Argument (#09 September 2018)

Ukrainian Real Estate and Construction Sector: Reforms on the Go


As real estate plays a sufficient role in Ukraine's economy, the legislation regulating it is being developed to create an enabling and transparent market and sound legal environment for attracting investments in real estate and construction. Over the last few months, there have been several legislative updates aimed at filling legislative grey areas and improving the investment climate in Ukraine. Among other things, this includes a number of considerable steps made by the Parliament of Ukraine and the Ministry of Regional Development, Construction and Housing and Utility Services in Ukraine (Ministry), as described below.


Simplification of land access for oil and gas business

In an attempt to resolve the problems in the oil and gas business related to having reasonably quick access to land, the Parliament of Ukraine adopted the Law of Ukraine On Amending Laws of Ukraine to Deregulate Oil and Gas Industry (No 2314-VIII), which took effect on 1 April 2018. The new law contains a number of long-awaited regulatory changes that simplify the land allocation procedure for oil and gas companies.

Under the old rules, the only way the holder of a subsoil use permit (i.e., the key document allowing one to use subsoil areas) could obtain the rights to the land plots for commercial production was to comply with the general procedure, which commonly required changing the existing land plot's category to energy lands followed by leasing or purchasing the targeted land. Such procedure was often time consuming and costly.

The new law simplified land access for oil and gas companies by vesting them with a right to use the land plot for construction and operation of extraction facilities on the basis of a servitude. If an extraction is expected to be carried out on agricultural lands, lands of residential and public development, forest lands, or industry, transport or telecommunication lands, changing the land plot's category would no longer be required upon setting up a servitude.

Under the new law, an oil and gas company can commence commercial production on occupied land without the perfected rights to it, provided such company previously used land on the basis of a survey works agreement with a landowner for geological surveying or pilot production purposes.

In addition, before the new law's adoption, access to agricultural lands for subsoil use purposes required the subsoil use permit holders to remove the topsoil based on the land management design and a special permit obtained from the relevant local authorities. Under the new law, oil and gas companies can remove the topsoil without obtaining such a permit, thus allowing production to begin earlier.

The new law's implementation is expected to intensify oil and gas production in Ukraine.


Land Swaps

As the land allocation process was historically quite chaotic in Ukraine, land fields leased by agricultural companies usually consist of small land plots owned by private individuals. Thus, it may be the case that the lands leased by the companies do not constitute a closed field, but include the land plots of other landowners (land users), preventing agricultural companies from using them efficiently.

To address this issue, the Parliament of Ukraine passed the Law of Ukraine establishing the so-called land swaps (Law No. 6049-д). The law has not been signed by the President and is yet to become effective.

Under the law, agricultural companies and private individuals leasing land are now entitled to "swap" the land plots by executing sublease agreements without obtaining the landowners' consent, which is otherwise mandatory under Ukrainian law.

The new law also grants a company leasing more than 75% of a land field a preemptive right to lease other land plots within such field. Should the owners or users of the other land plots refuse to lease them to such company, the lease agreement can still be recognized by a court as executed, except when the targeted land (i) contains perennial plantings, (ii) has another soil composition or (iii) has a designation other than "for agricultural commodity production" or "personal farming", etc. Furthermore, a company leasing more than 75% of the land field is not obliged to pass a public auction procedure in order to obtain the lease rights to state or municipally owned land plots located within such land field.

Should the President of Ukraine sign the new Law On Land swaps, an effective mechanism facilitating agricultural companies' operation would be introduced in Ukraine. The measures provided for by the law should resolve most of the existing problems regarding the use of agricultural lands within a field, and should serve as a safeguard against violations of the rights and lawful interests of landowners and land users.


New Urban Development Standards

As the urbanization process continues to gain momentum in Ukraine, urban construction is increasing and expanding.
The absence of strict statutory requirements for the key parameters of such construction has led to chaotic development in settlements and created an imbalance between the number of residential buildings and infrastructure available for apartment owners.

To resolve these issues and ensure proper livelihood conditions, the Ministry has been developing and approving a number of State Building Norms ("DBNs"), which are mandatory for developers.

DBN Б.2.2-12:2018 On Planning and Development of Territories will come into force on 1 September 2018 and is being referred to as the key novelty in the urban development sector. It establishes the following major development restrictions to be included and further elaborated in the settlements planning documentation:

— the permissible height of buildings in a city, town and village (so-called "Blue Lines")

— the restrictions relating to the development of public green zones (so-called "Green Line")

— the requirements limiting development around territory adjacent to the footprint of a building, aiming to create a free space for various emergencies (accidents, destructions, etc.) (so-called "Yellow line")

The recent editions of DBN provide limitations regarding the size of the building footprint compared to the area of the land plot on which it is to be developed. For example, a 4-storey residential building cannot have a footprint exceeding 45% of the land plot's area.

The Ministry has also adopted three other DBNs regarding the construction of educational institutions and roads of settlements. In particular, the DBNs prescribe the possibility of constructing built-in kindergartens in residential buildings and constructing open educational spaces, provide for narrowing the width of the roads in settlements and introduce the new term "the pedestrian zone of the pavement" (the installment of temporary constructions, advertising or fencing within which this would be prohibited).

Consequently, even though the new DBNs may potentially complicate the settlement development process, their adoption is a necessary step on the way to harmonizing urban space and improving the comfort and safety of urban residents.

To sum up, recent legislative updates are a step towards the improvement of doing business in Ukraine, while also bettering the livelihoods of people. The legislative improvements are expected to facilitate investment flows into Ukraine's real estate and create an enabling climate for doing business.


Andrii Grebonkin, senior associate at Baker McKenzie


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