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B.C. Toms & Co is a multinational law firm of Ukrainian and Western lawyers specializing in Ukrainian law. It was the first Western law firm to open a Kiev office, having focused its practice on Ukraine at its independence in 1991. The firm has handled many of Ukraine’s largest oil and gas and other energy projects. We also handled the legal work for the first, and many subsequent, IPOs to raise funding for Ukrainian projects. Based on our over 28 years of experience in Ukraine, we can provide practical commercial advice on how to establish and develop a business in Ukraine. Based on the firm’s practical experience, it has written numerous articles on Ukrainian law, including the legal section of the book Doing Business in Ukraine. The principal practice areas of B. C. Toms & Co include real estate and land development, energy, natural resources, agriculture, banking and finance, M&A, environmental, labor, bankruptcy and administrative law. In addition, the firm has a successful litigation and arbitration practice, having been involved in many of Ukraine’s most important cases, including before the Permanent Court of Arbitration in The Hague. The firm also regularly advises on Ukrainian tax law, including from a multinational tax planning perspective. B. C. Toms & Co has prepared a wide variety of documentation for clients, including Ukrainian law share purchase agreements, asset purchase agreements, joint venture agreements, construction contracts, project financing documentation, production sharing and oil and gas license agreements, airport investment and management agreements, hotel management agreements, private placement agreements, real estate acquisition agreements, loan agreements, leases and agency, distribution, franchise and licensing contracts. (As a matter of its strict client confidentiality policy, the firm does not make disclosures on client work to third parties, and therefore does not participate in law firm directory rankings such as by Yuridicheskaya Practika Publishing).
Developments in Real Estate Law in 2017/2018
This article analyses the most important recent developments in Ukrainian real estate law.
Improvements to the Multi-Apartment Buildings Law
After the original approval of the Law of Ukraine No.417-VIII On the Peculiarities for the Realization of a Right to Property in a Multi-Apartment Building of 14 May 2015 (hereinafter — the “Multi-Apartment Buildings Law”), the owners of residential apartments and non-residential premises were obliged by 1 July 2016 to register a condominium (commonly referred to as an OSBB) or make certain other arrangements for the management of their buildings. If they did not meet this deadline, then their buildings would thereafter have to be managed by private managers appointed by the designated local government authorities, under contracts that could automatically be forever renewed, except as such contracts may be terminated, and the managers replaced, by the appointing local government authorities. The owners of the apartments in such buildings would not be involved in such decisions, though they would have to pay these managers fees at whatever level they might be. This provision has been recently amended (following a successful campaign by the British Ukrainian Chamber of Commerce (BUCC) that called attention to the problem) by the Law of Ukraine No. 1413-VIII On the Amendments to Article 13 of the Law of Ukraine On the Peculiarities for the Realization of a Right to Property in a Multi-Apartment Building of 14 June 2016 (hereinafter — the “Multi-Apartment Buildings Amendments Law”).
Such improvements to the Multi-Apartment Buildings Law establish the right of the majority of the owners of the apartments and other premises of a building at any time (1) to terminate the contract for the management of their building that has been concluded by the local government authorities with a private manager, by giving two month notification on such termination; and (2) to replace such terminated contract by the creation of an OSBB to take over the management or to provide for management by another entity that their OSBB or they authorize.
Adoption of a New Housing and Communal Services Act
The Law of Ukraine No. 2189-VIII On Housing and Communal Services of 9 November 2017 (hereinafter — the “Housing and Communal Services Law”), adopted on 10 December 2017, but that only enters into full application on 1 May 2019, except (1) for some provisions that only come to force on 1 January 2019, and (2) the provision on building management service that came into force on 10 June 2018. This Law, together with the Multi-Apartment Buildings Law, aims to prevent supply monopolization in the real estate market, cancels the state regulation of tariffs for communal services and provides for the conclusion of contractual relationships between the owners of the premises of buildings and their service suppliers.
To begin with, the Housing and Communal Services Law envisages the detailed regulation of the services for the management of multi-apartment buildings, as was originally established by the Multi-Apartment Buildings Law, with free market (contractual) prices and lists of the services provided, which facilitates competition in the housing management market by avoiding government assisted monopolization.
Second, the new Housing and Communal Services Law provides for owners of premises to choose one of following three basic models of contractual relations for the provision of communal services in a multi-apartment building (with exceptions for services for the supply and distribution of natural gas and electricity that require individual contracts): (1) the individual contract; (2) a collective contract; and (3) a contract with an OSBB as a collective consumer. The deadline for the selection of the model for such contractual relations for each type of communal services and the conclusion of an appropriate contract is one year from the moment of the Housing and Communal Services Law’s validity, namely by 1 May 2019. In case the co-owners fail to take a decision on a model of contractual relations for providing communal services for their building, then individual contracts will be concluded separately with every owner and supplier of every communal service.
