Ukraine

1. Parties and Ownership – Who can own real estate and what types of ownership are there?

Parties

There are no specific limitations as regards ownership of buildings in Ukraine. Therefore, any individual, company, the state and the municipalities may own real estate.

Foreign nationals and companies can also own buildings, but under the current law there are some limitations on owning land. Thus, the aforementioned persons are not allowed to own agricultural land. Non-agricultural land may be owned by foreign persons only when it is located under buildings/structures owned by such foreigners. In urban areas foreign companies may also acquire ownership of non-agricultural land for the purposes of construction of business-related facilities. Foreign companies must have an official representative office in Ukraine if land is purchased from state or municipal bodies.

Along with the above land restrictions which apply only to foreign persons, the law also provides for a “moratorium on the disposal of agricultural land” which prohibits the sale and purchase, alienation or change of designated use of privately-owned land designated for use in commercial agricultural production and individual farming. This prohibition is due to remain in force until 1 January 2017.

Ownership

Under Ukrainian law, ownership is the most comprehensive right a person or legal entity can hold in relation to a property. The owner’s rights include possession, use and disposal. Depending on who holds the right (i.e.; legal entities and individuals, state and municipal bodies), the ownership may be identified as private, state or municipal.
Where more than one person has ownership over a single property, they will hold their interest as follows:

  • Co-ownership – in which case, each of the owners has a defined share of the property, which is determined as a part of the overall property. Each of the co-owners is entitled to freely dispose of his share.
  • Joint ownership – the shares of the joint owners are not determined. All owners dispose of the jointly owned property together.

Under the new registration system which came into effect on 1 January 2013, ownership rights in respect of buildings and land must be registered into the State Register of Corporeal Rights to Immovable Property (the “State Register”), otherwise these rights are considered invalid. At the same time, the corporeal rights to immovable property accrued prior to 1 January 2013 are considered valid, provided that these rights were registered in accordance with the requirements applicable at the time. The owner/user of immovable property is not obliged to additionally register such rights into the State Register.

2. Interests – What types of interest in real estate are sold?

Ukrainian law recognizes following types of corporeal rights (rights in rem) to real estate:

  • Right of ownership; and
  • Other corporeal rights which are derivative from the right of ownership.

Amongst “other corporeal rights” the law distinguishes between the following rights: right of possession; right of use (servitude); right of use of a land plot for agricultural purposes (emphyteusis); right of development of a land plot (superficies); right of economic/operational management; right of permanent use and lease of a land plot; right of use (rent, lease) of buildings or other capital structures, or their parts; mortgage and trust. Under the law this list of corporeal rights is not exhaustive and may be expanded.

Generally, the right of ownership and other corporeal rights specified above have to be registered at the State Register in order to become valid.

Though the list of existing types of corporeal rights is quite wide, only a few of them are commonly used in Ukraine. Thus, one of the most popular rights established with respect to real estate in Ukraine is the right of lease.

The right of lease arises on the basis of an agreement executed between a lessor and lessee. Leases of buildings for a term of three years or more must be executed in front of a notary. Furthermore, a new lease right must be registered into the State Register. There are no limitations as to the term of leases for buildings.

By contrast, leases of land are executed in written form (but no notarisation is required unless one of the parties insist on this) and the lease term may not exceed fifty years. Land lease rights should be registered at the State Register. The law provides that the land lease right may be alienated (i.e.; sold, mortgaged) except for certain cases when the leased land plot is in state or municipal ownership.

3. Employees – What employment issues affect real estate acquisitions?

In Ukraine, employment issues are not relevant to real estate transactions. This is because Council Directive 2001/23/EC of 12 March 2001 (on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses) does not apply in Ukraine.

4. Procedure – What are the steps in a sale and purchase transaction?

Real estate business transactions formally start when proposed heads of terms are drafted, negotiated and agreed between a seller and a buyer. The heads of terms (or memorandum of understanding) set out the principal terms agreed between the parties and are generally expressed to be “subject to contract” and not legally binding. They might be accompanied by a (legally binding) preliminary agreement.

The seller’s lawyers will usually collate all information relating to the property and submit it to the buyer’s lawyers. The buyer’s lawyers will undertake general due diligence investigations. The initial draft of the sale agreement is usually provided by the notary who will certify the transaction. In turn, the buyer’s and seller’s lawyers will further amend the initial draft as required for the specific transaction. The scope of the due diligence and the draft of the sale agreement will vary according to whether the property being sold is under construction or already built and the extent to which leases to tenants have already been granted, as well as whether the transaction will be structured as an asset deal or a share deal.

