Real Estate in Ukraine

These are the highlights if you want to know more about the Real Estate in Ukraine. This entry was drafted by Arzinger law firm.

This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case  Arzinger law firm an excellent option in Ukraine.

Real Estate Law

In accordance with the legislation of Ukraine the term “Real Estate” is defined as land plots and the property located on land plots which cannot be relocated without its depreciation or changing its purpose.

A land plot is a part of the earth’s surface with fixed boundaries, exact location and the defined rights attributed to it. The freehold (ownership) covers, within the boundaries of a land plot, the surface (soil) layer and water bodies, forests and perennial plantations located on such land plot, unless otherwise provided by law and provided that it does not affects third parties’ rights, as well as the space above and beneath the surface for the height and depth necessary for construction of buildings.

Based on the above definition, to qualify for real estate, the property (if other than land) should have a foundation and should be inseparably attached to a land plot, so that it cannot be removed from a land plot without its depreciation or changing its purpose.

The following types of property do not fall within the category of real estate as they do not meet all the requisite qualifications: temporary constructions, small architectural forms, non-capital facilities situated on the land plot (stationary outdoor advertising), facilities which are appurtenant or constituent part of another item e.g. pipe lines, automobile roads, power supply and heating networks, railroad tracks. . At the same time, an integrated property complex of an enterprise is treated as being equivalent to real estate. As for the construction in progress, its disposal as a real estate property can be carried out only after its commissioning and registration of title to such construction as a completed construction project in accordance with the legislation of Ukraine.

Rights to Real Estate

In Ukraine, a building and the underlying land plot is subject to a separate legal treatment. The Ukrainian legislation defines the following types of rights to real estate:

• IN RESPECT OF A LAND PLOT: ownership (private, state and communal), lease, permanent use, emphytheusis, superficies, and servitude;
• IN RESPECT OF OTHER REAL ESTATE: ownership (private, state and communal), lease, right of operational management, right of full economic use, and servitude.

The right of ownership to a land plot includes the right to own, use and dispose a land plot. Land lease is a contract-based possession and use of a land plot required by a lessee for conducting commercial and other activities for a defined period and in consideration for an agreed payment. A leased land plot can be further sublet by a lessee to a third party upon prior consent of a landlord.

The right of permanent use of land is the right to possess and use the land plot being in state or communal ownership without limitation of the term of use. The entities which are currently entitled to have the right of permanent use of a land plot can be divided in few main groups: (1) enterprises, institutions and organizations being in state or communal ownership; (2) Ukrainian non-profit organizations of disabled persons, their enterprises, institutions and organizations; and (3) religious organizations of Ukraine for the construction and servicing of religious or other buildings necessary for supporting their activities, (4) higher education establishments (irrespective of form of ownership).

Land servitude is the right of an owner or a user of a land plot to use third party’s land plot either for free or on a chargeable basis for pass, laying out cables, electricity transmission lines etc. Land servitudes can be either permanent or temporary. The existence of land servitude does not entail the seizure of a land plot or termination of owner’s title to it. Emphytheusis is the right to use a third party’s land plot for agricultural purposes, while superficies means the right to use a third party’s land plot for construction purposes. Emphytheusis and superficies are rarely applied in practice. In contrast to ownership and lease which are applicable to both land and other real estate, the right of operational management and the right of the full economic use are normally related to buildings and constructions and are mainly applied within structuring of state, local authorities and their subordinate companies’ activity. The right of operational management of state or municipal property may be granted to state and municipal institutions and organizations, which do not conduct commercial activity; for instance, ministries, local state administrations, government agencies, etc. An organization or institution which holds real estate property on the right of operational management is not entitled to dispose of it with the intention of gaining any profits. The respective ministry or department, acting on behalf of the state or local community, exercises control over the use of the granted property and they may withdraw the property from the operational management if property is used in breach of its designated purpose.

The right of the full economic use is defined by the Commercial Code as the right of an entity that possesses, uses and disposes of the property assigned to it by the owner (or its authorized representative), with the limited authority to dispose of certain types of the property with the owner’s prior consent only. The right of the full economic use is provided to the state owned or municipal enterprises for the purposes of their commercial activities. The owner of the property exercises direct or indirect (i.e., through its authorized representative) control over the use and management of the property without interference in the day-to-day business activities of the enterprise.

Registration of Proprietary Rights to Real Estate

Since the beginning of 2013, a new system of registration of real estate rights has been enacted in Ukraine. The essence of the reform lies in the introduction of a unified State Register of Proprietary Rights to Real Estate (hereinafter – ‘Register’), which contains records on all registered rights to real estate and their encumbrances, and replaces the former multiple registers with fragmented information on property title. One of the most important features of the Register is its publicly access upon the person’s registration and verification of personal data.