Real Estate Tax in 2018
In connection with the coming into force on 1 January 2017 of (1) the Law of Ukraine No. 1791-VIII On Amendments to the Tax Code of Ukraine and Certain Legislative Acts of Ukraine on Ensuring the Balance of Budget Revenues in 2017 of 20 December 2016, and (2) the Law of Ukraine No. 1797-VIII On Amendments to the Tax Code of Ukraine on Improving the Investment Climate in Ukraine of 21 December 2016 (hereinafter — collectively, the “Tax Laws”), some changes have occurred from 2017 for the imposition of the real estate tax on the owners of real estate.
To begin with, the real estate tax, other than for land, is still paid by natural and legal persons, including non-residents, who own residential and/or non-residential property. Second, in 2018, the real estate tax is being charged to individuals who own real estate for 2017. The rates are established by the decision of the relevant village or city council, or council of a united territorial community, as applicable. According to the Tax Laws, the real estate tax rate in 2018 should not exceed 1.5 per cent. of the minimum wage as of 1 January 2017 (UAH 3,200) per 1 square meters (in 2016, the rate was capped at not more than 3 per cent., or UAH 41.34).
The tax base has not changed — as it is still the total area of the residential and non-residential real estate, including privileges, according to the following sizes: (1) for apartments — 60 square meters; and (2) for residential buildings — 120 square meters. The real estate tax is paid for every square meter exceeding this norm. For example, if a property is an apartment with a total area of 80 square meters or a residential building with a total area of 140 square meters, then owner needs to pay only for the “extra” 20 square meters.
New Procedure for Privatization of State and Municipal Property
On 18 January 2018, the Parliament of Ukraine adopted a new Law of Ukraine No. 2269-VIII On the Privatization of State and Municipal Property of 7 March 2018 (hereinafter — the “Privatization Law”), adopted as proposed by the Cabinet of Ministers of Ukraine. The main aim of these amendments is the simplification and acceleration of the privatization procedure, as well as increasing its transparency and efficiency.
The Privatization Law establishes a new classification for the subjects that can be included in the state’s privatization lists by dividing them into (1) a small privatization group, that includes real estate, small enterprises, and (2) a large privatization group of real estate and other objects whose assets exceed UAH 250 million (approximately USD 9.3 million), including unified property complexes of state enterprises and shares of entities with 50 per cent. of the state’s participation. The preparation period for the sale of an object has been shortened to five months for small privatization objects and 11 months for large ones, and the deadline for submitting applications by potential buyers has been extended. The Privatization Law introduces two methods of sale being (1) an auction and (2) the redemption of privatization objects that are under lease at the time of the adoption of the Privatization Law. Small privatization objects will now be sold through open online auctions, and large objects at auctions with the involvement of an investment advisor. The requirements for a guarantee deposit by bidders have also been limited from 5 per cent. to 20 per cent. to a maximum of 5 per cent. of the starting price.
One of the key changes by the amendments of privatization process is the possibility for the parties to settle any dispute in an international arbitration with the application of a foreign law, which should help Ukraine attract potential foreign investors by ensuring the impartial consideration of cases. Moreover, the transitional provisions of the Privatization Law also expressly establish the ability to privatize an object of large privatization based on the laws of England and Wales. This provision will be valid through 1 January 2021 (the currently stated end of the judicial reform process in Ukraine) and should also help attract needed foreign investment into the Ukrainian economy. As a result, purchasers of such subjects of privatization have the right to demand the conclusion of their agreements according to the laws of England and Wales.
The Privatization Law likewise establishes other favorable conditions for investors. In particular, bankruptcy proceedings within one year from the moment of the sale of the subject of the privatization are prohibited, to allow the new owner time to pay off old debts and not suddenly lose the company to its existing creditors. The statute of limitation for possible appeal of sales results is limited to three years, to help prevent corporate raiders engaging investors in endless legal proceedings many years after a privatization and further investments have been made, which has been a problem in Ukraine.
In addition, the Privatization Law amended the Law of Ukraine No. 1952-IV On the State Registration of Property Rights to Immovable Property and Encumbrances Thereon of1 July 2004 to establish a detailed procedure for the state registration of the rights to unfinished buildings.