After the draft sale agreement has been negotiated and agreed by the parties, it should be executed in front of the notary who also registers the buyer’s new ownership right into the State Register (in the case of an asset deal).

In the course of execution of the agreement, the notary authenticating the sale agreement must verify the power of the corporate bodies and their signatories (in the case of legal entities being parties to the transaction) and that there are no impediments to the sale. The notary also checks the State Register in order to be sure that the seller holds proper ownership title to real estate and that there are no encumbrances and/or limitations established over the property which may affect the transaction. The real estate public duties and notary fees need to be settled in full. Following this, the notary is able to register the buyer’s ownership right against the property in the State Register.

5. Contract terms – What provisions does a real estate contract contain and what is implied by law?

Provisions of the contract

An agreement for sale and purchase of an immovable property must be in writing and must contain all essential terms and conditions as specified by law. The agreement is executed in front of the notary and must be signed by both seller and buyer.

Under the law, the essential terms of sale and purchase agreements relating to building or structures are limited to the definition of the property and the price (including payment conditions). However, as a matter of practice, sale and purchase agreements would also include a number of conditions which are essential from a commercial standpoint (i.e.; existing encumbrances over the property, date and conditions for the transfer of possession over the property etc.).

The legislative requirements with respect to sale and purchase agreements relating to land are stricter and require that the following information is included in the agreement:

  • Parties to the agreement (their full details)
  • Type of deal (i.e.; sale and purchase)
  • Detailed identification of the land plot (i.e.; location, area, designated purpose, type of land composition and legal regime)
  • Specification of documents evidencing the seller’s title to the land plot
  • Confirmation that there are no bans on alienation of the land plot
  • Information on limitations which may prevent usage of the land plot in compliance with its designated purpose (i.e.; lease, servitudes etc.)
  • Purchase price
  • Rights and obligations of the parties
  • Cadastral number of the land plot and
  • Information on the moment when the ownership title to the land plot is transferred to the buyer.

Terms implied by law

Some of the most significant are as follows:

  • The seller is obliged to inform the buyer of all existing third party rights to the property (i.e. leases, mortgages etc.). If the seller fails to comply with this requirement the buyer may demand a reduction in price or termination of the sale and purchase agreement.
  • The seller is liable for defects in the property unless such defects were known or should have been known to the buyer. If defects are ascertained, the buyer is entitled to seek a reduction of the purchase price, to require the defects to be remedied or, if the buyer remedies the defects itself, to seek compensation for the expenses incurred in doing so. If the defects are substantial (i.e. the property is not fit for use) the buyer has the right to terminate the sale and purchase agreement or to ask for the replacement of the property. The rights of the buyer in connection with any defects revealed are subject to specific deadlines.
  • Change of landlord – generally if leased property is sold during the term of the lease the buyer replaces the seller in the leasehold relationship. This rule is applicable to both residential and non-residential premises. However, the lease agreement may provide that the lease is terminated if the ownership to the property is transferred to a third party.

6. Due Diligence – What investigations does the buyer normally make?

Every careful buyer that has the intention of buying a property should conduct extensive due diligence concerning the property in question. Usually the buyer will perform legal and technical due diligence, and if the seller is a legal entity, also full corporate, commercial, tax and financial due diligence. The usual procedure is for the buyer’s lawyers to prepare a list of documentation which they would like to review and to send the list to the seller’s lawyers so that they can provide the requested documents.

From a real estate perspective, it is necessary for the buyer’s lawyers to conduct a thorough investigation of the ownership title of the property held by the seller. This investigation may be notionally divided into the following steps:

  • Review of the current seller’s title to the property
    In the course of this review the buyer’s lawyers check whether the seller holds valid and proper title to the property (i.e. certificate of ownership right to buildings, sale and purchase agreement etc.). In order to verify the current status of the property the lawyers also review up-to-date information from the State Register with respect to the property. This information will show if there are any registered lease agreements, property rights established in favour of third parties, bans on alienation and/or other existing encumbrances established over the property. If the property constitutes a land plot, the extract from the State Land Cadastre, containing detailed characteristics of the land plot, must be also reviewed and analysed.
  • Review of the history of acquisition of the ownership title to the property by the seller
    This review will include an extensive investigation of the historical documents and deeds which evidence that the required procedure for the property’s acquisition (if any) was properly performed by the seller (i.e.; if the property was privatised etc.).
    Where the real estate is land, the buyer must also review the allocation procedures and, if the land is developed, the development procedure. Thus, the due diligence must also cover the main stages of the construction process, so that it is clear that the building works have been carried out and completed in accordance with the applicable legislation, the construction permit and the project design.

