Cover Story (#09 September 2014)

Reasonable Concerns

by Serhiy Piontkovsky

Since a great deal of attention is being drawn towards the declared presidential reforms course, land relationships are fairly considered to be a huge catalyst for waking up business activity in the country. Indeed, Ukrainian soil has a lucrative attraction for investors. We asked Serhiy Piontkovsky, head of the representative office of the Kiev office of Baker & McKenzie, where he heads the Energy, Chemicals, Mining and Infrastructure and Real Estate Practice Groups, what the main pitfalls are of effective land law and the major concerns held by sectoral lawyers.

UJBL: What recent changes in legislation that are important for development of land relationships in the country could you note?

Serhiy Piontkovsky: First of all, it should be noted that in late 2012 and early 2013 the State Land Cadastre became effective, the system of state registration of real estate interests and encumbrances was reformed, and a clear demarcation line was drawn between lands in state or communal ownership.

Speaking of recent changes in legislation in this area, we should note Act of Ukraine No.1325-VII dated 5 June 2014, amending the On State Land Cadastre Act of Ukraine. In particular, payment for entering any record in the State Land Cadastre or amending such record was cancelled. At the same time, any data from the State Land Cadastre is still provided at a charge.

The Act of Ukraine No.1507-VII of 17 June 2014, removed the provisions on the State Land (Mortgage) Bank (the Land Bank) from the Land Code, i.e. inexpediency of further existence of the Land Bank was actually acknowledged at state level.

It was intended earlier that creation of the Land Bank would enable more active lending to agricultural business by extending cheap loans. At the same time, a number of representatives of the agricultural business repeatedly expressed their fairly reasonable concerns over the fact that the transfer of any land plot in state ownership designated for agricultural use to the capital of the Land Bank carries a significant risk of land market monopolization.

Relationships in respect of registration of interests in a land plot as real estate also underwent some changes. Act of Ukraine No.1219-VII of 16 April 2014, amended Act of Ukraine On State Registration of Interests in, and Encumbrances on, Real Estate, and, in particular, a notary became entitled to provide information from the State Register of Real Estate Interests in the form of an extract, summary of information or excerpt.

Within the trend towards simplification of conditions for conducting business, Act of Ukraine On Amendments to Certain Acts of Ukraine for Reducing the Number of Permits No.1193-VII of 9 April 2014, was adopted which, inter alia, removed the requirement to obtain certain permits in respect of land. At the same time, this Act only strengthened the status quo, for many such documents were no longer being used in practice (for example, opinion of the Commission for matters of approval of land survey documents in respect of approval of allocation of a land plot).

It is necessary to note as a separate section the laws intended to govern legal relationships related to ownership, occupancy or disposal of real estate located in the Autonomous Republic of Crimea and the City of Sevastopol; these include specific provisions of Act of Ukraine On Ensuring Rights and Freedoms of Citizens and the Legal Regime in the Temporarily Occupied Territory of Ukraine, and Regulation No.226 of the Cabinet of Ministers of Ukraine Matters of State Registration of Interests in Real Estate Located in the Temporarily Occupied Territory of 2 July 2014.

UJBL: On 1 January 2013, the State Land Cadastre Act of Ukraine came into effect. What is your opinion on the implementation of its provisions in practice? What issues arise when working with the cadaster, and what ways do you see to deal with them?

S.P.: It should be observed that provisions of the State Land Cadastre Act are actively applied in practice subject to certain comments set out below. Moreover, the State Land Cadastre has already become essential in practical activities, since without initial state registration of a land plot with the State Land Cadastre no transaction in respect of that land plot is possible. We would like to note that, in fact, the State Land Cadastre operates together with the State Register of Real Estate Interests, while a lot of details in respect of land plots (for example, cadaster number, designation, area and location of a land plot, etc.), due to their fundamental nature, appear both in the State Land Cadastre and the State Register of Real Estate Interests.

