Land reform in Ukraine: sale of agricultural land to foreign buyers is not allowed, but what about mortgage?

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 >>, and the second can be found here >>

The Law, having lifted the moratorium regarding sale of agricultural land, has introduced new restrictions as to the permitted classes of buyers and the land that can be transacted with. Thus, among others, the state cannot sell state-owned agricultural land, and foreign entities or individuals cannot buy or own agricultural land, neither directly, nor via Ukrainian subsidiaries.

While foreign entities are not allowed to buy and own agricultural land (Article 130 of the to-be-amended Land Code), the law does not address the question whether they are allowed to be mortgage holders of it.

According to the Mortgage Law, a property may be the object of mortgage, if it satisfies the following two conditions, relevant in the context of our inquiry: (1) the owner may sell the property, and (2) the property can be foreclosed on (Article 5).

At a first glance at the condition (1), it would intuitively appear, that if a Party A may not sell the land to a Party B (because the latter is not the permitted buyer, as in a case at hand), then these parties cannot execute a mortgage agreement. Under the literal interpretation, however, the condition does not require that it should specifically be Party B that must be the permitted buyer; rather, the requirement is that for the purpose of the mortgage agreement, there must exist any permitted buyers of the land in question from the Party A, regardless of the status of the mortgage holder himself. In other words, even if a creditor is not a permitted acquirer of the agricultural land, this, in itself, does not preclude such creditor from being a permitted mortgage holder, provided, that the land plot is sellable by the owner to other permitted acquirers.

The condition (2) above can be dealt with in a similar manner, with a resulting conclusion that as long as the land in question is legally capable of being foreclosed on by someone, – that land can be the object of mortgage in favor of a creditor that itself cannot be its acquirer. Even if, however, the question of the creditor's eligibility to be the mortgage holder is thus settled, the question of that creditor's eligibility to effect foreclosure remains open, given that it is crucial for the practical viability of the mortgage.

The Mortgage Law provides, that foreclosure can be either in the form of creditor taking ownership of the asset directly (Article 37), or the creditor selling the asset to a third party (Article 38). The former option is unavailable to the foreign creditor, it is not a permitted acquirer. As regards the sale to a third party, the common options under the Mortgage Law are a private sale, or a sale via public auction (public sale) (Articles 38, 41 of the Mortgage Law). However, the Mortgage Law specifically provides, that with regard to agricultural land plots foreclosure can be effected by public sale, which likely implies public sale only (Article 15). Further, even though mortgage agreements regarding agricultural land are nominally allowed as of 1 July 2021 (i.e. the date when agricultural land becomes sellable in principle), legal entities only become the permitted acquirers of the land as of 1 January 2024. Until this latter date, if a foreclosure is to occur, the allowed buyers in a public sale will only be Ukrainian individuals.

It thus transpires that agricultural land in Ukraine, as collateral, is not off-limits to foreign creditors acting as mortgage holders, even though foreclosure options are limited to public sale (and until 1 January 2024,  – to public sale to Ukrainian individual participants only, at that). Admittedly, we make this conclusion rather cautiously, because (i) our key underlying conjecture, i.e. that an eligible mortgage holder over a property does not need to be the eligible acquirer of that property, remains to be tested by court and administrative practice and/or survive further legislative updates; (ii) questions of enforceability of mortgages  require further analysis (in particular the legalities and practicalities of the public sale process). We hope to touch upon some of these issues in our upcoming writings.

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