Real estate finance law in Ukraine

Introductory note: Ukrainian real estate security instrument ‘ipoteka’ is often translated into English as ‘mortgage’. However, ipoteka should not be confused with mortgages as this is understood in common law jurisdictions; rather, it is a charge, a non-possessory security. It involves the creation of new proprietary rights in the creditor. The essence of a charge is that the secured property is made liable for the repayment of a debt without there being any transfer of ownership or possession from the debtor (the ‘chargor’) to the creditor (the ‘chargee’). The debtor retains both ownership and possession of the asset; the creditor obtains neither. Instead, the creditor obtains a new form of proprietary interest, a charge, over the secured property. In the event of default by the debtor, the creditor is normally entitled under the terms of the security agreement to initiate the sale of the secured asset and recoup the outstanding debt from the proceeds of the sale. Thus, all references to mortgage in this document are references to Ukrainian law ipoteka as explained above.

Yes.

Lenders can take a mortgage over “real estate objects” – being land and buildings on the land. Foreign lenders can take security over assets, which can only be owned by Ukrainian residents, e.g. agricultural land; however, enforcement of such security can be through public auctions but not by transfer of the collateral into the ownership of the foreign lenders. Only persons prescribed by the Land Code of Ukraine can acquire agricultural land. Only banks can act as mortgagees with respect to agricultural land.

2.1 The distinction between mortgages on land and buildings on the land?

The mortgage of a building or construction must include the underlying land (and vice versa), if both the building and the land are owned by the same person (i.e. mortgagor). Incomplete construction work is construction; the construction, regardless of whom it belongs to, if located on the mortgaged land, is deemed to be collateral.

2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable?

Mortgage certificates (zastavna) can be issued in Ukraine, and should specify, inter alia, the amount of principal obligation and interest. Mortgage certificates should be documented on secure forms/blanks, which can be ordered from and produced by specialised licensed enterprises. Notary fees for notarization of a mortgage agreement and the issuance of a mortgage certificate are negotiable and typically do not exceed 0.21% of the value of collateral.

2.3 Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered?

Second ranking security over the same real estate can be taken subject to the consent of the initial mortgagee. In order to secure priority of claims all mortgages over land and buildings must be registered in the State Register of Proprietary Rights to Immovable Property. On registration, the registered mortgage will have priority over any unregistered security interests and those registered at a later date. Priority deeds are not registered in Ukraine.

2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender’s consent?

No. In order to prevent any unauthorised transfers, the mortgage should be registered with the State Register of Proprietary Rights to Immovable Property.

2.5 Are there any preferred creditors (other than a prior ranking mortgage holders)?

No.

2.6 Can “all monies” mortgages be taken?

No.

2.7 Can a landlord’s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how?

Yes. The landlord’s right to receive rent can be charged by way of a pledge agreement.

2.8 Is it customary/possible for a lender to take a charge/security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made?

Yes. It is customary/possible for a lender to take a charge/security over bank accounts of the borrower as the rights to funds under a pledge agreement. It is usual to contractually restrict the borrower’s rights to withdraw funds from the bank accounts.

According to Ukrainian legislation, the right of ownership, the right of lease and the right of permanent use to both private and public land take effect as of the moment of the state registration. Such rights are registered in the State Register of Proprietary Rights to Immovable Property. The mortgages over the land are registered in the same register.

3.1 Consequences of failure to register?

The mortgage takes effect from the moment of registration in the State Register of Proprietary Rights to Immovable Property. Thus, failure to register the mortgage makes the mortgage invalid.

3.2 Formalities for execution of security and costs?

The mortgage agreement must be executed in writing and is subject to notarisation. Costs include: (i) state duty – in the amount of 0.01% of the mortgaged property value; (ii) notary fees (negotiable) – typically up to 0.2% of the value of collateral; (iii) registration fees – up to EUR 26 depending on the urgency of making the registration action.

Under Ukrainian law only a creditor having a valid monetary claim can hold a security. It may sometimes be seen in practice in Ukraine that the security is held by a Security Agent based on the “parallel debt” concept, contemplating that the Security Agent is granted with the benefit of a separate claim and a status of an independent and separate creditor. However, the “parallel debt” concept has no distinctive legal meaning in Ukrainian law and has not been tested in practice. It is, therefore, not clear whether and in what way it would be enforced by a Ukrainian court.

