Real Estate Articles - Page 11

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. 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. (18.10.2000)

FOREIGNERS ENTERING UKRAINE NO LONGER TO REGISTER WITH AUTHORITIES

KYIV, June 19 - Ukrainian President Leonid Kuchma has abolished the requirement that foreigners register with local authorities upon arrival in Ukraine, a Foreign Ministry official said Tuesday. As of July 1, foreigners will be obliged only to register at border check points and will be free to travel throughout Ukraine without further registration, said Viktor Kiryk, head of the ministry’s consular department. Kuchma has also ordered the government to abolish the system that assigns Ukrainian citizens to specific addresses by 2005. That change would require parliamentary approval. Both changes are intended to increase freedom of movement in Ukraine, which still has restrictive, Soviet-era laws on the books. (05.01.1999)

Private apartments to compete with Kyiv’s expensive hotels

Kyiv’s hotels have a well-deserved reputation for being shabby and expensive. And Western businessmen have a well-deserved reputation for complaining about that unfortunate mix. Kyiv’s hotels have a well-deserved reputation for being shabby and expensive. And Western businessmen have a well-deserved reputation for complaining about that unfortunate mix. Well they can stop complaining. An alternative has arrived: private apartments tailor made for Western businessmen. " We really faced a problem finding proper accommodation [in hotels] for our foreign guests," said Maryna Chekannikova, marketing manager at Business Link Training and Coordination Center. "At last, we discovered a good substitute- private apartments can serve businessmen much better than hotels," she said. Ukrainian company Teren Plus is a leasing agent that specializes in renting private apartments out to visiting businessmen for days or weeks at a time. "Currently, Western businessmen would prefer staying at fashionable apartments with a wide range of hotel services, rather than go to Kyiv’s hotels," said Teren Plus Director Serhy Shevchuk. The practice of leasing out private apartments, widespread in other countries of Eastern Europe, usually targets tourists. So Teren Plus decided to adapt the strategy to businessmen. "We strive to work with multinational corporate clients," Shevchuk says. "Our strategy is to offer comfortable apartments with a full range hotel services as an alternative to existing hotels." Such apartments are based primarily in Kyiv’s center. According to Shevchuk, they must feature most modern conveniences, including a kitchen, bathroom, washing machine, working desk, and satellite TV. The kitchen should include amenities such as a microwave, toaster, coffee-maker and refrigerator. Service is important, as well. Teren Plus arranges cleaning twice a week and handles any technical problems that arise. In some cases, breakfast and ironing services are available. Sounds just like a Western-style hotel, right? Shevchuk likes to think so. "In such apartments, guests can both work and feel at home," Shevchuk said. That’s exactly how guests don’t feel at the majority of Kyiv’s dreary, Soviet-era hotels. Yet those hotels get away with charging $135 to $200 a night. Teren Plus undercuts those rates, with prices in the $50 to $80 range. And unlike in most of Kyiv’s hotels, those prices include good service, Business Link’s Chekannikova added. "It is better to work through leasing agents, since they are quite efficient at finding an appropriate apartment and handling all negotiations." Teren Plus also helps foreigners staying in Kyiv for more than three days register at the Interior Ministry’s Visa and Registration Department, better known by its Russian abbreviation OVIR. By Anna Stepanenko, KIEV POST, March, 2nd, 2000

Mandatory insurance cancelled (5.1.1999)

