Real estate in Ukraine (land issues)

© Arthur A. Nitsevych

International law offices & Veritas Legal advisers
Odessa – Kiev – Nikolaev – Ilyichevsk

February 3, 2005

1 General overview

On October 25, 2001 the Parliament of Ukraine adopted a new land Code which came into effect on January 1, 2002. In keeping with the new Land Code land is finally deemed as an object of private ownership rights. So, landowners have the right to sell, exchange, donate or pledge their plots.

Finally investors can feel more secure. First, now they can deal with actual owners of land. Second, land, unlike movable property, is extremely difficult to hide or move. So, foreign investors are also able to receive something of real value if their Ukrainian counterparts fail to fulfill their contractual obligations.

No doubt, the adoption of the above Code together with other vital performances gave a strike to foreign investment into Ukraine. For instance, on May 17, 2004 Bunge Limited, an integrated, global agribusiness and food company, founded in 1818 and headquartered in White Plains, New York, announced that its European operating arm, Bunge Europe, had entered into a 50-50 joint venture with Estron Corporation to build an oilseed crushing plant in the port of Ilyichevsk, Ukraine. The new plant is adjacent to the grain export terminal owned by Estron Corporation. The plant's projected crushing capacity is 600,000 tons per year, and it is expected to be operational in early 2005. The plant, as a client of the terminal, will have access to the terminal's expanded capacity of 240,000 tons of storage space with two panamax vessel loaders. Who would think it is possible if the land matter cannot be solved?

The most progressive innovation of the above Code is the concept of private ownership of land. Under the previous Code, private land ownership was limited to Ukrainian individuals and the land sale-purchase was permitted under very limited circumstances.

The concepts related to land use classifications and zoning are taken from the previous Code. Lands are divided into a few major categories: residential, industrial and agro-industrial. Residential land includes land plots used for construction of residential buildings within populated areas, public constructions and other structures of public use. Industrial land includes lands provided for the allocation and exploitation of principal and auxiliary buildings and structures of industrial, mining, transportation and other enterprises, including their means of access, communication networks, administrative-infrastructure buildings and other structures.

Another innovation introduced by the Code is the right to pledge (mortgage) privately owned land. However, only Ukrainian banks may act as pledgees (mortgagees), and then only if they comply with the requirements established by law.

The Code also introduces some new concepts in land relations: landed servitudes and good-neighborliness. As for landed servitudes, they may be given to a landowner or user with regard to the limited free or paid use of another land plot. Under the concept of good-neighborliness, land owners and users are required to use land in accordance with its designated purpose to provide the least nuisance to neighboring land plots.

2 Private Ownership and transfer limitations

Although the most progressive concept is full private ownership of land, the Land Code establishes a moratorium on the sale-purchase of agricultural lands until January 1, 2007. Also until January 1, 2015, the area of an agricultural land plot, that may be privately owned, may not exceed 100 hectares. Moreover, until January 1, 2007, land ownership and use rights cannot be contributed to the authorized fund (charter capital) of legal entities.

 

3 Nonagricultural Land

After January 1, 2002, any legal entity or individual can acquire nonagricultural land, except for beaches, roads, and strategically important state-owned lands (e.g., lands of railways, airports, pipelines, atomic energy). No significant limitations are imposed on a nonresident's ownership of nonagricultural land other than those imposed on Ukrainian residents.

 

4 Agricultural Land

The new Code strictly prohibits foreign citizens, legal entities and governments from acquiring agro-industrial lands. Lease arrangements are the only way foreign investors may get an access to agricultural land. Agricultural land inherited by foreigners must be sold within one year after the inheritance. So, agricultural land may be privately owned by legal entities and individuals, with the exception of foreigners.

Only members of farmer organizations and former members of collective agricultural enterprises enjoy the right to privatize agricultural land. However, even after January 1, 2007, agricultural land may only be sold to Ukrainian citizens with a degree in agriculture or work experience in agriculture or who conduct agricultural production activity as well as to Ukrainian legal entities engaged in such activity.

5 Rights of Nonresidents

Ukrainian citizens may acquire ownership rights to land by way of:

  1. a sale- purchase, gift, barter or other civil agreement;
  2. gratuitous transfer from state or communal ownership;
  3. privatization of land plots previously allocated to them for use;
  4. inheritance;
  5. an in-kind share to which they are legally entitled.

Foreigners may acquire non-agricultural land plots by way of:

  1. sale-purchase, gift, barter and other civil agreements;
  2. buyout of land plots on which real estate under their private ownership is located;
  3. inheritance.

