Developments in Real Estate Law in 2014
B. C. Toms & Co
- +380 44 490 6000
- +380 44 278 6508
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, many of Ukraine’s largest agricultural land leasing projects and acquisitions of land for commercial property developments as well as the first and the most IPOs to raise funding for Ukrainian projects. Based on our over 23 years of experience in Ukraine, we can provide practical commercial advice on how to establish and develop a business in Ukraine.
The firm has recruited and trained its Ukrainian lawyers from students at Ukraine’s leading law schools, most of whom have also studied at UK and US law schools as Chevening, Pinchuk, Fulbright and Muskie fellowships. Based on the firm’s practical experience, it has written numerous articles on Ukrainian law, including the legal section of the book Doing Business in Ukraine.
The principal practice areas of B. C. Toms & Co include real estate and land development, oil and gas and natural resources, agriculture, banking and finance, M&A, environmental, labor, bankruptcy and administrative law. In addition, the firm has a successful litigation and arbitration practice. The firm also regularly advises on Ukrainian tax law, including from a multinational tax planning perspective.
B. C. Toms & Co has prepared a wide variety of documentation for clients, including Ukrainian law share purchase agreements, asset purchase agreements, joint venture agreements, construction contracts, project financing documentation, production sharing and oil and gas sales agreements, airport investment and management agreements, hotel management agreements, private placement agreements, real estate acquisition agreements, loan agreements, leases and corporate acquisition, agency, distribution, franchise and licensing contracts.
This article reviews recent developments in Ukrainian real estate law and certain practical legal aspects for conducting real estate transactions.
Open Access to the State Registry of Proprietary Rights to Immovable Property and Encumbrances Thereon
Online access to the State Registry on Proprietary Rights to Immovable Property and Encumbrances Thereon (hereinafter — State Registry of Immovable Property) is open to individuals and legal entities as of 1 January 2015 by virtue of the Act of Ukraine No. 1701-VII, On Amending Certain Legislative Acts with Regard to the Identification of the Ultimate Beneficiaries of Legal Entities and Public Figures, of 14 October 2014. The procedure for obtaining information from the Registry of Immovable Property is set out by the Resolution of the Cabinet of Ministers (hereinafter, CMU), No. 722 On Certain Issues on Providing Information on the Registration of Proprietary Rights to Immovable Property and the Encumbrances Thereon of 24 December 2014 (hereinafter — CMU Resolution No. 722).
The major innovation offered by CMU Resolution No. 722 is the possibility to receive information from the State Registry of Immovable Property via the online service. In order to submit an information request, an interested person should register with the new online service by providing identification information such as one’s full name, tax number and passport series and number, for individuals, and the name and tax number for legal entities. The online system contains information on the real estate property presently recorded in the State Registry of Immovable Property, excluding the personal details one the property owners. According to CMU Resolution No. 722, it is possible to run a search based on a real estate property’s details (i.e. its address, identification or cadaster number) or a property rights holder’s details.
It should be noted that the online register’s database still experiences some technical issues, such as the absence of a cadaster number search option for searching land plots. Moreover, the relatively new State Registry of Immovable Property, set up in 2013 by virtue of the Act of Ukraine No. 5034-VI, On Amendments to Certain Legislative Acts of Ukraine with Regards to the Improvement and Simplification of the Procedure for the State Registration of Land Plots and Property Rights to Immovable Property, of 4 July 2012, lacks information on a significant portion of the real estate objects that are still recorded in the State Registry’s paper files, that makes the new online system less effective than it should be.
Introduction of a Real Estate Tax Applicable to Non-residential Property
The Act of Ukraine No. 71-VIII, On Amending the Tax Code and Some Other Legislative Acts of Ukraine Concerning Tax Reform — of 28 Decem- ber 2014 (hereinafter, the Tax Reform Act) introduces a real estate tax applicable to non-residential property. This tax shall apply to all owners of non-residential real estate, whether legal entities or individuals, regardless of their citizenship or residence status.
While the Tax Code provides for an open list of real estate falling under the category of non-residential property, this newly introduced tax will not apply to certain non-residential objects of real estate. For instance, industrial property, such as production and storage facilities, buildings not presently suitable for use such as buildings in a critical condition, and real estate used by agricultural producers directly for agricultural purposes are exempted from the real estate tax. There may be a risk, however, that the tax authorities may attempt to extend the application of the tax to non-residential property that it claims is not used exclusively for agricultural purposes, so the agricultural use should be documented carefully.
