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Managing Partner, Law Offices of OMP
Partner, Law Offices of OMP
Agribusiness in Need of Land
Land reform and the increasing valuations of land banks are still the main topic for farm owners and potential investors. Today, farm owners are under continuous pressure from land owners willing to sell their land. At the same time, there was a little progress towards liberalization of the land market. The archaic moratorium on the sale of arable land is where it was last year and over the previous decade.
In view of possible land reform, it is important to understand current regulations and practice in the land market. This knowledge provides valuable insights into life after introduction of unrestricted sale of agricultural land. Many a myth are ruined by reading what the land law says today. To give just one example, there is sufficient legal protection of tenants in the case of sale of leased land plots. Importantly, the transfer of agricultural land is achievable even despite the moratorium (the Moratorium).
It must be noted that the purchase of land today is rather risky for businesses. The risk always hits the price of relevant assets. Ukrainian arable land is not exempt from this law. The current market (we must confess that there is a market for land under the Moratorium) responds by reducing land prices, thereby cutting sellers
revenues by at least 25%-50% compared to what the seller could have earned in case of a transparent land market.
Restrictions on Purchase of Land
The Moratorium set forth by the Land Code effectively prohibits sale and purchase agreements, preliminary purchase agreements or any other instruments aimed at disposal of the land plots in future, i.e. in case of lifting the Moratorium. The latter means that preliminary sale agreements, power of attorneys or other similar documents concluded prior to the lifting of the Moratorium may be deemed void ab initio under Ukrainian law. In addition, the Moratorium prohibits any change of formal designation (allotment) of related land plots, thereby not allowing the pulling of a land plot out from the limitations set by the Moratorium.
At the same time, land pots under the Moratorium can be inherited, swapped or redeemed for public needs.
Which Land is Currently Not for Sale?
The Land Code of Ukraine (Land Code) provides for three types of agricultural lands which may not be sold by their legal owners. These include agricultural land formally designated for (i.e. the Moratorium):
— commercial/commodity agriculture; and
— private/individual agriculture and parceled from the land mass previously cultivated by state and/or or collective farms; and
— any agricultural use in case of land plots owed by the state or a municipality.
Contrary to popular belief, not all agricultural land is subject to the Moratorium. Thus, the ever-growing body of land privatized by individuals (with a maximum area of 2 hectares available under such procedure for an individual plot) is freely transferable under Ukrainian law.
Are There Ways of Buying Land despite the Moratorium?
With the number of landlords willing to dispose of their land plots growing steadily, both agribusinesses and private investors are actively buying the land that is on offer. Indeed, the sale of land is on the rise. The Moratorium makes the parties look for creative forms of sidestepping it.
Presently, there are two main strategies pursued by parties willing to transfer land ownership:
— long-term land use agreements:
• land lease agreements for the maximum allowed term of up to 50 years (as a practical matter —
49 years); and
• emphyteusis agreements allowed under Ukrainian law without any limitation on the maximum period of land use (in contrast to land lease agreements). Emphyteuses are often concluded for a period of 100 to 500 years. Furthermore, Ukrainian law allows the sale (transfer) of the right of emphyteusis from one tenant to another without the consent of a land owner (freeholder).
— transfer of ownership (freehold) on the basis of land swap agreements.
The current market approach is to swap land plots, which are (i) located within the same district or municipality and (ii) designated for agricultural use, irrespective of the areas of swapped land plots.
Unfortunately, the Ukrainian authorities do not have any consistent policy in their treatment of the above arrangements. While they agree on the lawfulness of long-term land lease agreements, both emphyteusis and land swaps quite often attract criticism. Furthermore, land swaps, which were once the most popular land transfer tool, were recently challenged by the Supreme Court of Ukraine.
What are the Key Issues Related to Land Reform?
More than a decade of debate around land market liberalization has crystalized the few issues which are essential to the proper functioning of the land market.
These include the following:
— permitted buyers;
— maximum number of hectares which might be owned by one permitted buyer;
— minimum sale price;
— preemption rights (right of first refusal); and
— restrictions on resale of land.
Restriction on Resale. These provisions are introduced to control land speculation. Their aim is to discourage any land purchase focused solely on subsequent resale. To that end, the law might provide for heavy taxation of the proceeds from the resale of land. Often, the applicable rate during the first years after the purchase may theoretically peak at 50%.
Permitted Buyers. It is expected that the deal breaker for any vote by the Ukrainian Parliament on the land market would be the issue of permitted buyers.
The land market is a hard sell of and by itself. Even fewer people would be willing to extend the right to buy agricultural land beyond nationals of Ukraine. The majority of Ukrainians have an irrational fear of foreigners buying all the land and evicting the locals. Consequently, it is widely believed that any reform of the land market will provide for at least an interim period of 5 or more years during which only Ukrainians will be able to buy and sell agricultural land. Of course, Parliament may at any later time recognize the need to permit purchase of agricultural land by Ukrainian legal entities or foreign nationals.
Preemption Rights. In contrast to the previous issues, preemptive rights should protect an agribusiness more than landowners. If the land is to be put to its best use, then arguably those who managed it properly should be the first to buy it.
Owners of adjacent land plots or family members might have similar rights.
Land Bank Cap. The issue of permitted buyers goes hand in hand with the maximum land bank limitation. Although the latter is less controversial, the popular approach is to limit the land bank held by one individual or legal entity. For individuals, the suggested caps range from 100 to 1,200 ha, for legal entities from 500 to 10,000 ha.
There is little theory behind any of the above limitations. As in the case of permitted buyers, it is highly likely that caps will be increased (at least for legal entities, if they are ever to be allowed to buy agricultural land).
Minimum Sale Price.The rationale behind the fixed minimum sale price is to protect unsophisticated landowners. It is often believed that poor rural landowners might be pressed to sell their land plots substantially below their market value. While case studies do not always confirm this theory, the popular consensus is to include such protection.
What to Expect Post from Land Liberalization
As many other Ukrainian reforms, liberalization of the land market is long overdue. It comes at a time when arable land is in short supply and in high demand. Even without a free land market, agricultural land is at the center of multiple conflicts among agribusinesses and landowners. The price of leasing land has been growing steadily over the past 10 years. Currently, a medium term lease of prime agricultural land can easily fetch USD 800 to USD 1,500 per hectare. On the other hand, we are currently seeing a slight decrease in land prices in Central Ukraine compared to those at the end of 2017.
Opening up the sale of agricultural land will further fuel the price of land and intensify competition for it. Unless carefully managed and controlled, the land market could become as volatile and unpredictable as it was prior to 2008 (in the case of land for residential construction in and around the city of Kyiv and major metropolitan or seaside areas in Ukraine). Given any unfettered influx of cash, land speculation will quickly overtake the market.
The land market would resolve or at least speed up resolution of several problems plaguing land management in Ukraine. Land aggregation will make it possible to lease whole fields without facing sabotage from the lessees of any interrupting land plots, which is often currently the case. Furthermore, contiguous land masses accumulated by individual landowners will also make any field roads redundant. The roads would be sold by the state, ending the years of controversy over their use and the relevant fiscal liabilities.
Both the medium and long-term effects of land reform should be positive. More importantly, whatever the negative consequences, of which there would be quite a few, there appears to be no viable alternative to liberalization of the land market. Both land lease and any other forms of land use, outside of the free market, have proved unreliable in modern day Ukraine. More than fifteen years of the Moratorium demonstrated that its overall effect on land management has been largely negative.