The State Register is maintained by Ministry of Justice of Ukraine. Registration of rights to real estate property is performed by state registrars acting within state enterprises such as state and municipal Administrative service centers and by notaries. Despite of the fact that state registrars and notaries have almost the same powers there are few peculiarities of its implementation. Thus, state registrars are exclusively allowed to register the title to newly-created property. Notaries perform functions of state registrars while certifying a property deed, which allows simultaneous conclusion of an agreement and registration of the respective title. Under the Ukrainian legislation the following rights and encumbrances are subject to compulsory registration:  ownership right,  servitude, emphyteusis, superficies, right of economic use and operational management, lease (if the lease term exceeds three years), right of permanent use of land, mortgage, trust management as well as other proprietary rights, tax lien and other real estate encumbrances.

The right of ownership to a real property or a land plot arises upon its state registration with the Register. The state registration of all rights to land is carried out after the state registration of land with the State Land Cadaster. Data regarding owner, lessee, area and designed purpose of all land plots registered in State Land Cadaster is publicly available via Public Cadaster map of Ukraine  All the proprietary rights to real estate duly registered with previous registers (before 2013) and those, which had not to be mandatory registered under the previous legislation, remain valid.

The Principle “Land Follows the Property”

The past years saw the general trend toward the gradual implementation of the principle “Land Follows the Property”. In pursuance of the above principle, the amendments have been adopted to both the Civil Code and the Land Code to the effect that the indication of the cadaster number and the total area of a land plot are qualified as the material term and condition of an agreement for alienation of a building located on such land plot (except for multifamily apartment buildings). The principle “Land Follows the Property” is further supported by the amendments introduced to the Civil Code, the Land Code as well as the Law “On Land Lease”, which can be summarized as follows. In case of acquisition of title to a building, a freehold or leasehold of the owner of such building in respect of the underlying land plot terminates. The freehold of the land plot or part of it underlying the property passes to an acquirer without change of its designated use. Where the underlying land plot is not a freehold, but is rather leased, the new owner acquires such right of land use in the same scope and on the same terms and conditions as available to the former land user (lessee). Where an acquirer is not entitled to own land under Ukrainian law, it acquires the right of land lease instead.

Despite certain promising signs of the “automatic” transfer of land following the property, the above principle does not work properly yet. As before, the parties would have to comply with the ordinary formalities and procedures to execute the transfer of title to land. The abovementioned principle is hardly applied with regard to state and municipal land which was leased by the previous owner of property due to specific procedure of leasing state and municipal land and termination of such lease relations.

Restrictions on Foreign Ownership to Land

In accordance with the legislation of Ukraine, foreign legal entities, foreign citizens and joint ventures with foreign participation may purchase and lease buildings, constructions and their parts as well as lease both agricultural and non-agricultural land plots equally to Ukrainian citizens and legal entities without foreign participation. However, they may purchase land plots only according to the procedure and with limitations set out by the Land Code. Foreign individuals, foreign entities and foreign states are prohibited from acquiring agricultural land into private ownership. As far as non-agricultural land is concerned, foreign citizens and stateless persons are entitled to purchase non-agricultural land plots within residential areas without limitations and non-agricultural land plots outside residential areas only if such persons own real estate located on such land plots.

Foreign entities and joint ventures may only acquire land into ownership (i) within residential areas if they acquire real estate for construction of the property involved in the commercial activities; or (ii) outside residential areas if they purchase real estate.

State or communal land may be sold to a foreign legal entity provided also it establishes and registers its permanent establishment in the form of a commercial representative office in Ukraine. State-owned non-agricultural land is sold by the Cabinet of Ministers of Ukraine, subject to the prior approval of such sale by the Ukrainian Parliament. Communal nonagricultural land is sold by the relevant municipal authorities, subject to the prior approval of such sale by the Cabinet of Ministers of Ukraine. The legislative guidance on the procedure for the obtaining of approval of the Cabinet of Ministers is lacking. In practice, the obtaining of such approval appears lengthy and complicated.

Those state-owned lands underlying the property which is subject to privatization may be sold to foreign legal entities by a state privatization body upon approval of the Ukrainian parliament.

Please note that any land plot which is in state or communal ownership as well as the rights to it (lease, superficies and emphyteusis) should be sold on a competitive basis (at a land auction) subject to the extended list of exceptions. For example, when a land plot is underlying building owned by an individual or a legal entity, or a land plot is granted for subsoil use and special water use pursuant to a special permit (license), etc.