According to the Tax Reform Act, the tax base is to be quantified based on the net area, while most experts agree that it should reasonably be calculated based only on the residential area. The Act also stipulates the maximum level of the real estate tax rate at 2% of a minimum salary. However, since the real estate tax falls under the category of local taxes, only the relevant city and village councils are competent to establish the precise taxes.
New Flexible Rules on the Valuation of Real Estate Property
The Resolution of the Cabinet of Ministers of Ukraine No. 358, On Conducting a Valuation for the Purposes of the Calculation and Payment of Taxes and other Compulsory Duties Collected in Accordance with Law of 21 August 2014 (hereinaf- ter — Resolution, No. 358), effectively abolishes the existing monopolies on the valuation services market and provides for broader flexibility for independent valuators.
Pursuant to Resolution No. 358, the valuation of property, including real estate, can be carried out by any entities meeting the requirements of the Act of Ukraine No. 2658-III, On the Valuation of Property and Property Rights and Professional Valuation Activity in Ukraine of 12 July 2001, and that employ at least one professional valuer who holds a qualification certificate for at least one of the listed specializations for valuations. Valuators engaged in the valuation of land shall additionally comply with the requirements stipulated under the Act of Ukraine No. 1378-IV, On Land Valuation, of 13 December 2003.
Resolution No. 358 further provides that a valuation for the purposes of calculating and paying taxes and other compulsory duties shall equal the market value calculated based on national standards and other normative acts on property valuation.
Information on a valuation report shall be recorded in the unified valuation reports database, with this valuation report as an annex.
The Procedure to Purchase Real Estate
To purchase a building or other real estate, a buyer should verify the seller’s title by examining the title documents. As legislation on misrepresentation and fraud is not yet well developed in Ukraine, it is strongly advisable to have a very protective purchase agreement, as is quite common in the West. Such an agreement should guarantee, inter alia, the transfer of absolute and unconditional title, the good physical condition of the premises and information on any encumbrances, adverse claims or defects, if applicable, or at least the absence of any knowledge of such problems.
(a) Information on the Seller
Turning to the title documents that should initially be presented to the buyer, ordinarily this includes (1) a title certificate, a purchase agreement (notarized), a certificate of inheritance or gift, a court decision on the ownership right to property or other documents lawfully evidencing the acquisition of title, and (2) an extract from the Register confirming the seller’s title to the property, which should be produced by the notary handling the transaction.
The parties are required to provide documents confirming their identity. In particular, an individual should show his or her passport, personal tax number and, where the seller has a spouse, a notarized spousal consent for the sale. A corporate seller must prove that it validly exists and that its representatives are duly authorized.
(b) Documents Required of the Buyer
On the buyer’s side, an individual needs to show his or her passport, and a corporate buyer must prove its valid existence and the authorization of its representatives. In addition, a foreign company should have a permit (1) to purchase real estate in Kiev, from the General Direction for Services to Representative Offices (known as GDIP), and (2) for purchases outside of Kiev, from the appropriate regional state administration. For the purposes of the notarization of a sale and purchase transaction, the parties are required to present receipts confirming that the state duty and, for the purchase of real estate, the payment to the Pension Fund (each constituting 1% of the price) have been duly paid. The parties can negotiate who pays the state duty, but only the buyer may make the payment to the Pension Fund.
(c) Due Diligence for Purchases
Before a purchaser completes any acquisition of real estate in Ukraine, a complete due diligence of title should be conducted. This should start with the property’s original transfer from state ownership or its construction. For a building or other construction, the necessary construction documentation (including construction permits and other project approval documentation, such as the relevant act on acceptance into use) should be verified. The technical description of the property being purchased should correspond exactly to all official records as indicated in the property’s technical passport.
The importance of exhaustive due diligence, including practical verifications, for title transfers in Ukraine, cannot be overemphasized. Prior problems can, in practice, result in the invalidation of title to a property when held by a subsequent purchaser, notwithstanding the Civil Code’s provisions to protect bona fide purchasers. Unfortunately, usually many documents that should be examined in Ukraine for such due diligence to verify title will not be officially available for inspection in public records. Hopefully, as the State Register is better organized, the relevant laws will be suitably revised to address this serious problem.
(d) Completion of a Purchase — the Notarization and Registration of Agreements
According to Article 657 of the Civil Code, a real property purchase agreement must be notarized and is subject to state registration as required by the Act of Ukraine No. 1958-IV, On the State Registration on Property Rights to Immovable Property and Encumbrances Thereon, of 4 July 2004. Such registration should be carried out by the notary who formalized the transaction upon the application by any party to the sale and purchase agreement.