During the period of practical operation of the State Land Cadastre, a number of issues were detected related to its operation, which for convenience, can be divided into two categories as follows: 1)mistakes in the details contained in the State Land Cadastre, including discrepancies between the data from the State Land Cadastre and data from the State Register of Real Estate Interests, and challenging issues in the procedure of correcting the detected mistakes; 2)drawbacks related to public access to the details contained in the State Land Cadastre.

At present, it is well known that details in the State Land Cadastre have some mistakes, i.e. incorrectly indicated borders of a land plot, cadaster number, or area, etc. Hence, the primary task is to correct such mistakes which can be identified by either registrars of the State Land Cadastre or by any other individual or legal entity. The existing procedure for correcting any mistake in the details contained in the State Land Cadastre is far from perfect, and needs to be simplified.

As is often the case, many practical situations have no obvious resolution based on the provisions of applicable legislation. For example, we had a practical situation when the same land plot was registered in the State Land Cadastre under different cadaster numbers. On the one hand, we undoubtedly deal with a mistake in the details in the State Land Cadastre, but on the other hand, under applicable laws, a cadaster number shall be cancelled only in the event of cancellation of the state registration of the land plot which, in its turn, may be cancelled in a limited number of cases, namely: if a land plot is divided or combined with another land plot (on the grounds of the application for state registration of a land plot(s) created as a result of such division or combination), or if the interest in such land plot(s) was not registered within one year after state registration of the land plot(s), through the applicants error.

Theres been a lot of talk lately about free access to the details in the State Land Cadastre as a guarantee of transparent conditions for conducting business and a way to combat corruption. At this moment, public access to the details in the State Land Cadastre can be obtained with the help of the Public Cadastre Map which, unfortunately, has not started operating yet as originally intended. For example, Article 36 of the State Land Cadastre Act contains a list of details that shall be made public on the official website of the central government authority implementing the state policy in the area of land relationships. At the same time, in fact, only some of the said details (i.e. cadaster number, area, or borders of a land plot) can be obtained by means of the Public Cadastre Map. Hence, the primary task is to implement statutory provisions in this field in practice, rather than reform them.

UJBL: The Kiev office of Baker & McKenzie is often engaged by foreign investors to act on investment projects in our country. What issues in the field of land relationships do your clients deal with most often?

S. P.: Usually, any difficulty is connected with the lack of clear legal regulation of various aspects of land relationships. The main issues that arise in practical work include the following ones.

Firstly, a complicated process of registering real estate interests, including interests in land plots. Any difficulty during such registration arises due to the fact that, in practice, state registrars require documents that are not provided for in legislation, and thereby delay the registration process, or unlawfully refuse registration altogether.

Secondly, the complexity of purchasing a land plot in state or communal ownership. At present, undeveloped state land or community land can be purchased or leased only as a result of land auction. And in practice, such auctions either are not held at all, or are held with violations of established procedures.

Thirdly, lack of publicly available sources making it possible to verify basic information about a plot of land. Legislative authorities tried to regulate this matter by launching the Public Cadastre Map of Ukraine. However, at present, it is not too informative, and it fails to cover all existing information gaps. In particular, the Public Cadastre Map contains no important information on the land plot such as its designation, normative evaluation, any existing restriction on use or encumbrance. Such information can be obtained only by requesting the respective documents from the owner (tenant) of the land.

Fourthly, a lack of information on urban-planning documentation. Despite the fact that legislation provides for free access to master plans of settlements, at present there is no free public access to the urban-planning documentation of many settlements. All these things prevent investors from determining whether the planned development of a particular land plot is possible, what the land plot parameters are, and whether it is accessible.

UJBL: How would you comment on current allocation of land plots for lease by Kiev City Council? Are decisions adopted? What is the maximum lease period (over 5 years)?

S. P.: Land plots are exclusively allocated for lease at Kiev City Council (KCC) plenary sessions. Given the political situation in Ukraine, the KCC experienced a temporary interruption of its sessions until the beginning of June 2014. Now, KCC sessions are held twice a month on average.

