Ukrainian Real Estate Law
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. It is currently among the largest law firms in Ukraine. The firm has recruited and trained its Ukrainian lawyers from among the highest-ranked 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 American Chamber of Commerce sponsored book Doing Business in Ukraine.
The principal practice areas of B. C. Toms & Co include oil and gas and natural resources, agriculture, banking and finance, M&A, Kyoto Protocol and environment, labor, real estate, 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.
The firm has handled, for example, the first as well as most IPOs in the energy sector and the most recent IPO in the agricultural sector. Based on its 21 years of experience in Ukraine, the firm can provide practical commercial advice on how to establish and develop a business in Ukraine.
Developments in Real Estate Law in 2013
This article reviews recent developments in Ukrainian real estate law and certain practical legal aspects for conducting real estate transactions.
The State Registration of Proprietary Rights to Real Estate
The new system for the registration of property rights to real estate was only implemented in 2013 pursuant to the 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 Act of Ukraine of 4 July 2012, No.5034-VI (hereinafter — theAmendments Act).
The most fundamental change from the Amendments Act is the beginning of the operation of the State Registry on Proprietary Rights to Immovable Property and Encumbrances Thereon (hereinafter — the Registry of Rights or the Registry), managed by the Ministry of Justice of Ukraine, which constitutes a unified register of all property rights, including ownership title, leaseholds and encumbrances, with respect to both buildings and other structures (real estate) and land.
From a practical standpoint, the operation of this registry is supposed to simplify and expedite the documentation of transactions with real estate, especially those whereby title to the land plot underneath changes. At the same time, it should be noted that the new need to transfer information to the new system and the staff in some local divisions of the Registry, together with some important software development problems, have resulted in significant backlogs in the processing of registration applications filed at the Registry.
According to the Amendments Act, beginning from 1 January 2013, public and private notaries can also handle the state registration of rights to real estate and land, as well as other rights and liabilities for registered real estate and land, by entering the relevant information in the Registry of Rights. This should facilitate the process, subject to improvements in software.
Previously, the registration of rights to real estate was the prerogative of the Bureau of Technical Inventory (hereinafter — the BTI), a Soviet-style communal entity that functioned like a state registrar. Based on changes resulting from the Amendments Act, notaries have now become a kind of “single window” for real estate transactions. Hopefully, this will result in reducing the long queues and bureaucratic rules that characterised the BTI in order to get an extract from the state register or to register the rights to real estate of a new owner.
One key improvement is that presently, after a closing (including notarization) of a transaction by a notary, the same notary who handled the transfer can register the corresponding title right to the property, which previously had to be done by the BTI. A further improvement is the new requirement for professional liability insurance by notaries for such acts. Though the expense of this insurance may end up being passed on to the notary’s clients, if such insurance is properly provided for then this will give a needed guarantee. In the past, too many purchasers have unfairly lost their titles and had no such recourse, as professional liability insurance was not previously required and, in practice, is rarely carried by Ukrainian lawyers and notaries.
Changes in the Procedure for Registration
Another significant development is the adoption of the Procedure for the State Registration of Proprietary Rights to Immovable Property and Encumbrances Thereon, approved by the Resolution of the Cabinet of Ministers of Ukraine, No. 868, of 17 October 2013, effective as of 12 February 2014 (hereinafter — the Procedure), that stipulates the procedure for the state registration of rights to real estate and encumbrances, including the list of the documents required for an application and the timeline for state registration, as well as to provide for the organization of the State Register’s maintenance.
A number of significant changes were introduced to the existing procedure for the registration of rights to immovable property and encumbrances by virtue of the enactment of the new Procedure that, as mentioned above, took effect on 12 February 2014. The said Procedure provides for some flexibility in the application procedure and clarifies several issues that used to cause practical impediments in the past. In particular, the Procedure simplifies some technical steps in the registration application procedure. Applicants will be able to submit the package of documents required for registration by post or courier delivery (previously personal submission was required), and likewise, the registration authority is also entitled to send decisions on registration or a refusal of registration in the same way. It should be noted that the Procedure clarifies that the party making an application is responsible for the authenticity and accuracy of information in its application documents.
Another improvement in the Procedure aimed at simplification of the registration process provides for the possibility to submit one application for the registration both of the ownership right and of any lease and other property rights related to the underlying real estate. The procedure clarifies that should a change in ownership to real estate occur simultaneously with a change in the property rights to the land plot associated with it, the applicant should submit one application for the registration of all such transactions and changes.
On 1 January 2014, some further changes to expedite the registration process also took effect. To begin with, the state registration of rights to real estate or the taking of a decision on refusing such a registration is supposed to be completed within five business days following the filing of the registration application and accompanying documents with the registration authority. Furthermore, the state registration of property rights to a business entity as an integrated property complex where it is preceded by the issuance of a title certificate is supposed to be completed within 14 business days.
The Procedure also simplifies the process and requirements for the registration and termination of encumbrances on real estate. Under the Procedure, the registration of the termination of an encumbrance should be conducted by the same notary who cancelled the said encumbrance, so that a separate application to the State Registration Service for this is no longer required.
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 seller is required to provide documents confirming the seller’s identity and the authorization of the seller’s representatives. 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 the buyer’s representatives. 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 buyer 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 (although informal inspection can sometimes be arranged). Hopefully, as the State Register is better organized, the relevant laws will be suitably revised in the near future 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 On the State Registration on Property Rights to Immovable Property and Encumbrances Thereon Act of Ukraine of 4 July 2004, No.1958-IV. 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.