Ukrainian Land Law Developments in 2015
B. C. Toms & Co
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B.C. Toms & Co is a multinational law firm of Ukrainian and Western lawyers specializing in Ukrainian law. It was the first Western law firm to open a Kiev office, having focused its practice on Ukraine at its independence in 1991. The firm has handled, for example, the land leasing for many of Ukraine’s largest agricultural and oil and gas projects, as well as acquisitions of land for commercial property developments. We also handled the legal work for the first, and the most, IPOs to raise funding for Ukrainian companies, as well as the first true project financing in Ukraine. Based on our over 25 years of experience in Ukraine, we can provide, with our legal advice, practical commercial advice on how to establish and develop a business in Ukraine.
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The principal practice areas of B. C. Toms & Co include real estate and land development, energy, natural resources, agriculture, banking and finance, M&A, environmental, labor, bankruptcy and administrative law. The firm also has a successful litigation and arbitration practice, having successfully handled many of Ukraine’s most important cases, including in all Ukrainian courts and before the Permanent Court of Arbitration in The Hague. The firm regularly advises on Ukrainian tax law, including from a multinational tax planning perspective.
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The simplification of the relevant procedures for transactions with land, in particular by making information on agricultural land more open and accessible to the public, as we described in this publication last year, has continued. However, the moratorium on the sale and purchase of Ukrainian agricultural land has again been prolonged, thus “freezing” this issue for another year, with the prospect of further moratorium extensions.
To prolong the moratorium, Act No. 767-VIII of 10 November 2015, On Introducing Changes to Chapter X, the Transitory Provisions of the Land Code of Ukraine on the Continuation of the Prohibition to Dispose of Agricultural Land, was adopted. It extended the moratorium on the sale of agricultural land in Ukraine until 1 January 2017. It also entrusted the Cabinet of Ministers of Ukraine with the task of drafting by 1 March 2016 a proposed law on the transfer of agricultural land, the adoption of which is a condition in the Ukrainian Land Code for lifting the moratorium.
As a practical matter, ending the moratorium may also be tied to more progress being made on the current revision of the state land cadaster. As presently no new draft legislation has been proposed for the transfer of agricultural land, or for improvement of the state land cadaster, and the actual development of the state land cadaster seems unlikely to be sufficiently advanced by 1 January 2017, an additional moratorium extension is probable. Until agricultural land can again be sold, land leases remain the most common legal form for the commercial use of agricultural land. Such land leases can be for up to 50 years and must be for a minimum term of at least seven years.
Further Deregulation and Simplification of Leasing Procedures
(a) Fewer Mandatory Terms for Land Lease Agreements
Act No. 191-VIII of 12 February 2015, On Introducing Changes to Certain Legislative Acts of Ukraine Regarding the Simplification of Conditions for Conducting Business (Deregulation) (the Deregulation Act), that entered into force on 5 April 2015, restated parts of Act No. 161-XIV of 6 October 1998, On the Land Lease, by reducing the number of mandatory terms for land lease agreements. The absence of any of the many such mandatory terms previously provided a legal basis for a land lease to be invalidated by a court. However, such problems continue because the officially recommended Model Land Lease Agreement was not modified to reflect these changes in law, so notaries still, in practice, require these no longer mandatory terms as a condition of their notarization of land leases. Hopefully, the Model Land Lease’s terms will be modified soon to reflect the Deregulation Act’s changes in law, so that these continuing problems will actually be eliminated in practice.
In addition, the special requirements imposed in 2008 (the 2008 Requirements), that mandate that land leases must provide whether their land lease rights can be contributed to the capital of a company or pledged, has been repealed for the future. Unfortunately, this change was not properly drafted to eliminate the illegality resulting from the 2008 Requirements for land leases executed between 2008 and 2015. Therefore, an estimated approximately 75% of current land leases (e.g. for agriculture and oil and gas, in particular) continue to violate the 2008 Requirements and can be cancelled at any time on this basis (this is an important point for due diligence that is often missed).
(b) Open Access to Information on the Owners and Users of Land Plots
On 6 October 2015, information about the owners and users of land plots in Ukraine became openly accessible to the public (before it was only possible to obtain information about the area and purpose of use of a particular land plot), as provided by Act No. 597-VIII of 14 July 2015, On Introducing Changes to Certain Legislative Acts of Ukraine to Increase Transparency in the Sphere of Property Relations and the Prevention of Corruption. There is now an electronic service1 to obtain information, that is available free of charge to properly identified users via the Public Cadaster Map at the internet link www.map.land.gov.ua (identification can be done either with an electronic digital signature or in some other approved way, such as by using a bank card to identify oneself).
