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DRAFT LEGISLATION ON REGISTRATION OF REAL ESTATE RIGHTS: NEW ERA OF THE UKRAINIAN PROPERTY MARKET

The problem with real estate title has always been one of the most important and complicated issues for everyone involved in property business in Ukraine. From the point of view of a western business, the practices whereby the State does not guarantee the real estate title would be regarded as more than just risky. Presently in Ukraine, the State does not legally undertake guaranteeing property titles. The market segment of residential apartments is not substantially destabilized by the fact that the State does not guarantee property title as this segment of the market is well regulated by the State, and the stability of title is provided by alternative methods. Unlike residential apartments, the stability of the market segment of buildings (both residential and non-residential) is considerably undermined by the State not playing the role of property title guarantor. Those having invested into purchasing buildings had either misinterpreted the legal role of bureaus of technical inventory (it is rather common that foreigners take it for the analogue of land registries in western countries) or underestimated legal consequences of the State not being responsible to ensure the legality of the property title. The absence of the system of state guarantee on real estate title creates numerous problems for title holders: title disputes, especially with the municipality, bureaucratic problems, devaluation of property, obstacles for sale or rent of real estate or obtaining loans against real estate, etc. To say nothing about the fact that the above system not being in place, it would not be realistic to expect serious long-term investment into the real estate market.

Currently, the State does not undertake ensuring the legality of property title. However, it is anticipated that the situation may change for the better in the future.

The presumption is due to three prepared draft laws on state registration of rights to real estate. One draft has been prepared by the economic legislation subcommittee of Verkhovna Rada (Mr. Tkalenko, MP, and Mr. Khmeliovyi, MP) - draft law "On State Registration of Rights to Objects of Real Estate" of 26 March, 1999; there is also one worked out by the Cabinet of Ministers [Ministry of Justice] - draft law "On State Registration of Rights to Real Estate" of 18 June, 1999. The third draft law has been prepared by Mr. Shmidt, MP, and Ms. Romovska, MP.

The two main drafts - Cabinet of Ministers' draft and Parliamentary draft - could not but have clashed. Although both drafts have the same purpose, i.e. to introduce a real estate rights registration system, they differ as to who should be authorized to register titles and how that should be done. On 16 June 1999, there was an attempt to introduce the system of state registration of real estate rights (hereinafter registration system). On 16 June 1999, the President passed a Decree #666/99 "On State Registration of Real Estate Rights". The content of this decree was totally based upon the Cabinet of Ministers' draft. Verkhovna Rada did not look at this attempt favourably and on 7 July, 1999, Verkhovna Rada adopted resolution #837-XIV whereby the Cabinet of Ministers draft submitted by the President was rejected, that led to the above Presidential Decree not coming into force. On the same day, Verkhovna Rada adopted its Resolution #838-XIV of 7 July, 1999 whereby the Tkalenko-Khmeliovyi Parliamentary draft (which by that time has passed the so-called first reading) was regarded as the principal draft, thus, the Cabinet of Ministers and Shmidt-Romovska drafts were to be regarded as secondary ones. In addition, under the Resolution of Verkhovna Rada # 838-XIV, the Tkalenko-Khmeliovyi draft was to be further developed taking into consideration the Cabinet of Ministers' draft and Shmidt-Romovska draft, the resultant draft to be submitted for the second reading. It is not easy to comment on the reasons why the Tkalenko-Khmeliovyi draft was preferred to the one of the Cabinet of Ministers. Each draft has its merits and defects. Therefore, let us attempt to analyze both drafts.

Below we shall refer to Tkalenko-Khmeliovyi Parliamentary draft as to [P]-draft and to Cabinet of Ministers' draft as to [CM]-draft.

By volume, the [CM]-draft is more than 50% larger than the [P]-draft. Regarding legal techniques, i.e. the methodology of formulating legal rules, the [CM]-draft is prepared more professionally, which is probably understandable as the Ministry of Justice has more legal expertise. We would say that the definitions of terms of the [CM]-draft are more precise and legally correct. As to the terminology and legal rules contained in the [CM]-draft, it absorbed international experience to a greater degree than the [P]-draft.

