will make the process of monitoring the legality of construction at all stages fast and efficient. The Register will not allow the registration of any object that does not meet the legal criteria.
All documents from the very beginning of construction and before commissioning are created and verified by QR code immediately in the register.
The public portal of the state electronic system in the field of construction will provide open access to information in the new Register of construction activities.
In 2020, the second stage of decentralisation reform has started. The decentralisation reform envisages the transfer of powers, finances and responsibility for their implementation from the central government to local governments.
The reform is carried out through the unification of basic territorial communities of cities, villages, settlements into consolidated territorial units – known as 'united territorial communities'.
As a result of the unification, the local self-government bodies of the united territorial communities shall receive much greater opportunities for development than individual villages or cities. This is due to a change in the administrative–territorial vertical.
As of December 2020, about 1,500 united territorial communities have been established in Ukraine.
According to the Land Code of Ukraine, the state authority responsible for disposing of state-owned land plots outside the settlements is the State Service of Geodesy, Cartography and Cadastre. The Service carries out its activities within each region through the its regional main departments. The Service is also responsible for the registration of land plots in the State Land Cadastre and the maintenance of the public cadastral map.
In order to rationally use the land outside the settlements, the state has agreed to transfer state-owned agricultural land to all, without exception, the united territorial communities of Ukraine in municipal ownership. The transfer covers more than 2 million hectares of agricultural land.
After the transfer, the State Services of Geodesy, Cartography and Cadastre will be reorganised. Specifically, the main departments of the Service in the regions as separate legal entities will be liquidated. Territorial branches of the Service will be created instead. They will be responsible, inter alia, for the registration of land plots in the State Land Cadastre and the maintenance of a public cadastral map.
Ukraine is not standing still. Given all that is described in this chapter, it is clear that Ukraine has launched a number of serious reforms that will significantly affect the real estate market in Ukraine. These include, in particular, the decentralisation, reorganisation of urban planning authorities, transfer of lands into municipal ownership and creating of the construction register, which are described above.
The most anticipated reform is the cancellation of the moratorium on the sale of agricultural land. From 1 July 2021, the Law of Ukraine on Amendments to Certain Legislative Acts of Ukraine Concerning the Conditions of Circulation of Agricultural Land (the Law) comes into effect. The law cancels the moratorium on the sale of agricultural land, which has existed for decades. The moratorium on the sale of agricultural land shall be cancelled on the same day, 1 July 2021. Initially, the moratorium will be cancelled only for Ukrainian private individuals. New restrictions on the sale of more than 100 hectares of land to one person will be introduced. Legal entities will be admitted to the land market only if they are created under the legislation of Ukraine exclusively by the citizens of Ukraine. The law excludes the possibility of foreigners participating in these legal entities. Granting the right to foreign private individuals and legal entities shall be established exclusively by referendum. If such a decision is adopted in a referendum, foreign investors will have almost equal rights as Ukrainian investors. Exceptions are residents of the aggressor or occupying states and other sanctioned states. Foreigners will be prohibited from purchasing agricultural lands located closer than 50km to the border. Foreign investors will be able to carry out their activities through a Ukrainian legal entity.
The next not less important reform is launch of electronic services in the field of construction on the portal 'Diia'. The project provides administrative online electronic services for submission, amendment, data change, registration, issuance and cancellation of documents entitling to preparatory and construction works and documents certifying the commissioning of completed facilities, for construction customers, through a unified state web portal for all construction items. Currently, the Diia portal is being tested by the Ministry of Digital Technologies, and in beta mode allows receiving notifications about the start of preparatory works, notifications about the start of construction works on development sites of insignificant class of consequences (CC1) and notifications about the start of construction work on the basis of a construction passport.
1 Alexander Borodkin is a partner, Roman Riabenko is a senior associate and Mariia Chaban is an associate at Vasil Kisil & Partners.