I would like to note that, according to the information we have, KCC has not adopted a single decision on allocation of land plots for lease since 13 November 2013. Perhaps the situation will improve in future.

According to laws, the leasing period cannot exceed 50 years. We know that there are leasing agreements concluded for a period of 49 years, but this is rather rare in practice. Generally, the lease period does not exceed 15 to 20 years.

UJBL: What are the types of title and leasehold encumbrances applied today?

S. P.: Nowadays, the most practically widespread encumbrance is land mortgage. Servitude also become common practice recently.

I would like to point out that land mortgage or land leasehold mortgage in respect of state-owned or community-owned land plots is very rare in practice, as it requires permission from the lessor, i.e. the state or local authorities.

Besides, the use of land plots might be limited. For instance, a condition to start or complete construction works within a certain period of time might be established, certain types of activity prohibited, change of designation prohibited, etc.

UJBL: The key issue regarding the land market remains agricultural land use. What is your assessment of the expediency of the existing legal restrictions towards agricultural land transactions? What are the alternatives practically applied to acquire the right to use state agricultural land?

S. P.: The moratorium restrains development of the land market and leads to an inability to use agricultural lands effectively. Moreover, the moratorium encourages various uncertain schemes for obtaining agricultural lands.

UJBL: What do you think about the consequences for Ukraine after cancelation of the moratorium on the sale of agricultural land? What nuances will be provided for in the legislation to mitigate probable misuse and non-transparent scheme risks?

S. P.: Agricultural lands are very investment attractive. The main reason is that Ukraine possesses fertile soils by virtue of which major crop yield is high.

In the event of cancellation of the moratorium on sale of agricultural lands, the growth of transactions with regard to such land is expected to be high.

Therefore, prior to the cancellation of the moratorium it is necessary to clearly define the rules of agricultural land sale, change of purpose thereof after purchase, and payment arrangements.

For instance, we deem it is helpful to introduce new types of agreements enabling the lease of agricultural land with purchase thereof in the future, for small farm operators to buy land on the basis of long-term loans, etc.

It will prevent agricultural land monopolization by major agriculture players.

The State Agency for Land Resources of Ukraine has developed the Draft Act of Ukraine On Agricultural Land Turnover. Enactment of the relevant law would encourage cancellation of the moratorium in respect of agricultural land turnover. Nevertheless, even a quick look at this draft makes it possible to conclude that instead of the moratorium it is assumed to apply new mechanisms, eventually restraining free agricultural land turnover. Therefore, it is supposed that agricultural land can be transferred to legal entities on the basis of leasehold only, with concurrent limitation of the area of such land plots; it is proposed to establish minimum hiring rate for the rural population, to limit maximum size of land plots owned by individuals, and to grant the priority right for land plots being disposed of to government and local authorities.

UJBL: Did your clients turn to you to settle the issues of title to real estate and land plots in the Autonomous Republic of Crimea? What are the most regular inquiries from clients in the current situation?

S. P.: Our clients frequently address the issue of real estate in the Autonomous Republic of Crimea.

At present, the most frequently asked questions are those related to retention of title to real estate, expediency of transfer of the title to a company organized under foreign laws, land tax and land rent payment issues.

Such issues, as a rule, are comprehensive and require the involvement of our foreign colleagues. In respect of these issues we successfully cooperate with our foreign offices, finding the most appropriate solutions for our clients.

UJBL: What trends in court practice would you highlight? What is the recent practice of consideration of disputes between payers of rent for community land and the regulator? Are cases of land disputes considered by foreign courts?

S. P.: In terms of court practice the main category of disputes, traditionally, is disputes related to land plot lease (change of rent, cancellation of lease agreements, etc.).

The negative trends in court practice with respect to land disputes are its inconformity and inconsistency. That is, it is quite complicated to predict termination of a dispute at the initial stage. Various courts can pass completely opposite judgments on similar cases which, for instance, took place in disputes on change of rent for state-owned or community-owned land plots, after the land tax was changed.

