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Attorney-at-Law, Ph.D. (Law), Senior Partner, TOTUM
Attorney-at-Law, Counsel, TOTUM
Ukraine Unlocks its Land Market. What should Foreign Business Focus their Attention on?
Summer 2021 is expected to be a hot one for development and for farmers.
Ukraine has impressed not only its citizens but also the world.
For more than 20 years officials have turned a blind eye to the need to recognize agricultural land as a commodity. And now 1 July 2021 is the date, the starting point of the recent history of land relations.
Obviously, the Law of Ukraine On Amendments to Certain Legislative Acts of Ukraine on the Conditions of Circulation of Agricultural Lands, No. 552-IX of 31 March 2020 does not provide for the full authority to sell all the chornozem soils of Ukraine, but it does set out many changes to the course of economic development of our state.
And let’s not be deceived by the provision that foreigners are not land market participants.
Who are actual Market Participants?
The current version of the Law stipulates that, from 1 July 2021, only citizens of Ukraine will be able to purchase land.
Formally, legal entities will acquire legal capacity from 2024.
We emphasize that these are legal entities established under the law of Ukraine, and participants are exclusively citizens of Ukraine, territorial communities or the state.
At this stage, foreigners are completely excluded from this list. The latter will acquire the right to purchase agricultural land if it is supported by the Ukrainian people as a result of an all-Ukrainian referendum.
The legislative basis for holding it already exists. On 26 January 2021, Law of Ukraine No. 1135-IX On the All-Ukrainian Referendum was adopted.
Another subject of free circulation of agricultural land is a bank. The law does not specify its residency. Therefore, the right of a foreign bank to acquire ownership of chornozem soils is not excluded. However, it is limited. The basis for taking over land is foreclosure on soils as collateral with the obligation to alienate them within 2 years.
The state and territorial communities, obviously, conclude this list.
Under no circumstances will sanctioned persons, offshore companies, firms without an ultimate beneficiary, non-Ukrainians be able to buy land in respect of lands located closer than 50 km from the state border.
What is a Commodity under Law No. 552-IX of 31 March 2020?
This reform undoubtedly affects the agrarian business first and foremost, since the object is agricultural land.
But if the urban situation permits it, then it is possible to change the purpose of such lands and to use them for the construction of houses or even industrial facilities. By the way, there are innovations in this category as well. It will be both easier and more difficult to change the functionality of a land plot.
From 1 July 2021, citizens of Ukraine will be able to purchase up to 100 hectares per person. From 2024, this rate will increase to 10,000 hectares.
Nevertheless, only private land is a commodity. The state and territorial communities are merely watching. State and communal land may still be transferred exclusively for use but without restrictions on the status of a subject — both individuals and legal entities, regardless of citizenship and concentration.
Ukrainian Agricultural Land Market for Foreigners
Though at first glance it may seem that such changes do not affect the interests of foreign investors, in fact, businessmen who have been operating in Ukraine for a long time, as well as those who only potentially regard it as an object of investment, are supposed to actively come into play.
One way or another, the current government is not going to deviate from the course of the real free circulation of agricultural land. State land should also be sold, including to foreigners.
The date of 1 July is not the final one. This is only an intermediate stage. After all, active work on accumulating the land bank has been going on for a long time.
A commodity may be land, which is a direct asset of its own economic activity, or an accumulated land bank.
And given practical experience in Ukraine, the second option is quite common. Therefore, it may be beneficial for a foreign investor – the commodity is a ready-made business. On the other hand, it is a way of speculating on the price of such a business.
If you are already an active player in the agricultural market of Ukraine, or you are just planning to expand your business limits, do not be afraid to be active.
Check your land bank for protection against potential buyers – how long the proprietary right to the land is valid. It may be worth making changes to the documents, which, as a result, will be an unpleasant surprise for the new owner. No-one wants to have encumbered property in favor of third persons, especially if the terms of cooperation between the land user and the previous owner were not very attractive in terms of financial enrichment.
The existence of a condition of long-term cooperation, as well as unconscionable sanctions for early termination of such obligations, may frighten applicants for such land.
This is one of the options to get ahead of this.
There are a lot of mechanisms to check and protect your business. To do this, it is just enough to turn to experts who will analyse your current situation, forecast the situation on the market today and in a year or two, and will provide effective (practical) advice to achieve your goal — to save and accumulate assets.
It is possible for you to carry out initial analysis even on your own. In preparation for the launch of the market, Ukraine is conducting a global inventory of Ukrainian lands (of not only agricultural land), which will ensure that the database of the State Land Cadastre contains information about plots, rights and restrictions imposed on them.
The public cadastral map is an information system that reflects the national infrastructure of geospatial data. Its data is public and official.
Pre-emptive Right to Sell
We have emphasized that the market will open without the participation of foreigners only at first glance.
After all, both now and in July 2021, land users will have a privileged position if the owner wants to get rid of his or her plot.
In this case, the best recommendation would be to exercise such a pre-emptive right. No-one can stop you from seeking the support of friendly citizens of Ukraine, who will be able to become your business partners as new landowners this summer.
However, in this case, you should analyse all the little things — both ways to protect such a partnership and the preparation of a partner. After all, the condition for acquiring land ownership is transparency of the buyer’s income. The sale will be carried out in non-cash form with verification of the sources of funds. The price until 2030 is also partially regulated — no less than the level of the regulatory monetary value. Otherwise, this may be grounds for invalidating the agreement.
Renewal of Lease Agreements after July 2020
Considering the need to preserve land assets, it is already important to keep abreast of changes in the agricultural sector. Legislation is a changeable thing, so changes are inevitable. Thus, the approach to the procedure for renewal of land lease agreements was changed in 2020.
These changes will involve those plots that have been transferred after 16 July 2020, or the old contracts will be amended.
Previously, the term «renewal» created a feeling of security of a tenant — it was enough to follow, in time and in accordance with the rules, the procedure for prolongation of agreements. However, today the situation is changing somewhat. In particular, the legislator has provided for two options for continuing the cooperation of a landowner with users. We would call the first option the passive one. Nevertheless, it is quite profitable for the land user. In this case, the right is automatically extended each time the term, for which a lease agreement has been concluded, expires without any action being taken to formalize such a procedure. This is the technical function of the State Register of Property Rights to Immovable Property, where these rights are directly registered.
This procedure may continue until either party, including the owner, decides to terminate the cooperation or change its terms. Regardless of the grounds. This is always a risk for the land user. Therefore, it is necessary to ensure effective protection with regard to such cases directly in the actual agreement. Similarly, no-one has cancelled the maintenance of friendly partnerships with landowners.
At the same time, if the landowner still decides to change the terms of transfer of land for use, the previous tenant will have the pre-emptive right to conclude the agreement for a new term. In this case, the reaching of a compromise between the parties is crucial. If the stated conditions are acceptable to the tenant, he or she will have priority in signing a new agreement. If not, this right will be transferred to the person who agrees to them.
Summer 2021 promises a lot of new events and changes. Therefore, you should not go with the flow and watch from the sidelines. Develop strategic and tactical behaviour regarding further plans, development without drastic actions, but with thorough due diligence of your business, with special emphasis on assets and their legal formalization. The application of effective preventive mechanisms will help you not only to make savings but also to increase your profits from Ukrainian business.