4.1 What happens if the lenders change later on e.g. on a transfer? Do new security documents have to be signed?

Yes. Changes to the existing agreements have to be made, unless the lenders change these by way of transfer of the mortgage certificate (by endorsing the relevant mortgage certificate).

Transfer of the lease to a new tenant (by way of sub-lease or assignment) is subject to the consent of the  borrower, unless the lease agreement provides otherwise. In case of sub-lease the original tenant remains bound by the lease.

Transfer of any use rights to state owned or municipal land is not allowed by Ukrainian law.

Under Ukrainian law, a mortgage can be enforced either through: (i) out-of-court settlement (if so provided for by the agreement); (ii) notarial writ (endorsed on the original execution copy of mortgage agreement); or (iii) court judgement. In practice, first two methods are would significantly depend on the cooperation of the mortgagor.

6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised?

Ukrainian courts have exclusive jurisdiction over the matters involving real estate, including enforcement of mortgages.

6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review?

Prior to enforcement, arbitral awards or foreign judgements have to be recognized in Ukraine. Ukraine is a party to the New York Convention.

6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers/liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction?

The most reliable method of enforcement is through a court judgement. Although enforcement without recourse to the courts is allowed under the Ukrainian law (based on a notarial writ or out-of-court settlement provisions of the mortgage agreement), in practice, however, such enforcement is difficult without the cooperation of the mortgagor. It is not possible for a secured party to appoint receivers/liquidators in Ukraine. Typically, collateral is sold by public auction; however, the mortgage agreement can permit the transfer of the collateral into the ownership of the mortgagee, or the sale of the collateral by the mortgagee to a third party; the latter can also be effected through the court.

6.4 Is the lender responsible for maintenance and insurance of the real estate after default until sale?

No. The mortgagor remains responsible, unless the mortgage agreement provides otherwise.

6.5 Is there any method of foreclosure (lender obtaining good title to the real estate in satisfaction of all or part of its debt)? If so, does this require a court order and is it only automatically used when the real estate is not sold at public auction?

The mortgage agreement can provide for such out-of-court settlement option as transfer of the collateral into the ownership of the mortgagee. However, in an event of default, this transfer is not automatic, and in practice is difficult without the cooperation of the mortgagor. Alternatively, if the real estate is not sold at a public auction ordered by the court or carried out pursuant to the notarial writ, collateral can be transferred to the mortgagee, provided that, within 10 days after the auction, the latter decides to acquire collateral at the starting price setting off secured claims against the value of the collateral.

Cross-border loans from foreign lenders to Ukrainian borrowers are subject to registration with the National Bank of Ukraine prior to the disbursement of any funds. Ukrainian legislation sets maximum interest rate limitations with respect to such loans. In particular, the floating-rate loans in major currencies such as euros, US dollars and sterling, are capped at 750 basis points above the three-month LIBOR USD rate; while fixed rate loans are capped at 9.8% pa if repayable within one year; 10% pa if repayable within the term from one to three years; and 11% pa if repayment period exceeds three years.

Early repayment under loan agreements between Ukrainian borrowers and foreign creditors is currently temporary prohibited.

Assuming real estate is held in a locally incorporated single purpose vehicle to provide an alternative to enforcement of the mortgage over real estate:

Yes.

Yes. Security (of any ranking) over shares in a joint-stock company (“JSC”) is to be registered with a depositary institution (custodian) and the State Register of Encumbrances over Movable Property. The security over share (being participatory interest) in a limited liability company (“LLC”) should be registered in the State Register of Encumbrances over Movable Property.

3.1 Consequences of failure to register?

Failure to register a pledge over shares in a JSC with a depositary institution (custodian) would not prevent the borrower from the transfer of the shares to a third party. Failure to register the pledge over share(s) in a LLC/JSC with the State Register of Encumbrances over Movable Property affects the ranking of the pledge.