Reporting to the client

Before execution of the sale and purchase agreement, the buyer’s lawyers report their due diligence findings to their client, raising any matter of particular importance or concern. Their findings are often indirectly included in the sale and purchase agreement – either an issue has been identified that the seller has to remedy before payment of the purchase price, or the seller is asked to provide a particular warranty and/or indemnity with reference to a certain finding.

7. Registration and Notarisation of real estate – What are the basic requirements?

Starting from 1 January 2013 a new registration system came into effect in Ukraine. According to this system all corporeal rights (ownership, use, servitude, mortgage etc.) to buildings and land created after 1 January 2013 must be registered into a new register – the State Register of Corporeal Rights to Immovable Property (the “State Register”), otherwise these rights are considered invalid. At the same time, the law acknowledges the validity of the corporeal rights to immovable property accrued prior to 1 January 2013, provided that these rights were registered in accordance with the requirements applicable at the time. The owner/user of immovable property is not obliged to additionally register such rights into the State Register.

Registration of the rights in the State Register is performed by the “state registrars” which include:

  1. individuals having legal education, who meet the qualification requirements established by the Ministry of Justice and are employed with the local municipal or state authorities;
  2. notaries; and
  3. state enforcement officers (only within compulsory enforcement proceedings).

The general timeframe for state registration is five working days.

Once registration is completed, the decision of the state registrar and information from the State Register are issued.

Notaries are authorised to register the rights when certifying agreements under which the rights to the building or land are transferred or mortgaged (i.e. sale and purchase of building/land, mortgage agreement etc.). In this case, the notary certifies the agreement and registers the new right into the State Register simultaneously, which is very convenient and effective from a timing perspective.

Due to recent changes to legislation, information on registered rights to real estate and encumbrances is open and publicly available on a payable basis.

In addition to the State Register, there is one more official database in Ukraine which contains detailed information with respect to the characteristics of land plots. This database is called the State Land Cadastre (“Cadastre”) and is managed by the Ukraine State Service of Geodesy, Cartography and Cadastre. As opposed to the State Register, adding information to the Cadastre does not create any property right to the land plot but only confirms actual creation of the land plot and provides for its detailed characteristics. In particular, the Cadastre contains information on the land plot’s cadastral number, location, area, the designated purpose of the land, borders, limitations of use, data on the characteristics of land, the land’s monetary value and the distribution of land between owners and users. Access to the Cadastre is not public. However, as of 1 January 2013 certain data from the Cadastre is available to the public and may be accessed on the official site of the Ukraine State Service of Geodesy, Cartography and Cadastre. Public information with respect to the land is limited to the area, designated purpose and cadastral number of the land.

8. Permits – What permits are required for the use and occupation of real estate and are they personal?

As generally accepted in Europe, commencement of construction in Ukraine is subject to the developer obtaining a construction permit (“Construction Permit”). However, certain less complex construction works do not require a Construction Permit, but simply a notification to the construction authority or registration of declaration with the construction authority.

The Construction Permit entitles the developer to carry out preparatory works and construction works, as well as to connect the construction to the engineering networks. The Construction Permit is issued by the local construction authority (State Architectural and Construction Inspection) on a free-of-charge basis and is effective until the construction is completed. The issuing authority has statutory time periods within which a decision must be made as to whether or not the Construction Permit should be issued. If there is a change in the developer or general contractor, there is no need to reregister the Construction Permit. In this case the construction authority should be notified of the changes.

Use of a building constructed in accordance with the Construction Permit requires a separate document – the certificate which confirms that the constructed building may be operated. This certificate is issued by the construction authority upon an inspection of the constructed building.

Depending on the specific case, other supplementary permits/consents may be required in the course of construction (i.e.; for execution of preparatory works or removal of the top soil layer).

Upon construction and commissioning of the building additional consents for the operation of a property may be required, depending upon the nature of activities and operations to be performed on the property (i.e. grain storage etc.).

9. Insurance and Risk – What insurance will the parties effect and when does the insurance risk pass at the time of sale?

Ukrainian law does not provide for any obligatory rules with respect to the property insurance in the course of the sale and purchase transaction. Therefore, in case of the property transfer, the question of insurance is considered to be a commercial issue and is usually agreed by the parties. At the same time, the law requires insurance if the property is mortgaged or is subject to concession.

