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Real Estate Laws and Regulations in Ukraine

Real Estate Laws and Regulations in Ukraine

Real Estate Comparative Guide: 2021
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Contributed by Arzinger.

1. REAL ESTATE OWNERSHIP

1.1  Legal framework

The constitution guarantees the right to ownership and the right to judicial protection. The key sources of law guaranteeing private ownership are domestic legislation and international law applicable to Ukraine.

Ukrainian law does not recognize different types of ownership and all real estate owners are generally equal in their rights.

There are no restrictions for foreign capital in the real estate space and foreign investors are entitled to invest directly or indirectly in all types of Ukrainian real estate assets (commercial, residential, corporate/ industrial/ infrastructure, non-developed land, etc.) subject to certain conditions.

No significant regulatory burden is associated with the property transactions, which means that no usual regulatory approvals or FDI screenings are needed to acquire real estate in Ukraine. The only regulatory approval might be merger control due to the quite low filing thresholds that apply to both direct and indirect share and certain asset deals.

It is also important to remember that all foreign documents are subject to apostille or legalization, and a notarized translation in Ukrainian is necessary.

However, under the Land Code of Ukraine, the foreigners and foreign companies are not allowed to acquire agricultural land into ownership (either directly or indirectly) – it may be owned only by Ukrainian citizens, state, and municipalities as well as legal entities owned exclusively by them. These restrictions can be lifted after 2023 only upon approval of such decision at the referendum. Otherwise, foreign capital can use lease of agricultural land.

The rules for expropriation in Ukraine are quite clear. There are several grounds for expropriation of ownership to real estate, including paid (expropriation for public needs or public necessity, in case of war or emergency situation, purchase of agricultural land by a foreigner) and non-paid (as a penalty for certain criminal offenses) cases. We are not aware of the recent nationalization, i.e. expropriation cases.

1.2.  Registration of ownership

Real estate transactions (acquisition, disposals, and leases exceeding three years) are subject to mandatory certification by a Ukrainian notary and the notary is taking care of the title – registration with the public registry – State Register of Proprietary Rights to Real Estate kept by the Ministry of Justice.

Regardless of such registration, it is important to properly keep title documents as the notaries require their presentation when a real estate transaction is done.

In addition, the land and some information about it (designated use, limitations, easements, etc.) is registered in the State Land Cadastre, and such registration is mandatory as well.

1.3.  Publicity of real estate register

Both the State Register of Proprietary Rights to Real Estate and the State Land Cadastre are publicly accessible online.

1.4.  Protection of ownership

Registration of a title in the State Register of Proprietary Rights to Real Estate certifies the title.

The owner may claim in court return of the real estate if it was unlawfully disposed of, removal of any obstacles preventing the owner from freely using or disposing of the real estate, require access to the real estate from other real estate owners (e.g., claim establishment of an easement), etc.

If real estate was disposed of without proper authorization, the owner may claim termination of registration of such new (illegal) owner's rights in anti-raider commission at the Ministry of Justice as a pre-trial measure, which may be quite cost- and time-efficient. If unsuccessful or skipped for some reason, the owner may claim in court invalidation of the unlawful transaction, cancellation of registration of the unlawful rights, return of the real estate, and damages. In some scenarios, the return of the real estate may be claimed even from a good faith acquirer.

In the case of unauthorized use, the owner may claim termination and prohibition of such use, return of the real estate, as well as damages.

2. REAL ESTATE ACQUISTION

2.1.  Share deal or asset deal?

Share purchases are the prevailing option when it comes to investment in real estate, especially while acquiring yielding properties. Not only it is faster and more flexible, but typically the parties may also apply foreign law and subject the contract to arbitration. Historically, share purchases were also a lot more tax efficient, however since the withholding tax was introduced for sales of real estate rich companies, share acquisitions may not always be the most tax-efficient choice. Share transaction also allows the investor to continue business as before without having to assign all contracts, transfer employees, etc. Also, it allows creating effective partnership and conclusion of shareholders agreements.