Foreign visitors entering Ukraine may find comfort in the government’s latest move. Officials have announced that Ukraine will cancel mandatory health insurance for all visitors arriving to the country. Foreign visitors entering Ukraine may find comfort in the government’s latest move. Officials have announced that Ukraine will cancel mandatory health insurance for all visitors arriving to the country. Helena Antropova, the Cabinet’s spokeswoman, confirmed May 29 that the government had approved a resolution annulling obligatory medical insurance for foreign citizens entering Ukraine. The decision also affects Ukrainian citizens leaving the country. Though the draft resolution proposes canceling the regulation as of Sept. 1, Antropova said the decision may become effective sooner. She said the move should make entering Ukraine a simpler procedure for international travelers. “The goal is to bring Ukraine’s border regulations into compliance with international standards,” she said. That came as welcome news to foreign organizations like the American Chamber of Commerce, which had lobbied against the requirement. According to Executive Director Jorge Zukoski, the chamber was never opposed to the concept of Ukrainian Health Insurance offered to foreigners at the borders. “What we have made clear to the Ukrainian authorities is that we believe making the health insurance a mandatory requirement is an incorrect policy that further impedes business and leisure travelers,” Zukoski said. Since 1997, foreign citizens arriving to Ukraine were required to buy medical insurance at the border, regardless of whether they had international health coverage. The local insurance policy covered emergency medical care and cost between $10 and $50, depending on the term of stay. The regulation has consistently outraged international travelers who regarded the requirement as a mere racketeering practice. The government has finally caught on to the idea, too. “When an American or a Frenchman is coming to Ukraine, why does he have to insure himself on the border if he already has insurance coverage in Ukraine?” said Vitaly Antonyuk, an official at the State Border Committee, a government body that drafted the resolution annulling the regulation. Antonyuk said the change was suggested by the Foreign Affairs Ministry. He said his agency initially planned to cancel obligatory medical insurance for citizens of the United States, the European Union and Japan only, but ultimately decided to drop the requirement for all foreigners. The decision is a blow to Ukrinmedstrakh, a Canadian-Ukrainian joint venture that held the sole right to provide medical insurance to foreigners entering Ukraine. Ukrinmedstrakh was set up specifically for the job back in 1997. The company is 40 percent owned by the state and 48 percent owned by Amadeus II, a Canadian firm. Borys Sharykov, deputy chairman of the board at Ukrinmedstrakh, said the government’s decision to cancel mandatory health insurance for foreigners was an economically unwise move. “It’s a very big mistake,” Sharykov said. “The state will lose a lot of revenue.” He said his company pumped Hr 2 million (about $370,000) into state coffers annually. He suggested that the decision to cancel the regulation was prompted by Ukrinmedstrakh’s competitors, who “envied” his company’s monopoly position in the burgeoning market. © Vitaly Sych, Kyiv Post Staff Writer (05.01.1999)

