Real Estate and Construction in Ukraine
Can Foreigners have Property Rights in Ukraine?
Are there any Registration Requirements
Applicable to Property Rights?Real estate and construction in Ukraine
Can Foreigners Have Property Rights in Ukraine?
In Ukraine, the foreign citizens enjoy the same rights and freedoms and bear the same responsibilities as Ukrainian citizens, including property rights. Foreign citizens and legal entities are entitled to own property in Ukraine, unless otherwise provided for the international treaties or other Ukrainian laws.
Are there any Registration Requirements Applicable to Property Rights?
Property rights to real estate (ownership, lease rights, servitudes etc.) are subjects to the state registration.
The lease of a building (or other capital structure) or part thereof must be concluded in writing, and must be notarized and registered by the state if entered into for a period of three years or longer.
What Types of Land Rights Exist in Ukraine?
In Ukraine, there are the following types of rights to land:
- ownership;
- perpetual/indefinite use;
- short-term lease;
- long-term lease;
- servitudes (easements).
The Land Code of Ukraine (the “Land Code”) clearly distinguishes between agricultural and non-agricultural land, and it establishes different regimes of ownership for each type of land.
There are three types of ownership of land in Ukraine: private, municipal and state. Subject to certain limitations, Ukrainian individuals and legal entities are not restricted in their ownership, use or disposition of land.
The right of perpetual use of land may be granted only to state and municipally owned companies.
Foreign individuals, legal entities and foreign states are allowed to own, use, and dispose of certain non-agricultural land in Ukraine, but are explicitly prohibited from owning agricultural land.
The Land Code, however, appears not to grant to Ukrainian companies with foreign investment the right to own any land in Ukraine, by stipulating that only those Ukrainian legal entities, which have been founded by Ukrainian individuals or legal entities and joint ventures, may own land in Ukraine. The Land Code, however, does not contain any similar restrictions with respect to the leasing of land by Ukrainian legal entities with foreign investment.
The Land Code contains a number of guarantees for landowners and land users. In particular, the state authorities may restrict or limit the ownership of land only pursuant to a court decision. The Land Code expressly provides a restrictive list of cases, in which the right of ownership of a land plot may be terminated, such as alienation of a land plot at the owner’s decision or alienation of land for public needs.
Is Restitution of Land Ownership Based on Historical Land Use Rights Possible in Ukraine?
Individuals (or their heirs), who owned land plots in Ukraine before 15 May 1992 (the date on which the previous version of the Land Code took effect), have no right to receive such land plots back into their ownership. There will therefore be no restitution of land ownership based on historical land use rights.
What are the Key Features of the Land Leases in Ukraine?
A land lease is a contractual, limited-in-time possession and use of a land plot, which is granted for compensation and which is necessary for the lessee’s commercial and other activities. All Ukrainian and foreign individuals, and legal entities, foreign states, and international organizations may lease land in Ukraine. The Land Code establishes two types of land leases: short-term (up to 5 years) and long-term (up to 50 years).
A land lessee can sublease the land plot, subject to the lessor’s consent. “Lessors of land plots” are defined only as the owners of such land plots or their authorized representatives.
Are the Third Party Rights Recognized in Ukraine?
In Ukraine, there are various types of rights of third parties as well as the concepts of “servitudes” (easements) and “good-neighborliness”.
Under the concept of “good-neighborliness”, landowners and land users are obligated to choose the manner of land utilization, which will create the least amount of inconvenience and discomfort (considering such issues as shading, smoke generation, odor nuisances and noise pollution) to the landowners and land users of neighboring land plots. Although the chapter of the Land Code on “good-neighborliness” contains a number of vague provisions, it also expressly regulates a number of specific practical situations.
How the Purchase and Sale of Land Is Made?
The purchase and sale of land plots can be made through civil law agreements. This method of land alienation applies to any type of land in Ukraine and, subject to certain limitations and restrictions contained in the Land Code, may be utilized by any Ukrainian or foreign individual or legal entity, foreign state, or international organization. For instance, vacant state and municipal land may be sold only at land auctions. The Land Code contains a very detailed description of the procedure for the sale of state and municipal land. Every agreement on the sale and purchase of a land plot is subject to notarization and state registration.
Can Foreigners Own Land in Ukraine?
Foreign legal entities and JVs may own only non-agricultural land (a) within city limits, if they purchase buildings or structures or land plots for construction purposes; and (b) beyond city limits, if they purchase buildings or structures. State or municipal land may, however, be sold to a foreign legal entity if it establishes and registers its permanent establishment in the form of a commercial representative office in Ukraine.
Foreign states and international organizations may purchase land for the purpose of constructing buildings for their diplomatic missions in Ukraine pursuant to international treaties binding upon for Ukraine.
State land may be sold to foreign states and international organizations by the Cabinet of Ministers, subject to the prior approval of such sale by the Verkhovna Rada, whereas the sale of municipal land to foreign states and international organizations may be made by the relevant municipal authorities, subject to the prior approval of such sale by the Cabinet of Ministers.