On the other hand, asset deals are used when the scope of the due diligence of the owner company was limited, or substantial risks associated with the history of the company owning the real estate were detected. Alternatively, an investor may not be interested in continuing business as previously and may want to cherry-pick the assets as opposed to buying the shares in the company holding them.

2.2.  Share deal

Prior to entering into a deal investor should consider conducting in-depth due diligence of the asset and the investment vehicle as it will bear the historical risks associated with the company (title to shares, debt, existing contracts, etc.), as well as any historic flaws in the title to the real estate. The risks are usually dealt with in the SPA, specifically by including extensive warranties, conditions precedent, indemnities, liquidated damages clauses, etc.

SPAs are usually governed by foreign law to allow for greater flexibility and proper balance of parties' interests. Arbitration clauses and choosing foreign law are very usual in share deals.

Another important topic to account for is the correct structure of the transaction to avoid any unforeseen complications, in particular with certain restrictions on foreign ownership to agricultural land or extra taxes.

The main taxes involved in a share deal are corporate profit tax (although, usually paid outside of Ukraine to ensure tax efficiency of the deal) and the 15% withholding tax if an SPV holding a real estate rich company (50% or more of the shares value is comprised of real estate) is sold. Although, the withholding tax was introduced quite recently and the approaches to its application are not completely clear so far.

The share deal is not subject to VAT or other asset-transfer taxes.

2.3.  Asset deal

An asset deal is more straightforward than a share deal as it must be governed by Ukrainian law and is not arbitrable.

Same as in the share deal, the investor should consider advanced due diligence of the asset and comprehensive warranties. At the same time, the investor should bear in mind that while on paper Ukrainian law provides the parties with freedom of contract allowing any provisions to be inserted thereto, not all provisions are considered legal after all. For instance, liquidated damages are often discarded by courts. Basically, the most commonly recognized remedies of the buyer are conditions precedent to fix any remediable risks and fines for breach of contract. While warranties are often included in contracts, they were largely untested by caselaw. Only recently the warranties were included in Ukrainian legislation, which now allows for any contractual remedy to apply in case of their violation with the damages being a standard one offered by law.

The main taxes involved in an asset deal between legal entities are 18% corporate profit tax for the seller, a 20% VAT, and a 1% pension fund duty for the buyer.

2.4.  Disposal process

In a share deal, there is no notarization requirement and a simple written form is sufficient. However, a notary must be involved to notarize the signatures under the mandatory shares transfer act, the new shareholders and ultimate beneficial owner in the Unified State Register of Legal Entities, Individual Entrepreneurs, and Non-Governmental Organizations (unless the company being sold is registered outside of Ukraine).

In an asset deal, an agreement must be notarized by a notary, which means not only the notary will check the title, the authority of signatories, and the absence of any restrictions on disposal (which is the main scope of the notary’s job), but it will also check the agreement for compliance with the law.

The notary’s fees are subject to negotiations and are usually up to 1% of the transaction value for lower-scale transactions.

There are cases when consents or approvals are required (e.g., mortgagor’s, tenant’s consent, spousal consent where the individual seller was married at the time of buying the property, etc.). The law does not envisage a list of documents to be transferred with the property.

2.5.  Registration of change of ownership

The registration fee for a share transfer registration is UAH 680 (approximately USD 26), and for a real estate transfer, it ranges from UAH 230 (approximately USD 9) to UAH 11,350 (approximately USD 432), depending on the terms of the registration (from five business days to two hours).

In most cases, both share deals and asset deals are registered right away (within the same day).

The registration authority is, most often, a notary which checks all documents, makes scan copies, uploads them to relevant registers, and amends relevant entries in the registers.

2.6.  Risks to be considered

A joint owner of the real estate, if any, and a tenant, have pre-emptive right to purchase the property. In the case of agricultural land, a person possessing the subsoil use permit for the land also possesses the pre-emptive right. Quite rarely other contracts, e.g. easements or emphyteusis, may also contain pre-emptive right provisions.