3.2 Formalities for execution of security and costs?

A pledge agreement must be executed in written form. The pledge agreement must be notarized if the parties agreed on that or at least one of the parties insists on notarization. Costs associated with execution of a share pledge agreement are comprised of:

(a) costs related to the signing of the agreement. If the agreement is to be notarised, then the parties must pay a state duty in the amount of 0.01 per cent of the value of the pledged shares; and a notarial fee, which will vary;

(b) in case of pledge of shares in a JSC, costs related to the blocking of shares and the recording of the pledge with a depositary institution (custodian). These costs will depend on the depositary institution’s (custodian’s) internal rates; and

(c) costs related to registering the pledge with the State Register of Encumbrances over Movables Property (approximately EUR 1.5).

The transfer of the shares into the name of the lender, not related to the transfer of title, is not envisaged by Ukrainian law. The shares in a JSC encumbered by the pledge remain at the pledgor’s securities account and an encumbered share in a LLC remains registered in the name of pledgor in the State Register of Legal Entities, Individual Entrepreneurs and Civic Organizations.

Enforcement can be performed through a non-judicial procedure, by way of a notarial writ (if the agreement was notarised) or court proceedings. For more details, please see section 5.1 below.

5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers/liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction?

As soon as an event of default occurs and before the actual enforcement, the lender is required to send to the borrower and its shareholders (being pledgors) a cure notice. This notice must be sent at least 30 days in advance of the proposed enforcement. The notice must be registered with the State Registry of Encumbrances over Movable Property. The lender can only proceed with the enforcement of its security after the 30 day grace period has expired.

Enforcement can be performed through a non-judicial procedure, by way of a notarial writ (if the agreement was notarised) or court proceedings.

The non-judicial procedure of enforcement is only allowed if it was provided for in the pledge agreement. During the course of a non-judicial enforcement, the title to the shares can be transferred to the lender or the shares can be sold to a third party. The course of enforcement action depends on the terms and conditions of the pledge agreement.

If there is no non-judicial procedure set out in the pledge agreement, or a pledgor is not cooperative in the course of enforcement, the lender will be forced to enforce the pledge through court proceedings. As a general rule, shares enforced through court proceedings are sold through a public auction, unless otherwise provided for in the court judgement.

Court proceedings and a public auction are the mandatory enforcement procedure if the shares are owned by a state-owned enterprise.

Irrespective of the enforcement procedure, the lender can appoint any third party to act on behalf of the lender in enforcing the pledge. The scope of the third party’s authority will depend on the power of attorney issued by the lender’s.

Transfer of title to the pledged shares to a third party within the enforcement procedure may be subject to merger control clearance in cases where that is required by Ukrainian law.

5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur?

Ukrainian law does not provide for the mandatory subordination of shareholders’ loans. Subordination depends on the terms and conditions of a loan agreement. It is not customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur. In enforcing a share pledge a lender must consider any shareholders’ loans or third party creditors.

Legal issues that would be likely to impact upon the valuation and the security of income from an investment perspective.

1.1 Typical lease length?

Land: 5, 10, 25, 49 years
Buildings: 3 or 5 years

1.2 Maximum/minimum lease length if any?

Land: 50 years (maximum)
Buildings: no limits

1.3 Statutory controls and obligations re renewal/termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal?

Land

On expiry of a lease term, a tenant who has complied with its obligations under the lease has a priority right to renew the lease by sending the prolongation notice not later than one month before expiration of the lease agreement. In this case the parties may agree to change the terms and conditions of the lease.

On expiry of the lease term if a tenant continues to use the land plot, the lease is deemed to be renewed for the same term and under the same conditions provided by the original lease agreement unless the landlord objects in writing within one month of the lease expiry. The parties should, however, execute additional agreement on renewal of the lease agreement.

To terminate the lease, the landlord must serve a written notice on the tenant rejecting renewal of a lease within one month following the lease expiry.

There is no requirement for the tenant to serve any notice if it does not wish to renew the lease agreement after the expiration of the initial term.

Buildings

On expiry of a lease term, a tenant, who has complied with its obligations under the lease, has a priority right to renew the lease. In this case however, if the tenant intends to renew, it must inform the landlord prior to expiry of the lease.

If the tenant continues to use the premises after expiration of the lease agreement, such lease agreement is deemed to be renewed for the initial term unless the landlord objects in writing within 1 month of the lease expiry.