However, foreign citizens may only acquire ownership rights to a non- agricultural land plot outside the limits of populated areas if they have privately-owned real estate already located on such land plot.

Foreign legal entities may acquire ownership rights to land plots of non-agricultural designation: (a) within populated areas, when the property acquisition of real estate will be improved by buildings or other objects related to the companies business activities in Ukraine; or (b) outside the limits of populated areas in the case of the acquisition of real estate.

When the moratorium on the sale of land is lifted, foreign investors will have the right to purchase the land under their privately owned production and storage facilities, provided, however such land is not designated as agricultural or other land restricted for foreign citizens and businesses.

Foreigners are also entitled to participate in the privatization of land. However, sales of state-owned land to foreigners must be carried out by the Cabinet of Ministers and agreed to by the Parliament. As for municipal land, sales to foreigners must be carried out by the appropriate local Council and agreed to by the Cabinet.

Further, the sale of state-owned and municipal land is allowed on condition that the foreigner registers a permanent representative office in Ukraine. Foreign countries desiring to acquire state owned or municipal land (e.g. for embassies and consulates) must apply to the Cabinet of Ministers.

To avoid the above long procedure we advise our clients to use a "legal maneuver". First, foreign entities create a Ukrainian legal entity A. Then, the above Ukrainian resident creates another Ukrainian legal entity B which can purchase land plots without any limitations as it is not considered as a foreign company. If desired, after the purchase of land it's possible to change shareholders in B on foreign members.

6 Right to use the land

The Land Code permits two basic rights to land use: (i) the right to permanent use; and (ii) lease rights. The right to permanent use gives the right holder the right to possess and use a land plot under state or communal ownership without an expiration term. Unfortunately, this right may only be acquired by enterprises, institutions and organizations, which are related to state or communal ownership.

Fortunately, the right to lease plots of land is a viable alternative for foreign investors, international organizations and foreign governments. Under the Land Code, leases may be other short-term (no more than five years) or long-term (no more than50 years). The Land Code also allows the lessee to sublet the land plot upon consent from the lesser. All other issues in connection with the lease of land are regulated by law of Ukraine.

7 State registration

Article 210 of the Civil Code effective as of 1 January, 2004 stipulates a general rule that an agreement on real estate shall be registered. An agreement subject to state registration is considered valid as of the moment of state registration that is performed usually by a notary. Registration of title to real estate is carried by the State Registry of rights to Real estate and their limitations.

8 Conclusion

The new Land Code, which came into effect on 1 January 2002, represents a fundamental change to Ukrainian real estate law. It introduces new rights to private land ownership and use as well as the principle that land can be freely bought and sold. The adoption of the Land Code is a significant step forward in Ukraine's efforts to bring its legislation into compliance with international standards. Although the Land Code contains a number of deficiencies and discrepancies of a mostly technical character, it introduces a number of important concepts and principles. These will now govern legal relations in the field of land ownership and related rights, such as the private ownership of land in Ukraine, the right of foreign citizens and legal entities to own certain types of land in Ukraine, servitudes and rights of third parties.

The Code may be considered a revolutionary legal enactment that will lead to the development of a functioning land market in which transactions involving the alienation of land will eventually become commonplace. But, at this stage, the Code is mainly viewed as a basic legal framework for land ownership, with implementation to a large extent dependent on supplementary legal enactments to be adopted. Some steps in this trend have been already made (for example, on December 11, 2003 the Law On land appraisal was adopted).

The Author

Arthur A. Nitsevych, attorney-at-law within International law offices & Veritas legal advisers from Ukraine focused on shipping and commercial law mostly.


Arthur A. Nitsevych, Attorney-at-law (Odessa Kiev Nikolaev):
„Investors can feel more secure in Ukraine“.

Born in 1971. He was educated at the Odessa State University
as a philologist (English language and literature). Then he continued his education
at the Odessa State Legal Academy. He also graduated from the Interregional Academy
of Personnel Management in Kyiv and subsequently obtained a Degree of Master of
science in accounting.
He has got 10 years of practical experience.
Fluent
in English and Spainish.
His areas of practice include investment legislation
and settlement of tax disputes, maritime law.

International law offices & Veritas Legal advisers
15/6, Uspenska St, 65014,
Odessa, Ukraine
Tel. +38 048 7155855
Fax +38 0482 496925
Internet: http://www.murs.com.ua

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