There may also be various encumbrances on the real estate, such as mortgages, arrests, tax pledges, prohibitions of alienation, etc. Limitations imposed by special regimes, such as protection zones, cultural heritage objects, etc., must also be considered. Usually, an unsatisfied purchaser may claim defects of the acquired real estate only if the defects were hidden and could not be identified at the time of transferring the real estate. However, the regulation largely depends on the contract.

3. REAL ESTATE FINANCING

3.1.  Key sources of financing

Given the difficult situation in the Ukrainian financial market and the underdeveloped domestic capital markets, in the last few years, local debt financing and refinancing of property transactions have not always been attractive for the developers. The majority of developments are equity-financed by the developers themselves. However, larger developers with a good reputation typically receive financing from local or international banks or international financial institutions against pledge or mortgage of assets.

The situation in the residential market is worse for the buyers, especially in construction progress. Mortgages are not generally available due to certain weaknesses in Ukrainian real estate development legislation, which makes it too risky for the banks to take developing residential assets into mortgages, and the market is fueled by the equity of investors and developers. Thus, it is commonly using payments by installments.

It is important to note that both mortgages and pledges are registrable in Ukraine.

3.2.  Protection of creditors

Typical security usually includes mortgages and pledges, as well as (sometimes) suretyships. A more advanced transaction will also include:

  • the conditions precedent in loan agreements;
  • tri-partite agreements with the key tenants or provisions in the key lease contracts on the landlord's replacement for the mortgagee or the contract's termination in case of enforcement of the mortgage;
  • pledges of bank accounts with conditions for automatic withdrawal, etc.

4. REAL ESTATE TAXES

4.1.  Transfer taxes

The transfer taxes are in accordance with 2.2 and 2.3 above.

4.2.  Specific real estate taxes

The following taxes are charged on ownership of the land/real estate:

  • land tax at the rate set out by the municipality (usually may not exceed 3% of the normative monetary valuation of the land plot but depends on several factors, such as whether or not normative land valuation was done, designated use of the land, and the type of the title);
  • property tax at the rate set out by the municipality which may not exceed 1.5% of the amount of minimum wage (for January 1 of the applicable year) per square meter of property (in 2021 – UAH 70.8 (approximately USD 2.7) per square meter).

5. CONDOMINIUMS

5.1.  Legal framework for condominiums

In Ukraine, once a person acquires an apartment in an apartment block, he/she automatically becomes a joint owner of the common spaces in the building, as well as any ancillary buildings (such as boiler houses). It may also relate to the land plot underlying the building; however, it is quite rare in Ukraine as the condominiums seldom obtain the title to the land underlying residential buildings. Although, they are entitled to acquire or lease the underlying land.

At the same time, it is important to note that in most cases the joint ownership is never registered or otherwise evidenced and only exists on paper. Usually, an apartment owner is entitled to use the common spaces but their management is generally done by a management company or a condominium association.

5.2.  Rights and duties of co-owners

The co-owners are entitled to choose a form of management of the property being either a management company or a condominium association. The co-owners will have lesser rights to participate in the house's management in the former case and more – in the latter case.

5.3.  Liability of co-owners

Co-owners bear joint and several liability for the use of their joint ownership.

5.4.  Rights and duties of condominium associations

Condominium associations regulate the size and procedure for payment of various property maintenance payments to be made by the co-owners, determine their expenditures, enter into agreements with facility management companies, conclude contracts, conduct ongoing and capital repair, lease any of the common premises, submit lawsuits, etc.

At the same time, it is not common for a condominium association in Ukraine to set up any rules of co-living, except for rules for the use of common space.

6. COMMERCIAL LEASES

6.1.  Form and contents of a lease agreement

The leases must be concluded in writing, and if the lease term exceeds three years – be notarized and the lease right registered with the State Register of Proprietary Rights to the Real Estate.