Generally, insurance can be acquired for buildings and fixtures and fittings in the event of damage or destruction by any of a comprehensive list of insured risks, which will mostly depend upon the requirements of the party seeking the insurance and the insurance company. Land plots also may be insured under various conditions.

Under the terms of the law, the risk relating to a property passes to the buyer at transfer of the property. To avoid any issues with reference to this point, it is usual to contractually regulate transfer of possession in detail.

10. Environmental – What are the common environmental issues?

Environmental law has become a very important consideration in relation to real estate.

Regardless of the kind of development, before the acquisition of the property the buyer should take certain environmental issues into account. Thus, in some cases the development of land requires an environmental impact assessment. The environmental impact assessment is performed at the design stage and is accompanied with public hearings, which is a rather complicated process.

As some environmental issues can play a crucial role in the development and investment process, it is advisable to undertake environmental due diligence. Acquisition due diligence may involve the appointment of environment consultants to consider documentary information and to carry out a site visit. It is important to identify potential problems early on so that there can be negotiation on price, the need for and scope of any remediation and/or the need to put in place protection in respect of any losses relating to existing contamination that may arise in the future.

In principle, legal responsibility follows the “polluter pays” principle (i.e. the person who spilled, released or discharged the offending substance will normally be liable), but there are certain exceptions to this rule. Special rules are in place in case the “polluter” is not known – under certain conditions, the obligation to remedy contamination may pass to the owners and occupiers of the affected property.

11. Pricing/Valuation – What sets the price/valuation of real estate?

Ukrainian law does not provide for a fixed method of assessing a price for immovable property. However, there is a requirement to agree a price in a sale and purchase agreement, since it is one of the essential conditions of any property disposal agreement.

Professional property valuers have developed a logical system for assessing the value of different property types based on a unified set of valuation principles. The system operates through a series of consistent steps that allow for all important and significant market factors affecting the property value.

There are three property valuation approaches:

  • The cost approach employs methods assessing the costs necessary for rebuilding or renewing the property considering physical deterioration, functional and economic superannuation.
  • The market approach employs methods assessing the value by comparing the property with similar assets for which price information is available.
  • The income approach employs methods assessing the anticipated income relating to the commercial operation of the subject property.

12. Taxes and Costs – What are they and who pays them?

Corporate profits tax is levied at 18% on the gross profit, which is determined in accordance with financial accounting of taxpayers with a turnover of more than UAH 20 m per year (approx. USD 800,000 m) subject to a limited number of corrections. Small enterprises (with a turnover of below UAH 20 m per year) may pay corporate profits tax based on their financial accounting results.

For corporate profits tax purposes, profits from the sale of real estate by Ukrainian resident companies are calculated in accordance with accounting rules, subject to specific provisions of the Tax Code of Ukraine.

Income from the sale of real estate by non-resident companies is subject to 15% Ukrainian withholding tax, unless the applicable double tax treaty provides otherwise.

VAT, which is currently 20%, is paid on the purchase price or book (residual) value of buildings (premises), if the latter is higher. It is paid by the seller (if it is registered as a VAT-payer), but financed by the purchaser. Sale of land plots is exempted from VAT, except for land plot purchased together with real estate located thereon. Sale of residential premises on the secondary market is exempt from VAT, while first supply is subject to VAT, unless construction was performed at the state’s cost. While transfer duty is not applicable, a pension fund fee of 1% of the purchase price must be paid by the purchaser. Notarisation of sale and purchase agreements requires payment of state duty in the amount of 1% of the contractual value of the alienated immovable property.

Proceeds of sale of real estate (rather than capital gain) by Ukrainian resident individuals is subject to 5% personal income tax, unless proceeds are obtained from the sale of residential property owned for at least three years and provided it is the only sale of real estate by the seller in the calendar year. The requirement to have held the property for three years does not apply to inherited residential property. Proceeds of sale of real estate by a non-resident individual are subject to personal income tax at 18%.

For corporate profits tax purposes, profits on the sale of shares by a Ukrainian resident company shall be calculated in accordance with accounting rules. Capital gain from the sale of shares by a non-resident company is subject to 15% Ukrainian withholding tax, unless the applicable double tax treaty provides otherwise. Sale of shares is not subject to Ukrainian VAT.

In the case of both Ukrainian and non-resident individuals, profits from the sale of shares is subject to personal income tax at 18%.