DON’T PLAY WITH FIRE

Real estate is something any company or businessman has to deal with in this or that form. At some stage any company purchases or rents real property, or is involved in construction or refurbishment. In the course of the said activities you have to deal with the range of state bodies the functions of which are boiling down to the preparation of certain regulations and control over the execution of these regulations. Real estate is something any company or businessman has to deal with in this or that form. At some stage any company purchases or rents real property, or is involved in construction or refurbishment. In the course of the said activities you have to deal with the range of state bodies the functions of which are boiling down to the preparation of certain regulations and control over the execution of these regulations. Architecture control authorities, fire security service, health authorities, electricity supply control authorities, etc. are the bodies you can not avoid a contact with. Particularly this relates to the companies or businessmen professionally involved in real estate or construction business. Basically, there are two ways to meet them. One is when you go to them and they explain you what regulations you are to follow. The other is when they come to you and you explain them why you don’t follow the regulations. Obviously, the latter case is less attractive prospective, but this is what usually happens. For people who are used to think in terms of making money a lot of things can be priced. Observation and violation of various regulations also have their own prices. And the question is: "What is cheaper: to spend money to follow the regulations (it usually costs money) or to pay fine or bribe?" Certainly, a lot depends on concrete circumstances. In practical terms it would probably be right to say that presently the way the system of enforcement (of various regulations, relating to real estate and construction) operates makes it cheaper to divert from the regulations. The main reason for such inefficiency is the lack of financial sanctions in the arsenal of "tools" of all these controlling bodies. These authorities are poorly financed by the state budget, their employees don’t get their small salaries timely, so they have to seek for "additional" sources of income and to do that they have to connive at some of the violations. So, what we have in result is the following: the regulations are not observed and the authorities are involved in corruption. And considering "difficult" situation with the state budget the only way out of this plight is going through the pockets of those supervised by these bodies. If the violations are followed by serious financial sanctions two birds are killed with one stone: obviously, money, plus the violations are becoming a costly thing to afford, so their number is going down. It is just a matter of time when they practically implement the concept that the only way to reduce the violations is to make them (violations) very expensive to commit. In this article we’ll try to draw your attention to fire security regulations (FSR). We chose this subject for two reasons. Number one - all the companies irrespective of the type of business are to observe FSR (the latter may vary depending on the type of business activities). Number two - all the companies violate FSR in this or that form. "There is no company in Kyiv which does not violate fire security regulations"- said one senior fire security officer who wished to withhold his name. Fire security department experts of Starokyivsky district (one of the centrally located districts) have kindly agreed to provide us with some of the statistics. From the beginning of this year there were more than 400 cases when fines were imposed (this figure relates only to one district of the city). Fire security service has the right to suspend the activities of a company which violates the FSR, and the average figure of such companies (the activities of which were suspended) per one district during just one month is 20. If you are corporate executive sitting in your office now reading this article, take the labour to look around: Do you have fire security alarm in your office? Are there fire extinguishers in the office premises? Do you have a special place in your office where the fire security regulations are displayed so that everybody could see them? Did you know that you have to instruct your employees as to FSR when you employ them and quarterly afterwards? Did you know that employees when instructed have to sign a special form for that? If you are director of a company did you know that you may be personally liable for violation of FSR, including criminal liability? What are the most common FSR violations? When a company intends to have its corporate office in some property this company is to officially apply to the Fire security service (FSS) and obtain permission to have office in that particular property. Such permission is given after FSS checks the premises and issues certain prescriptions. (E.g. to make additional entrance, to install fire alarm, etc.). One of the most widely spread violations is failure to obtain FSS’s permission to have offices in a property. Not many companies know they have to do so. If you have your office in a residential building the part of the building used as an office is to be separated from the part of the building used for residential purposes by fire-proof material which means concrete or brick walls; and in buildings with wooden floors offices must be separated from residential areas by concrete floors. Failure to meet the above mentioned "separation" requirements appears to be the most widely spread violations. Also, offices are to have additional fire exits. Window metal grills at least on one of the windows must be fixed in such a way, which would allow to open them in case of emergency. The violations with regard to these rules are also widely spread. What we would recommend any company to do is to check whether there are FSR violations and how serious they are. And the person which should be the first to be interested is a director, for under the Law of Ukraine "On fire security" of 17.12.93, it is director who is personally liable for ensuring the observation of FSR by the company. Director has the right to authorise other person to carry out these functions, but the liability stays with him. In case of FSR violation a director may be held liable for administrative violation which is followed by a fine of 102 hrivnas ($20). If within one year after administrative violation a director is found to have committed the same breach of FSR he may be held criminally liable which is followed by probation up to one year or fine at the rate of up to 680 hrivnas ($120). If FSR violation has led to fire criminal liability means imprisonment for the period of up to three years or probation for the period of up to two years or fine the rate of which ranges from 850 hrivnas ($160) to 2040 hrivnas ($380); if such fire caused casualties or other grave consequences a person held criminally liable may spend in prison up to 8 years. (Article 2201 of Criminal Code of Ukraine). Regardless of whether a director is held liable or not FSS may impose sanctions on a company as well. Financial sanctions may mean up to 2% of monthly wage fund. One of the powers FSS has in its arsenal is the right to seal the premises up (the whole premises or separate rooms or areas), or .to suspend or terminate the activities of an enterprise, violating FSR. Although a company in breach of FSR may have serious problems with FSS, all these problems (fines, suspension of activities, etc.) may seem nothing in comparison with damages suits. Such legal suits could be filed, for example, by the inhabitants of adjacent premises, which were damaged by the fire in the property owned or rented by your company. Needless to say what may happen if FSS proves that you violated some FSR. That is why we advice those who are renting properties to carefully stipulate the terms relating to fire security. The rental contract should contain provisions, relating to the following: who is to install and maintain fire alarm system; what is the responsibility of a landlord in respect of fire security and what is that of a tenant; what is the extent of liability of each party in case of damages suit, etc. So, what we would advise any company to do (especially those owning considerable assets) is to readdress the issue of fire security proceeding from two points. Firstly, it is worthwhile checking fire security anyway. Secondly, it would be wise to establish the extent to which your company violates fire security regulations and estimate the risks arising out of such violations (various sanctions, imposed by FSS, civil and criminal liability, to say nothing about the risk of actual fire with damages and casualties). Such reasonable estimate of risks of non-compliance with FSR will be the basis of your decision (proceeding from the concrete circumstances your company is in) as to whether it is cheaper for you to proceed to violate FSS. In our view, if such problem is raised many companies, considering all the factors, would prefer to comply with the fire security regulations. © 2000 Peter Hackett and Partners (01.08.2000)