A standard commercial lease will include the following provisions (that may depend on the sophistication of the landlord and the type of the leased property):

  •       the designated use of the property;
  •       rent (and turnover payment, if applicable);
  •       operating expenditures compensation;
  •       utilities;
  •       payment procedures;
  •       rights and duties of the parties (e.g. to keep the premises open for visitors, to maintain security, etc.);
  •       code of conduct (if any);
  •       repair;
  •       procedure for acceptance and return of the property;
  •       fire safety, sanitary conditions, and other;
  •       parties' liability;
  •       early termination, etc.

It is important to understand, that there are different legal regimes for a lease of the buildings and a lease of land. While there is very much discretion in the lease of buildings (except for public properties, which are subject to a dedicated special regulation), a land lease is subject to a number of mandatory provisions and is regulated by a special law.

6.2.  Regulation of leases

Ukrainian law is fairly dispositive in terms of leases regulation and it does not contain a lot of overbearing mandatory rules. Therefore, the parties are free to regulate their relations in the lease contract.

6.3.  Registration of leases

A real estate lease should be executed in writing, be notarized, and the lease right should be registered with the State Register of Proprietary Rights to the Real Estate if the lease term exceeds three years.

6.4.  Termination of leases and renewals

As a rule, the landlords limit the tenants' opportunity to unilaterally terminate the lease. Mostly, the tenant is entitled to termination if the landlord does not conduct the required capital repair of the property, denies the tenant's access to the property without a good reason, or if utilities are not supplied to the property for a prolonged time. Also, a tenant may terminate the lease if (i) the real estate's quality is not as the landlord promised in the contract and it is not suitable for the designated use, or (ii) the landlord fails to conduct necessary capital repair of the real estate, both of which are the statutory grounds for unilateral termination.

The law provides that the landlord may terminate the lease if the tenant: (i) uses the property against the designated use or in breach of the agreement; (ii) subleases or assigns the lease to a third party without the landlord's consent; (iii) negligently poses a threat to the property; or (iv) does not conduct capital repair if it was obliged under the agreement. The landlord may also sue the tenant for termination in case the tenant systematically violates the payment obligations.

The parties' ability to terminate the contract without a cause largely depends on their negotiation positions.

The lease is automatically renewed if the tenant continues using the property within a month after the lease's termination without the landlord's objections. Also, a tenant compliant with the contract is granted a pre-emptive right to conclude a new lease and must notify the landlord of its intent to exercise the right before the lease termination, but the landlord may require changing of conditions of the contract.

6.5.  Rent regulations and rent reviews

The law does not regulate matters of rent and its review – this is up to the parties to decide.

6.6.  Services to be provided together with the lease

In most cases, the landlord will be responsible for utility services subject to further compensation of the costs by the tenant. In commercial leases, the landlord will usually provide other operational services: security, cleaning, maintenance of common parts, etc., as well as in some shopping malls will also require a separate marketing fee for the marketing of the shopping mall.

6.7.  Fit-out works and their regulation

The law stipulates that any improvements of a leased property made with the landlord's consent may be either detached and taken by the tenant (if separable) or compensated by the landlord after the lease termination. However, speaking about compensation for non-separable improvements, in the vast majority of cases the landlord will require the tenant to waive such right in the contract.

From a taxation point of view, if the lease is used in the tenant's business activity, the expenses made for the fit-out of the property (as well as deprecation expenses) will be deductible from its taxable income subject to certain conditions.

6.8.  Transfer of leases and leased assets

Transfer of the leased asset does not impact the contract's validity. The new owner becomes the new landlord automatically unless the contract provides otherwise, so, the lease follows the property.

Transfers of lease usually require the consent of the other party and do not influence the validity of the contract.

 

Guide Contributors For Ukraine

Timur Bondaryev

Managing Partner, Head of Real Estate and Construction Practice

timur.bondaryev@arzinger.ua

+380 44 390 55 33

 

Tetiana Storozhuk

Senior Associate

Tetiana.Storozhuk@arzinger.ua

+380 44 390 55 33

 

Anton Rekun

Associate

anton.rekun@arzinger.ua

+380 44 390 55 33

 

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