With regard to the legal content of the drafts, we would point out two conceptual issues which make the [CM]-draft and the [PM]-draft different.

  • The preamble of the [P]-draft reads that "This Law defines legal, economic, organizational fundamentals of the state registration of rights to objects of the real estate under the conditions of real estate market development and equality of various forms of ownership". The preamble of the [CM]-draft reads that "This Law regulates relations in the sphere of state registration of rights to real estate and is directed at provision of recognition and protection of these rights by the state, provision of conditions for operation of the real estate market, and encouragement of investment activities". As you see, the [P]-draft does not emphasize a rights protection element. In our view, this is one of the conceptual defects of the [P]-draft. One could take this as just an omission in the preamble, not as a conceptual defect, if it were not for the way the term "state registration of real estate rights" is defined in the two drafts. Under article 2 of the [P]-draft, state registration of real estate rights is defined as entering into State Register data regarding an object of real estate, its owner, as well as acquisition, limitation and termination of rights to such object of real estate. Under article 2 of the [CM]-draft, state registration of real estate rights is defined as official recognition and confirmation by the State of acquisition, limitation (encumbrance), transfer or termination of rights to real estate, that is accompanied by the appropriate entry into the State Register of rights. Comparing the above two definitions, the plus of the [CM]-draft is that conceptually it lays down a principle whereby the purpose of state registration of real estate rights is the state protection of these rights, i.e. by registering the right of X to a property Y, the State officially recognizes that X really owns a right to a property Y, and the State undertakes to provide that all third parties are to recognize X' s right to Y-property too. If you take the [P]-draft, you don't see this important point emphasized. The [P]-draft appears to have conceptually drifted away slightly. Under the [P]-draft, conceptually state registration of real estate rights has more technical and informational nature rather than a legal one (like what the Bureau of Technical Inventory [BTI] is now). In the [P]-draft, you don't see the link between the registration and liability of the State for property titles. If you correlate the legal core of the definition of real estate rights registration under the two drafts, as well as other relevant provisions of the drafts, you can clearly see the difference. Under the [P]-draft, the registration of real estate rights seems to be for the sake of registration; i.e. to enter data in order to accumulate and systemize such data for further provision upon request of entitled persons. Whereas under the [CM]-draft, at least conceptually, the authors of the draft reflect the true nature of real estate rights registration, i.e. that the State guarantees the legality of these rights and that the State undertakes to protect them.

  • The other point is the issue of a body authorized to carry out real estate rights registration, i.e. who should register real estate rights. In its own way, this is a political issue. Under the [CM]-draft, the body entitled to register real estate rights is the Agency on Real Estate Rights Registration, which is a part of the Ministry of Justice. The Agency would have divisions in administrative units, i.e. regions, cities, districts, etc. In order to obtain a certificate of a registrar, a person would have to be a Ukrainian citizen, have higher legal education, pass six months of internship, and pass a qualification exam. The Minister of Justice appoints the heads of the Agency's divisions out of registrars with at least three years of experience. All registrars are considered to be state officials. The head of the Agency has the position of the Deputy Minister of Justice.
    Whereas under the [P]-draft, the authorized body is the Bureau of Rights Registration, which is a part of the State Committee on Construction, Architecture and Housing Policy. The Bureau would have divisions in administrative units. Under the [P]-draft, in order to obtain a certificate of a registrar, one must have higher education (the majors of degrees to be defined by the State Committee on Construction, Architecture and Housing Policy jointly with the Ministry of Justice) and pass a qualification exam. Thus, on one hand, we have the Ministry of Justice and we have the State Committee on Construction, Architecture and Housing Policy on the other hand. Why are these totally different bodies competing for the right to register real estate rights? The answer is classical: money and influence. Then the question is: which one is better for real estate owners? Let us analyze.