What Are the Typical Transactional Structures and Corporate Vehicles Used in a Construction Project in Ukraine?
An SPV company is often used to act as a site developer in the private sector, and it is most commonly established in the form of a limited liability company.
The use of an SPV company is primarily driven by exit considerations, since it is usually more tax efficient to structure the sale of a property on completion of the sale of the company which owns the property, rather than the sale of the property itself.
To develop a land plot, a developer must have registered its rights to the land and obtained all of the permits required to implement the project. The developer must also hire a project designer and a general contractor on the basis of the relevant agreements.
Investment agreements are often used when one party (owner) has a land lease or permanent land use rights to a particular site, while another party (investor) wishes to invest its funds to develop the site. In practice, the owner often neither:
- Has the financial capacity to develop the site.
- Is able or permitted to sell or transfer the land plot, because it only has a land lease/use rights to the site.
However, while the investor does not have any rights to the site, it has the capacity to finance the development of the site.
Since land leases and permanent land use rights are not assignable in Ukraine, the parties often enter into an investment agreement, under which the owner permits the investor to develop the site in exchange for certain consideration. The owner usually acts as the official developer of the property.
The owner applies for and obtains the relevant construction and building permits in its own name, while the investor provides financing for the construction. On the construction’s completion, the investor usually receives the newly constructed property into ownership, while the owner either receives part of the new property into ownership or the agreed consideration from the investor.
How Construction Projects are Generally Financed?
Both debt and equity financing is widely used for construction projects in Ukraine. Until the financial crisis, it had become increasingly popular for a local developer to raise equity financing through either:
- The private placement of shares.
- An initial public offering (IPO).
These arrangements typically involve the use of SPV companies, which attract financing from outside the Ukraine and then lend the funds to Ukrainian project companies through shareholder loans.
At the local level, financing can also be secured through mutual funds, which are known in Ukraine as mutual investment institutions (Mils). Mils accumulate investors’ funds to raise profits from investments, for example, in securities, corporate rights, or real estate. The funds contributed by investors into Mils, as well as the profits on the assets, are not taxable, including those profits reinvested within the Mil. Taxes are charged on the payment of revenues to the investor or on the termination of the Mil. In addition, non-residents must pay a withholding tax chargeable on the amount of interest unless otherwise provided by any applicable international (double tax avoidance) treaties.
A key player in Mils is the assets management company. Mils can also involve other professional players on the securities markets, such as underwriters, custodians, financial consultants, and so on.
The funding of residential construction in Ukraine can only take forms which are explicitly prescribed by law. In particular, funding residential construction with non-governmental funds attracted from individuals and legal entities must be carried out exclusively through:
- Construction financing funds.
- Real estate funds.
- Mutual funds.
- Non-state pension funds.
- The issue of interest-free (targeted) bonds, for which a unit of the relevant real property is a basic commodity.
The main reason for this requirement is the protection of the individual investor’s interests against the misuse of the funds and fraud.
What Standard Forms of Contracts Are Used for Construction Projects?
The regulation of construction contracts varies depending on whether the relevant construction is sponsored by the state or is financed out of private sources. All state procurements, including construction, are heavily regulated and subject to special requirements and terms set out in the applicable legislation.
The Ministry of Construction has approved a template Construction Agreement for capital construction, so that the contracting parties may follow this agreement as a recommended model.
Construction contracts based on the Federation Internationale des Ingenieurs-Conseils (FIDIC) Conditions of Contract (produced by the International Federation for Consulting Engineers) standard forms are sometimes used for large international construction projects, but they are much less popular in Ukraine as compared to other jurisdictions. One of the reasons for this is that any FIDIC standard form contract must be substantially adjusted to comply with Ukrainian law.
What Licenses and Other Consents Are Required by Contractors to Carry out Construction Work in Ukraine?
Most construction activities are subject to licensing, including the activities of:
- The general designer.
- The architect.
- The technical and design supervisor.
The permits required to implement a particular project are issued in the name of the project owner, rather than the contractor, and these permits are not assignable.
The construction permit process is quite similar in case of both Greenfield and Brownfield development and it includes the following main phases:
- Land allocation.
- Obtaining data on the applicable construction restrictions.
- Preparation of the project design and obtaining approval from the local state authority on architecture and construction regarding the architectural part of the design.
- Submission of the project design to the state construction examination.
- Issue of the permit to start the construction works from the local construction authorities.
- On the completion of the works, obtaining a certificate of compliance for the completed property.
- In addition to the above, almost all development projects are subject to public hearings with the participation of individual representatives of the relevant local community, state authorities, and public organizations.
All of the information included in this document is for informational purpose only, and may not reflect the most current legal developments, judgments, or settlements. This information isn’t offered as legal or any other advice on any particular matter. The Firm and the contributing authors expressly disclaim all liability to any person in respect of anything, and in respect of the consequences of anything, done or omitted to be done wholly or partly in reliance upon the whole or any part of the contents of this brochure. No client or other reader should act or refrain from acting on the basis of any matter contained in this document without first seeking the appropriate legal or other professional advice or the particular facts and circumstances.
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