1.4 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)?

No, a tenant cannot unilaterally terminate the lease unless such break right is specifically provided for in the lease agreement.

1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents?

No.

2.1 Rental income receivable quarterly/monthly in-advance/in-arrear?

The mechanics of rental payments are agreed by the parties. Market practice is that the rents are payable on a monthly basis in advance based on invoices issued by a landlord.

2.2 Periodicity of reviews?

The rent payable under leases of state-owned and municipal land is reviewed on an annual basis. The review is undertaken in line with indexation of the normative value of the land (which is the basis for land calculations). .

For non state-owned or municipal land rent reviews the parties will agree the mechanics. Market practice is that rent is being reviewed on an annual basis.

2.3 Basis of review (upwards-only or variable, indexation or market rent)?

Market rent review and indexation are treated as different rent review mechanisms. Both mechanisms could be used simultaneously. Rent review is usually restricted to being subject to upwards only increases.

2.4 Are rents/reviews subject to statutory control in regard to quantum or increase (i.e. rent control)?

No, there are no controls other than the review of rent payable with respect to state-owned and municipal land being required annually.

3.1 Internal maintenance, decoration and repair?

Tenant, unless otherwise specifically provided for in the lease agreement.

3.2 External maintenance, decoration and repair?

Landlord, unless otherwise specifically provided for in the lease agreement.

3.3 Structural repairs?

Landlord, unless otherwise specifically provided for in the lease agreement.

3.4 Insurance?

Insurance of land is discretional and is determined by parties in the agreement. It is not common in Ukraine to insure land plots.

Insurance of state owned real property is mandatory and should be procured by tenants.

Insurance of privately owned buildings is discretional and is subject to parties negotiations. Market practice is that landlord would be responsible for insurance of structural part of the building and external fit out, whilst the tenant will insure internal fit out and fittings and its belongings.

3.5 VAT?

Yes, generally, VAT is payable on rents at the rate of 20% (except for the cases where the lessor is an individual or a company not registered as VAT-payer).

However, the following rent payments are exempt from VAT:

• rent of integral property complexes of state or communal enterprises if the lessor is state or local authority and payments under law are credited to the state budget of Ukraine or local budgets;
• rent of the land plots in ownership of the state or local communities, if the rent payments are fully credited to respective budgets.

In addition, the Tax Code of Ukraine provides 0% VAT for rent of the airport premises that are used for servicing of international flights.

3.6 Rates?

Subject to the agreement between the parties. State owned property rates are regulated and will depend on property, its designation and location. The rent rate for state-owned and municipal land shall not be less than 3% of the amount of normative value of the land. The rent shall not exceed 12% of the same (unless the lease to the land is granted via an auction). In most cases, the rent rate for state-owned and municipal property (land in particular) is determined by means of an auction.

3.7 Other typical outgoings?

Among other typical tenant’s expenses it is common to have phone and utility charges, marketing share (for shopping malls), fit out and internal fittings insurance, grand opening share (for shopping malls).

3.8 The ability to recoup any landlord outgoings (including management costs) by way of service charges?

Yes. The landlord can recover the costs of external maintenance, decoration, repair and structural repair, management fees etc. via a service charge.

4.1 Are terms of leases/contracts recognised and supported by case law in the jurisdiction?

No. Ukraine operates in the civil law system, which means that a court will be relying on the contents of the agreement and effective legislation rather than on existing precedents.

5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated/qualified party or is an RICS (Royal Institution of Chartered Surveyors)-qualified appraisal report accepted and recognised in each jurisdiction?

Any valuers/environmental surveyors must be licensed in Ukraine to undertake such appraisals for the appraisal to be recognised.

5.2 Is it possible/customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional?

Yes.

5.3 Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate?

No. The general principle of Ukrainian environmental legislation is that the liability for breach of environmental laws arises if the person is guilty of the relevant breach. Generally a party holding security over real estate is not liable for breaches of environmental law by its owner or a third party. However, once the lender enforced a mortgage over the property, i.e., became the owner thereof, it is deemed to assume all the environmental risks and liability attached to such property, unless there is an established fact that the breach of environmental laws in respect of the property has been caused by other person.