Information accessible through this electronic Public Cadaster Map includes (1) excerpts from the State Land Cadaster on a particular land plot and (2) excerpts about a land plot’s normative legal value. In addition, those persons and entities whose information has been searched for can use this electronic service to see who was searching and accessing it2.
(c) Better State Registration of Rights
Act No. 834-VIII of 26 November 2015, On the Introduction of Changes to the Act on the State Registration of Corporeal Rights to Immovable Property and Encumbrances Thereto and Certain Other Acts of Ukraine on the Decentralization of Powers on the State Registration of Corporeal Rights to Immovable Property and Encumbrances Thereto (which came into force on 13 December 2015 and is in the process of implementation), introduced, in particular, the following changes to improve the registration process for land, effective from 1 January 2016:
(1) (i) the executive committees of village, town and city councils and the local state administrations received the right to conduct registrations; (ii) notaries received the power to register rights to land and encumbrances thereto generally (i.e. not just when they are also notarizing related documents, as was all that was permitted before); and (iii) banks will also be able to undertake such registration functions, subject to their accreditation with the Ministry of Justice;
(2) it will now be possible to file administrative complaints with the Ministry of Justice of Ukraine on the actions and inactions of the registration authorities; and
(3) liability is created for the failure of administrative authorities to conduct the state registration of rights to immovable property and encumbrances thereto within the specified five day time limit.
A Partial Solution to the “Dead Soul” Leases Problem — More Land Can Now Legally be Used
Previously, an estimated 1.5 to 2 million hectares of agricultural land in Ukraine belonged to the category of the so-called “dead souls’” land, being land plots where the owners have died and there are no recognized heirs. The authority of the relevant territorial community had an obligation to establish its ownership over such land plots by court proceedings. The procedure for such proceedings was quite complicated, with territorial communities often unable to establish their ownership in practice.
In addition, while the fact that the land plot has no heirs was required to be established within six months from the owner’s death, the subsequent court proceedings establishing the territorial community’s right over the land could only be commenced after one year3, so there would be at least a six month legal vacuum, during which the land could not be legally disposed of or used. Other problems arose because such court proceedings were supposed to take place in the jurisdiction of the deceased owner’s last residence, which could result in the very odd situation where a territorial community could become the owner of land not situated within its own territory.
In response to this situation,Draft Act No. 3006 of 1 September 2015, On Introducing Changes to the Land Code of Ukraine and Other Legislative Acts of Ukraine Regarding the Legal Fate of Land Plots, the Owners of which Have Died, which has passed its first reading in Parliament and has been prepared for the second reading, will in its current form solve most of these problems with “dead soul” leases, and generally make their legal use possible. In particular, according to this Draft Act:
(1) After six months from the death of a land plot’s owner, the local council of the territorial community of the place where the land plot is situated can lease it during an interim period, until either (i) the heir(s) shows up and completes the state registration of his, her or their ownership rights to this land plot, or (ii) a court decision recognizes this land as being a “dead soul” land plot;
(2) If the owner of the land plot dies while a lease agreement is still in force, the land plot will be considered to be automatically prolonged, until either (i) the heir(s) completes the state registration of his, her or their ownership rights to this land plot, or (ii) a court decision recognizes the land as being a “dead soul” land plot;
(3) An application to a court for recognition of a land plot as being “dead soul” land can be made not only by the local council of the territorial community, but also by any creditor of the deceased owner(s), and for agricultural land by the owners or users of any of the neighboring land plots;
(4) If agricultural land is, by a court decision, recognized as being “dead soul” land, its ownership will be transferred to the territorial community in the location where the land is situated, which could then lease the land); and
(5) A special database or register will be created containing information on all such “dead soul” land plots.
2 Introduced pursuant to the Cabinet of Ministers of Ukraine Resolution No. 782 of 30 September 2015, changing the Order On Managing the State Land Cadaster, as approved by CMU Resolution No. 1051 of 17 October 2012.
3 According to Section 2 of Article 1220, Section 1 of Article 1270 and Section 2 of Article 1277 of the Civil Code of Ukraine, No. 435-IV, of 16 January 2003.