From the effective risk management perspective, investors are often recommended to consider a “two-tier” structure. Under this structure, which has become quite common in Ukraine, a “first-tier” Ukrainian subsidiary company is created, whether (i) fully owned by a foreign legal entity or a foreign natural person, or (ii) jointly owned by foreign and Ukrainian legal entities or natural persons. The “first-tier” subsidiary company would then establish a “second-tier” Ukrainian subsidiary company. Because the “second-tier” entity will directly involve a Ukrainian founder(s) only, it will not qualify for a foreign legal entity or a joint venture under the Land Code and, consequently, it will not be subject to the above restrictions while acquiring land in Ukraine.

When structuring acquisition transaction, the following important requirement should also be considered. The Civil Code expressly prohibits the establishment of the consecutive chain of two sole shareholder companies, i.e. a sole shareholder company cannot found another sole shareholder subsidiary company. Therefore, the “first-tier” subsidiary must be founded by at least two shareholders to enable the establishment of the “second-tier” legal entity with a sole participant. Alternatively, the “second-tier” subsidiary company must be founded by at least two participants, if the “first-tier” subsidiary company has a sole participant.

Land Moratorium

An important factor preventing the development of the land market in Ukraine is the temporary moratorium on alienation of agricultural land plots. However the moratorium is set not for all kinds of agricultural lands. In particular the following kinds of agricultural lands are not subject to alienation – commercial agriculture lands, personal farming lands (for land shares owners) and land shares. All other kinds of agricultural lands such as subsidiary farming lands, individual and collective gardening lands etc. can be alienated under Ukrainian legislation. Firstly introduced in 2001 the moratorium was initially planned to remain in force for five years – considered a reasonable period in order to properly prepare a legislative and institutional framework essential for the establishment of a well-governed land market. However, it has been extended several times and for now members of Parliament extended the moratorium until the adoption of the law on agricultural land turnover, but not earlier that January 1, 2018.

According to the wording of the governmental draft Law “On Agricultural Land Turnover” it is likely that foreign investors will not be allowed to directly invest in Ukrainian agricultural land, thus the only available option will be lease.

Escrow

The concept of escrow account has been introduced in Ukrainian law very recently, which is a major development.

The Escrow mechanism allows Ukrainian banks to keep the funds in the client’s special (escrow) account (the client or a third party may transfer the funds to the account) until said funds have been released, upon certain agreed conditions (stipulated in the transaction), for the benefit of the client or a third party beneficiary. The release is made against the submission of documents confirming fulfillment of the agreed conditions. Unless otherwise provided by the escrow agreement, the bank should only assess the external characteristics of the documents submitted. Until release the funds in the client’s special (escrow) account are frozen and neither client nor third party beneficiary may dispose of the funds.

Acquisition of real estate

There are two forms of real estate acquisition: a direct purchase of real estate (“asset deal”) or acquisition of shares in the company holding real estate (“share deal”). In choosing the preferable form of real estate acquisition, the following advantages and disadvantages of each option should be considered.

The main advantage of an asset deal is that the purchaser acquires a specific asset and it does not succeed to any debts and liabilities of the seller. Additionally, the registration of the property title is carried out simultaneously with the conclusion of the respective agreement.

The disadvantages of an asset deal are:

• It is necessary to re-register the right of ownership to the real estate property;
• Increased transactional costs (state notary fees and payment to the State Pension Fund, does
• not apply in the case of land sale) amount to 1% + 1%;
• In the case of the sale of a real estate property which is built on a leased land plot, a land
• lease agreement will not be automatically assigned to the new owner of such real estate
• Upon transfer, a land lease agreement should be concluded with the new owner;
• The purchase price is subject to VAT (save for the sale-purchase of land which is not subject to
• VAT);
• Ukrainian law is applicable to the agreement as the property is located in Ukraine;
• In the event of sale of a land plot, construction documents and other permits for construction
• activities on a land plot may not be automatically transferred to the new owner. Respective
• documents should be re-registered for the new owner;
• Restrictions for foreign capital in respect of land relations.

The advantages of a share deal are:

• A relatively fast procedure for registration of documents necessary for transfer of ownership
• to a participatory interest (share);
• VAT does not apply;
• An offshore exit is possible;
• A foreign governing law and foreign arbitration may be considered;
• It is not necessary to re-register the ownership title to the real estate property;
• No restrictions for acquisition by foreign investors;
• Land lease agreements, licenses, building permits, project documentation and licensing
• documentation for an investment project remain in force and do not need to be re-executed;
• Relatively low transaction costs.

The disadvantages of a share deal are:

• All the liabilities and debts of the target company are transferred to the purchaser;
• Acquisition may require a prior permit from the Antimonopoly Committee of Ukraine.