Nevertheless, quite often court practice can put an end to numerous disputes and interpretation of the law, allowing a specific, clear attitude on the issue. Thus, for instance, Resolution of the Supreme Court of Ukraine No. 21-41712 as at 5 March 2013 determined that the change of type of the land use within its purpose shall be performed according to the terms and conditions contemplated for change of land purpose with obligatory development of the draft for allocation of land plot.

Disputes related to lease of community-owned land are quite common. In particular, significant number of disputes considered by courts from 2001 until 2013 related to claims on change of rent and recovery of damages suffered from failure to pay rent in full. These disputes were initiated primarily as a result of the relevant amendments in the applicable legislation, namely in the Tax Code, by virtue of which it was determined that annual rent can not be lower than land tax amount for agricultural lands and respectively triple land tax amount for other categories of lands.

Court practice on this matter has been quite inconsistent for a long time. Finally, (e.g. in Resolution of the Supreme Court of Ukraine of 11 June 2013) the courts formed quite a clear attitude: change of land tax shall be grounds for rent review, which shall be attained by amending the lease agreement. And additional charges by the tax authorities of tax liabilities on rent with penalty provisions have been declared illegal.

With regard to disputes considered in foreign courts, first of all, I would like to note that pursuant to the On Private International Law Act of Ukraine, in the event that real estate is on the territory of Ukraine, cross-border disputes fall under the exclusive jurisdiction of the courts of Ukraine. Accordingly, the main category of similar disputes which potentially can be considered in foreign courts are disputes between foreign investors and government authorities regarding government control of foreign investments and operations of foreign investment enterprises, as provided for in the Forum of Higher Commercial Court of Ukraine On Certain Matters of Commercial Court Jurisdiction No.10 as at 24 October 2011. To a large extent this is possible due to the extremely broad interpretation of investment both in national legislation and at the level of international agreements. Such disputes related to land relationships are not so numerous, but they do happen. As an example I can quote the dispute of Generation Ukraine, Inc. against Ukraine considered in 2003 by the International Center for Settlement of Investment Disputes (ICSID). Maintaining its attitude, a claimant referred to the fact that having no court judgment, unilateral withdrawal from a land lease agreement by the Kiev City Administration is an event of direct expropriation. The court acknowledged its powers to consider the relevant dispute with reference to Article VI(1) of the Treaty between Ukraine and the United States of America on Encouragement and Reciprocal Protection of Investment, whereunder consideration of alleged infringement of any right provided for in, or arising from the Treaty in respect of investments falls under the jurisdiction of the court.

UJBL: What in your view are the high-priority changes that need to be introduced to laws for the efficient development of the Ukrainian land market?

S. P.: This is a complicated matter because legal regulation of land relationships in Ukraine leaves much to be desired.

I would like to mention the following high-priority changes to the laws:

1. The land market needs to become more transparent, the basic land plot information, namely cadastre number, area, type of property, designation, existing encumbrances and limitations of use, land use categories and soil constitution, has to be publicly accessible. This will provide for more efficient land plot due diligence and will give an understanding of the potential ways for use of the land plot.

2. We need a transparent and clear procedure for land auctions and lot preparation. Currently there are certain issues, including those related to financing of preparation and conducting of auctions that impede their conduction and, as a result, implementation of investment projects on state and community land plots.

3. Also, in terms of regulation, we need a procedure for acquisition, lease and use of agricultural land plots that would provide for less stress when passing through the cancellation stage of the existing moratorium on sale of agricultural lands. There should be a concise list of documents and requirements thereto related to the agricultural lands operations, specific grounds and a transparent procedure for the change of a land plots designation, etc.

4. The procedure for the acquisition of land title, currently extremely time-consuming and costly, needs to be simplified. Preparation of land survey projects and technical documentation, as well as their approval, should be simplified.

Kiev Office of Baker & McKenzie

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