    Let us start from the [P]-draft. Basically, the Bureau of Rights Registration and its divisions are going to be established on the basis of existing Bureau of Technical Inventory by means of extension of functions and powers of the latter. The existing BTIs by their current functions are the closest body to what is going to be established (although "close" does not mean "the same"). BTIs have databases and more or less qualified personnel. So, converting of a BTI into the Bureau of Rights Registration might be the right approach, if it were not for one problem. The point is that legally BTI is now a municipal enterprise, subordinated to municipality and the State Committee on Construction, Architecture and Housing Policy. The [P]-draft does not say that if BTI is converted into Bureau of Rights Registration, this newly created body ceases to be a municipal entity. This means to say that the Bureau of Rights Registration remains to be a municipal entity although subordinated to the state Committee as BTI is now. And article 11 of the [P]-draft proves this point by the provision that the head of Bureau of State Registration of Rights is appointed by the head of appropriate municipality subject to consent of the State Committee of Construction, Architecture and Housing Policy. Therefore, we can conclude that the [P]-draft provides for the situation whereby municipalities would have considerable influence over the body authorized to register real estate rights as this body is a part of municipality, and the head of this body is appointed by the head of municipality. And although Bureaus of State Registration of Rights are subordinated to the State Committee of Construction, Architecture and Housing Policy, in our view, the newly created body will be dominated by municipalities (like BTI is now), since the State Committee is itself to certain extent dependent upon municipalities as the functions and policy of the State Committee are realized through and by municipalities. So, is it correct that a real estate registration entity is somehow dependent upon municipalities? No, the main reason is that municipalities are major real estate owners, and it is municipalities that are the most frequent party to various real estate disputes. From the practical point of view, it would be difficult to expect that a real estate registration body, influenced by municipalities will treat all real estate rights holders, including municipalities, equally impartially.

    Regarding the [CM]-draft, at least formally, you don't see any dependence of the Agency and its divisions upon municipalities. The Agency and its divisions are subordinated to the Ministry of Justice, with heads of divisions appointed by the Minister of Justice. Politically, in relation to municipalities, the Ministry of Justice would be in a stronger position than the State Committee of Construction, Architecture and Housing Policy. That is why, in our view, a real estate rights registration body under the [CM]-draft would be less vulnerable to the influence of municipalities, which are the major real estate owners. Also, unlike municipalities, the Ministry of Justice does not own a lot of real estate. Therefore, this Agency of rights registration should be expected to be less politically biased, hence more objective.

    It should also be noted that the [CM]-draft provides for more centralized system, which may be beneficial to real estate owners in terms of title protection but detrimental in certain other aspects. Based upon the above, you can see that from the point of view of protection of real estate rights of non-state sector, the Cabinet of Ministers' draft appears to be more acceptable. It is difficult to say what the true reasons were for the Cabinet of Ministers' draft not to be accepted as the principal draft law on this issue. In our view, it could be a combination of two factors:

  • It was probably a matter of principle for Verkhovna Rada to give a green light to the draft prepared by one of its subcommittees and turn down the one submitted by the President; we have to remember that the second half of 1999 has been very politically tense;
  • Municipalities and BTI lobbying represented by the State Committee of Construction, Architecture and Housing Policy.

    The fact that the parliamentary draft is now regarded as the principal draft does not mean that it will be adopted in its present form. Most probably, it will be changed considering the content of the Cabinet of Ministers draft. In the course of legislation process, it is very difficult to avoid the struggle of state institutions for revenues and political influence. Sometimes such a struggle is constructive, when taxpayers benefit due to friction between state bodies. Whoever takes over in this case - whether it is the State Committee of Construction, Architecture and Housing Policy or the Ministry of Justice, - the point of which the law-makers should not lose sight of, is that the ultimate purpose of this law is to ensure the stability of real estate rights and to protect legitimate real estate rights holders irrespective of their status.

    • © Teren Plus 1998