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Bate C. Toms
Managing Partner, B. C. Toms & Co.
Legal education: Yale Law School (J.D.), Magdalene College, Cambridge University (Law Tripos I); Mr. Toms is admitted to legal practice in the District of Columbia and Virginia, USA, and in Paris, France; Chairman, British Ukrainian Chamber of Commerce (BUCC)
Associate, B. C. Toms & Co.
Legal education: Kyiv National Economic University named after Vadim Hetman (Commercial Law, Master’s Degree, 2007; PhD, 2014); Ukrainian Bar Association; (Certificate of Advocate, 2010)
The Main Challenges for Legal Due Diligence When Purchasing Real Estate
For any purchase of real estate in Ukraine, the buyer should begin by careful due diligence. As legislation on misrepresentation and fraud is not yet so well developed in Ukraine, it is strongly advisable to have a very protective purchase agreement on title as well as other aspects of real estate ownership, such as on the condition of the premises, the absence of hazardous substances, proper zoning and, the absence of liens, rights of way for utilities and other adverse claims and encumbrances. Such an agreement should therefore guarantee, inter alia, the transfer of absolute and unconditional title and the good physical condition of the premises.
Problems in respect of title are relatively common in Ukraine, so any legal due diligence should begin with an exhaustive title investigation. This should start with the property’s original transfer from state ownership or its entry into use following construction, no matter how many years ago this occurred. There are many exceptions to the Ukrainian statute of limitations, so it cannot be relied upon.
The Main Issues for Due Diligence of a Newly Constructed Real Estate
For a new building or other construction, to begin with the necessary construction documentation (including construction permits and other project/building approval documentation) provided by the seller should be verified. Many of these documents can be reviewed on the website of the State Architectural and Construction Inspectorate of Ukraine (SACI) in the sections on (1) the Register of Permits, and (2) the Register of Licenses Issued. These registries contain information on (1) the type of permits for preparatory and construction works (permission, notification and declaration), (2) the main construction participants (the customer, the architect/designer responsible for architectural supervision and the contractor), (3) the categories of complexity (and thus the corresponding need for a particular construction license) and (4) the land title. They should also contain information on the documents confirming the readiness of the building or other real estate for its use.
Additional information on the legality of the construction of real estate in Kyiv can be obtained on the website of the Urban Planning Monitoring Department of the Kyiv City Cadastre, where it is possible to review information on violations of law and the absence of permits and title documents. The right of the developer to the land on which the construction is carried out should be carefully verified. The lack of rights to a necessary land plot or for a specific purpose of use may block lawfully putting the built real estate object into operation, or at least significantly delay this process, which in turn can interfere with the timely registration of ownership of the buyer to the real estate. The existence of the developer’s land rights also should be checked through inspection of the records of the Urban Planning Monitoring Department of the Kyiv City Cadastre and the Public Cadastral Map, as well as those of the State Register of Real Property Rights at the Ministry of Justice’s Electronic Services Office.
The principal documents by which local authorities regulate the development of a land plot are the Town-Planning Conditions and Land Plot Development Limitations (the “TCLD”), developed on the basis of the relevant master plan and other town-planning documentation. The TCLD contains planning and architectural requirements for design and construction, e.g. on the number of floors and the building density for a land plot, the boundaries of the land plot and other requirements for construction as established by law and city planning documentation.
This due diligence on permits for construction should also include a verification of the project documentation and technical conditions with the main suppliers of utilities. The absence of arrangements with utilities at the initial stage of construction (which commonly happens in practice) may lead to project documentation needing to be changed in the future as problems are discovered, which can significantly delay and complicate the completion of construction and title registration for a new building.
The foregoing merely highlights some of the main aspects of a due diligence for newly constructed real estate. Much more must be covered in order to address and eliminate potential risks.
Due Diligence for Secondary Real Estate Transactions
The importance of exhaustive due diligence for title transfers in the Ukrainian secondary real estate market, including practical verifications, cannot be overemphasized. Many types of problems can, in practice, result in the invalidation of title to a real estate object when held by a subsequent purchaser, notwithstanding the provisions of the Civil Code of Ukraine No 435-IV of 16 January 2003 (the “Civil Code”) on protecting bona fide purchasers.
Any due diligence of a secondary real estate object should start with a verification on all prior transactions, which is, as a practical matter, hard to perform for many reasons. To begin with, the State Register of Real Rights to Real Property (the “Register”), the electronic registry that started its operation in 2013, contains only limited information about transfers of title prior to 2016, because title documents have only been comprehensively included since 2016.
All transactions prior to 2013 generally still remain documented only as written agreements and certificates kept by the Bureau of Technical Inventarisation (the “BTI”), which can only be inspected with the permission of an owner. Even if requested by an owner, the BTI, a private entity, is not required to provide this information.
The other necessary method for due diligence verification of title documents is to review the records of notaries and/or others that handled the prior transfers. However, such review will not necessarily be helpful. For example, notaries may refuse to provide access to records on prior transactions citing their notarial secrecy obligations as established by Article 8 of Law of Ukraine No 3425-XII, On Notaries of 2 September 1993 (the “Law on Notaries”), whereby notaries, as well their assistants, are obliged to keep the “notarial secret”. This is currently usually interpreted to mean that all information received while making a notarial act for the parties to a real estate transaction, including on property and non-property rights and obligations, must be kept secret from third parties, including subsequent owners of the real estate. Notaries cannot even be questioned in court or by certain state investigators as witnesses about information that forms a notarial secret. Therefore, presently, a buyer of real estate is not necessarily protected by trying to check the title and related documents.
The two main exemptions to the notarial secret are for: (i) the right of the actual parties to a transaction to receive information about notarial acts for their transaction; and (ii) the right of a court, a prosecutor’s office or other body which carries out search activity for pre-trial investigations in connection with criminal, civil, administrative proceedings, etc., to request information about notarial acts and other documents. A notary may be released from the duty to preserve the notarial secret only by a person or entity that has entrusted this information to the notary. In case of a violation by a notary of the requirements for notarial secrecy, the Ministry of Justice of Ukraine can cancel the notary’s certificate for providing notarial activities, among other consequences, so notaries have become increasingly uncooperative, despite this putting buyers at risk.
Thus, current Ukrainian law and notarial practice does not provide for a buyer necessarily to be able to conduct a full due diligence for a real estate transaction that is adequate to address most risks, primarily because prior transactions are not always reviewable. The principal problem is that misguided secrecy obligations can block title verifications. While verification techniques exist for buyers to protect themselves from most frauds as a practical matter, these restrictions on obtaining information from notaries on prior transactions can make full and official title verification impossible. Prior title problems can, in practice, result in the invalidation of title to a property when held by a subsequent purchaser, in particular because of the many (appropriate) exceptions to the protection for bona fide purchasers provided by Articles 330, 387 and 388 of the Civil Code.
There is, however, an easy solution to this problem.
In Western jurisdictions, the owner selling a property, as the successor in title to all prior owners, has full access to all information on the property’s title history, so that all potential buyers can be allowed access by the seller to full information and be assured that they will obtain good title when they buy real estate. The same should be the case for Ukraine. It is also recommended that the BTI should be legally obliged to provide full information on all prior transactions for a property owner.
These legal reforms would also assist to protect owners from fraudulent transfers of their real estate. The burden of title verification should then be entirely solely on the buyer, so that without the actual owner’s consent, a buyer should not possibly obtain good title to someone else’s property. The existing owners of real estate property should, on this basis, not be at risk from a fraudulent sale transferring their property. However, for this burden of title investigation to be solely on buyers, the buyers need the recommended full access to all title records.