Construction in Ukraine: What should be Taken into Account by Foreign Investors?

By Alexey Kot
Salkom

I nvestment in the construction of real estate objects designated for business in Ukraine is one of the most attractive segments of the real estate market today. With Ukraine hosting the Euro-2012 European football championship, the prospects are good for the development of this market over the next 5 years. First and foremost, this relates to the construction of hotels, stadiums and roads and highways. With this in mind, va rious measures are now being taken to attract foreign capital (for example, the VII Lvov International Investment Forum Euro-2012). At the same time, only a few investors actually know the conditions for construction in the te rritory of Ukraine.

Before starting construction activities, a legal entity should go through several stages, successful completion of which results in acquisition of the right to build. As a rule, the first and most important stage is acquisition of rights to the land plot to be used in future for the purpose of construction. The potential purchaser should then pay attention to some legal nuances in order to minimize possible risks at this stage.

Land plots in Ukraine are of a multifunctional designation. Article 19 of the Land Code of Ukraine of 25 October 2001 (hereinafter — LC of Ukraine) sets out 9 categories of land, each providing for a different functional (purpose) designation of specific land plots. Legislative requirements for designated use of land plots state that the purpose of a land plot should conform to the type of activity actually performed on it. In this connection a foreign investor should clearly specify the type of estate object to be built and the land needed.

The build of housing and hotel estates on lands of housing and civil building purpose, recreational estates on lands of recreational purpose, and shopping centers and road service objects on industrial lands, etc., is allowed. Having decided on the designated purpose of the land plot, we may proceed to choosing the method of acquiring it. The right to use land can be acquired through ownership or lease.

Ukrainian legislation sets out certain conditions for the purchase of land plots by foreign legal entities. According to Part 2 of Article 82 of the LC of Ukraine, foreign legal entities may acquire the right of ownership to non-agricultural land plots:

a) Within the settlements in the event of purchasing real estate and with the aim of building objects related to doing business in Ukraine;

b) Outside settlements in the event of purchase of real estate.

The above restrictions also apply to Ukrainian legal entities created with the participation of foreign individuals and/or legal entities, so-called joint ventures.

Moreover, acquisition of land plots owned by the state or a municipality requires additional permission from the Cabinet of Ministers of Ukraine and, in some cases, from the Ukrainian Parliament. It is also necessary to register a permanent representative office on the territory of Ukraine and submit a contract on lease of the respective plot of land.

Taking into account the red tape which a foreign legal entity will have to get through before it can purchase a land plot, this method of acquiring land is the least attractive for foreign investors.

In this connection, the leasing of land plots is more favorable for an investor. The order and conditions for the lease of land plots are determined by the LC of Ukraine and the On Leasing of Land Act of Ukraine of 6 October 1998. Pursuant to the above regulatory legal acts the leasing of land may be short-term (up to 5 years) and long-term (up to 50 years).

The right to lease land plots may be acquired both on a competitive basis and beyond competition or auction. In the event of acquisition of the right to lease a land plot on a competitive basis, the procedure and conditions for holding such a competition are most often determined by local authorities. Local authorities may also set additional conditions for the winner of a competition. For example, restoration of certain buildings or performing other actions for the benefit of the territorial community living in the settlement.

Moreover, granting a lease on land plots from reserve land for construction purposes requires an allotment project which is properly drawn up and coordinated technical documents for the land plot. Upon proper coordination of the allotment project, the body of local self-government adopts a decision to grant a lease on the land plot and signs a lease agreement with the lessee.

During the process of allocation allocation of a land plot for construction purposes the location of the objectshould be agreed preliminarily. For this purpose, based on the act of the specially created commission of local selfgovernment or executive authorities, a decision is adopted to agree to the location of the object, which, in it its turn, will be the basis for further processing of a permit to enable construction.

Therefore, the procedure for registration of the right to lease is also a rather complicated one. However, all important issues are agreed at local government level only, which makes this method of acquisition of rights to land the most favorable for foreign investors.

One more way of purchasing a plot of land in practice is to buy the corporate rights of a Ukrainian legal entity which leases such a plot of land. In this case, it is necessary to check the lawfulness of the right of the specific land user to lease and conduct due diligence of the enterprise. The second but important stage of acquisition of the right to develop the land plot is registration of the permit documentation allowing construction. This stage includes the following:

• obtaining a construction permit;

• obtaining primary data;

• development of design documents;

• comprehensive state examination of the design documents;

• approval of design documents;

• obtaining a permit for the performance of construction works.

A construction permit is issued by the executive authorities of local councils, provided that they are delegated such powers by the respective councils, following the fulfillment of legal procedures by legal entities. A construction permit gives no right to begin construction; it is only grounds for going through further stages. This permit is valid for 2 years. In the event of leasing of the land plot, the decision of the local council to allot the land plot with the respective designated purpose, is, at the same time, a construction permit.

Later on, it is necessary to fulfill the procedure for obtaining the primary data and development of design evaluation documentation. Primary data should be understood as being technical documents of a different level containing the requirements for the construction object as regards engineering support, safety and design. The initial data is provided by specialized engineering support organizations and the local town planning and architecture authorities, etc.

After obtaining the initial data, the design documents should be developed. These design documents should then be approved by the town planning and architecture authorities and the architectural and town planning council. The properly approved construction project is subject to comprehensive examination by the state as to its compliance with existing sanitary, construction, fire and other standards.

Upon the results of the examination and completion of all procedures stated above, state architecture and construction inspectorates issue a permit for the performance of construction works. The permit for the performance of construction works is a document confirming the right of the developer and the contractor to perform construction works, connect the construction object to utility networks and engineering structures, and issue orders to perform earthwork. This enables construction work to begin. Please note that the laws are currently being amended to improve the mechanisms for obtaining permits as regards distribution of the respective powers among different state authorities. From 1 January 2008 the On Amendment of Certain Legislative Acts of Ukraine Regarding Exercise of State Construction and Architectural Control and Promotion of Investment Activity in the Construction Field Act of Ukraine of 16 May 2007 will come into effect.

Notwithstanding the fact that the mechanisms for acquiring the right to build are rather complicated and lengthy, in the event of qualified legal support many foreign investors succeed in completing all the stages mentioned and successfully carry out their activities on the territory of Ukraine.