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Land reform in Ukraine: priority right, contract prices, and ensuring compliance

On 31 March 2020, the Ukrainian Parliament voted for the law on agricultural land marketWithin the "Land Reform in Ukraine" project, Asters experts will analyze practical issues or other areas of interest that we anticipate in the course of further implementation of the land reform in Ukraine.

The first article of the series is available following this link >>

Priority right status

The Law introduces an interesting new option for the market – "alienation of priority right to acquire land" (regardless of land designation). In practice, significant number of agricultural land lease and emphyteusis (perpetual lease) agreements contain clauses on priority right of lease holders and perpetual lease holders to purchase plots (subject to market opening). At the same time, the Law of Ukraine "On Land Lease" links the existence of the lease holder's priority right with the possibility to legally possess the leased land, while the Civil and Land Codes do not regulate the priority right in the perpetual lease relations.

Below are our considerations in terms of the Law:

  • It is likely that Ukrainian companies will not be able to exercise their priority rights to acquire agricultural land until 1 January 2024.
  • Foreigners will not be able to exercise their potential priority rights to acquire agricultural land until a relevant decision is adopted at referendum.
  • Procedure for transfer of priority rights is not provided in the legislation. Presumably, such transfers will take place under free-form contracts identifying the relevant land plots. In terms of the procedure, we believe that one of the important factors that will largely determine the prospects for common use of priority right transfers and subsequent formation of the related market is a possibility of registration of priority right to acquire land, especially if such right is transferred to another person who is not a lease holder or perpetual lease holder.

Price of privately owned agricultural land

The Law provides for state regulation of sale price of agricultural land allocated in kind (on site) to owners of land shares at the level not less than the value of the normative monetary evaluation (NME) until 1 January 2030. At the same time, the following aspects appears to us controversial:

  • Does this requirement apply only to the first transaction in respect to a land plot or to all subsequent transactions as well?
  • Shall the minimal price level be used in determining the opening price for agricultural land alienation at land auctions, including in case of alienation of pledged land by a bank within foreclosure procedure?

We are inclined to believe that, in the absence of additional clarifications on the matter, any sale of land allocated in shares has to take place at a price not less than its NME.

Ensuring compliance

The Law prohibits purchase (or any other payable acquisition) of agricultural land in absence of documents confirming the sources of funds or other assets used to acquire the title. Notaries or banks, as well as the parties who are naturally interested in “cleanness” of their transaction, are likely to be required to monitor compliance with this requirement (relevant instructions have yet to be developed).

We find that in the future an essential element of auditing agricultural land will be verification of availability of the documents confirming the sources of funds in the prior alienation transactions. As there are no clear requirements for such documents or criteria for the adequate sources of funds, it can turn out to be quite difficult to establish legality of agricultural land acquisition.

In addition, the Law establishes mandatory non-cash payment under agreements on agricultural land alienation.

We anticipate that transparency of the land market and the overall level of its complexity will increase.

 

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