Legal Developments and Continuing Issues in Land Law

The Moratorium on the Sale of Land Continues

On 7 February 2019, the Ukrainian Parliament extended again the mora­torium on agricultural land sales (the “Moratorium”), which is now supposed to continue until the earlier of (1) the entry into force of a new law on the transfer of agricultural land, or (2) 1 January 2020, as provided by the Law of Ukrai­ne No. 2666-VIII, of 20 December 2018, On the Amendments of Section X “Transitional Provisions” of the Land Code of Ukraine on the Extension of the Prohibition of the Disposal of Agricultural Land. The Cabinet of Ministers of Ukraine was instructed to submit to Parliament the proposed draft law on agricultural land transfer by 1 March 2019, but as of 18 June 2019, still no draft law has been submitted.

On 22 May 2018, the European Court of Human Rights adopted its decision in the Zelenchuk and Tsitsyura v. Ukraine case, stating that “the absolute prohibition on the purchase and sale of agricultural land in Ukraine violates the European Convention on Human Rights.” The Court ruled that “the Ukrainian Government should adopt legislative measures to ensure the necessary fairness of the balance [of interests] for the owners of agricultural land, although this does not mean that Ukraine should immediately introduce [such measures]”. Despite this ruling, no action to end the Moratorium has been taken, reflecting that there is still strong political opposition to agricultural land sales. Presumably, as Ukraine develops economically, support for the Moratorium will diminish.

The New Law on Reducing Collective Ownership to Land and Improving Land Use Rules for Large Agricultural Land Areas

2.1. General Overview

On 1 January 2019, the Law of Uk­raine No. 2498-VIII, of 10 July 2018, On Amendments of Certain Legislative Acts of Ukraine Regarding Collective Ownership to Land, Improving Land Use Rules for Large Agricultural Land Areas, Preventing Raiding and Stimulating Irrigation in Ukraine (“Law No. 2498-VIII”) came into force. Law No.2498-VIII amends the rules on the use of large agricultural land areas to provide for improvements to permit more effective use of large agricultural land lease holdings, and solves certain problems from the remaining collective land ownership. In particular, Law No. 2498-VIII:

(1) grants the right to a land user of a substantial part, being 75 %, of a large agricultural land area (a “Substantial User”) to receive a lease over land under field roads, with a corresponding obligation to establish land servitudes for access to land plots of the large area for other users;

(2) allows lessees of land plots within such a large land area to exchange their lease rights with those of other lessees within the same large area by concluding sublease agreements (without obtaining consents from their lessors, i.e. simply notifying them), but with the original lessees remaining responsible to their lessors for the performance of their respective lease agreements;

(3) provides that the exchange (swap) of a land plot of state or communal property may be carried out only if the difference in value between the normative monetary estimates for both land plots is not more than 10%;

(4) provides that the termination of a lease or sublease agreements used for such an exchange transaction terminates the vali­dity of the other lease or sublease agreement in the exchange, which should be stated in the agreement documenting such exchange;

(5) grants to a Substantial User the right to receive a lease, or sublease, of other land plots within the same large land area so as to remove impediments to forming small holdings, on condition that leases, or subleases, for similar land plots elsewhere of the same value are provided as a replacement in exchange; and

(6) provides opportunities for individuals and legal entities to use land plots under forest strips and other protective shrubs and similar areas under a right of lease.

Law No.2498-VIII also establishes rules to finally return lands stuck in collective ownership (and therefore effectively not usable) into private and communal property, by providing for:

(1) the recognition, as communal property, of village, township and city land held in collective ownership for those collective agricultural enterprises which have been liquidated;

(2) the opportunity for a general meeting of a collective agricultural enterprise which has already completed its allocation of land shares (pai) to redistribute the remaining agricultural land by 2020, and also transfer its non-agricultural land into communal property;

(3) the establishment of a 1 January 2025 deadline for the allocation of unused (unallocated) land plots;

(4) the right of local governments to temporarily dispose of land plots of collective property, by providing that they may be leased until the state re-registration of ownership to them; and

(5) local governments after 2020 to have the right to apply to a court with a claim to transfer to communal ownership land plots of collective property, using the procedure for their recognition as being ownerless (with the right of owners of unclaimed (unallocated) land plots, who for valid reasons missed the period for their allocation, thereafter to receive other land plots from communally owned lands free of charge).

2.2. The Procedure for the Mandatory Lease (Sublease) by a Substantial User of Land Plots Within the Same Large Land Area

According to Article 8(2) of the Law On Land Lease, if there are obstacles to the rational use of neighboring unused agricultural land plots by a Substantial User, the Substantial User has the right to lease or sublease such other neighboring land plots located within the same large land area, subject to replacing these land plots with land plots located in the same large land area under the same conditions and for the same term.

The terms for such lease (sublease) agreements, concluded under Article 8(2) of the Law On Land Lease, are subject to the agreement of the parties, except for the certain mandatory terms, such as on the term of the lease (sublease) not exceeding the term of use of the land plot under the agreement to be concluded in return, and the amount of the rent corresponding to the rent under the agreement to be concluded in return.

In case the Substantial User and the owner or lessee of the other land plot that is requested for lease or sublease fail to reach agreement on such a lease or sublease within one month, such agreement may be deemed to be concluded by a court decision (subject to certain limited exceptions under Article 8(2) of the Law On Land Lease).

The Need to Cure the Continuing Legal In validity of Most Land Leases Executed between 2008 and 2016

The majority of Ukrainian land leases, that agriculture (as well as most oil and gas) in Ukraine is based on, are technically invalid. This problem needs to be urgently corrected to encourage investment.

This land lease invalidity arises because most leases lack a material term added, after the adoption of the 2004 Model Lease Form (defined below), by the amendment adop­ted on 10 September 2008 that came into force on 14 October 2008 (the “2008 Amendment”), to Article 15 of the Law of Ukraine No. 161-XIV, of 6 October 1998, On the Lease of Land” (the “Land Lease Law”). This additional material term required all land leases to expressly state the conditions for (1) the pledging of the rights under a land lease, and (2) the contributing of such rights to a company’s charter.

However, this added lease term was never incorporated into the official Model Form of Land Lease Agreement, as adopted by Resolution of the Cabinet of Ministers, No.220, of 3 March 2004 (the “Model Lease Form”). Although the Model Lease Form was not strictly required to be used for agricultural leases as a matter of law, a land lease is not valid until it is registered and, in practice, Ukrainian land registrars generally insisted during 2008 — 2016 on the use of the Model Lease Form as a condition for registration, without allowing any revisions to reflect the cited additional required material term (our law firm was able to obtain the registration of suitably modified land leases, but only with great effort discussing the problem with the land registrars — we know of no other instances where the problem was cured). The 2008 Amendment was repealed on 12 February 2016, effective 5 April 2016 (as a consequence of a campaign by the British Ukrainian Chamber of Commerce (BUCC)), but most land leases executed between 2008 and 2016, before this reform, continue to be invalid for failing to have included the added material term.

The problem could be cured by the adoption of a further amendment to the Land Lease Law to provide for the implied addition to all land leases entered into from 14 October 2008 through 5 April 2016 of the previously required additional material term (i.e. by providing for all land lease rights to be able to be so pledged or contributed to capital, unless the land lease expressly provides otherwise). Such amendment should also expressly provide that, on this basis, no land lease should be canceled for lack of the material term required by the 2008 Amendment. Such an amendment would allow Ukrainian law firms to again be able to generally give clean legal opinions on the validity of the agricultural land leases that are the basis of Ukrainian ­farming businesses.