UKRAINIAN ARBITRATION COURT WOULD NOT ENTERTAIN A LEGAL ACTION AGAINST A NON-RESIDENT LEGAL ENTITY. SO, BEWARE.

Many transactions with the participation of western businesses in Ukraine would involve a non-resident company as one of the parties to contractual relations. Many transactions with the participation of western businesses in Ukraine would involve a non-resident company as one of the parties to contractual relations. And the real estate sector is not an exception with regard to offshore arrangements being particularly widely spread in lease contracts, relating to both commercial and residential properties. Regarding leases, landlord-tenant disputes are not rare. And if the parties do not very often bring legal actions against each other, they often prefer to discuss with their lawyers their chances to win a case in court. As we always do, we would like to bring to light an issue we come across in our practice and of which we think there is a general lack of knowledge on the part of those who should be aware of the issue. Normally, the western form of property leases involves at least one non-resident legal entity. Usually such leases include a clause referring disputes to a foreign, i.e. non-Ukrainian court. This is not always justified considering the cost involved. Depending on the type of legal suit, sometimes it is quicker, simpler and cheaper to sue in the Ukrainian court. Knowing this, a lot of Ukrainian companies, including western businesses operating as Ukrainian legal entities, provide a Ukrainian court jurisdiction clause or presume that in the absence of a foreign jurisdiction clause they can sue in the Ukrainian court if they wish to do so. But there are a few points one should take into account. In the following article we would like to draw your attention to the issue of jurisdiction. Under the current Arbitration Proceedings Code of Ukraine of 06.11.91, legal disputes between legal entities are considered by arbitration courts of Ukraine. Regarding territorial jurisdiction, relevant provisions of article 15 of the Code read as follows: disputes relating to conclusion, amendment and abrogation of business contracts, disputes relating to invalidation of contracts are considered by the arbitration court at the place where the party responsible for performance - transfer of assets, execution of works, provision of services, payment of money - is located; disputes relating to the execution of business contracts, disputes based upon other grounds, as well as cases relating to invalidation of acts are considered by the arbitration court at the place where the defendant is located; disputes relating to the right of ownership to assets, disputes relating to return of assets from adverse illegal possession, disputes regarding prevention of hindrance to the use of assets, are considered by the arbitration court at the place where the assets are located, these disputes being subject to exclusive jurisdiction of arbitration courts of the Autonomous Republic of Crimea, regions, Kyiv and Sevastopol. The above is a set of relevant general rules relating to jurisdiction of the Ukrainian arbitration courts. Under articles 1, 12-17 of the Arbitration Proceedings Code of Ukraine, foreign business entities are subject to the national regime of business disputes resolution. So, if, for example, a Ukraine-based tenant wishes to instigate legal proceedings against a non-resident landlord, it would be natural for the former to bring an action in the Ukrainian arbitration court. The same would apply if a local landlord wishes to sue a non-resident tenant. The Supreme Arbitration Court of Ukraine issued its Explanation #01-6/1459 of 03.12.92, whereby disputes involving foreign business entities were subject only to jurisdiction of the Supreme Arbitration Court if: relevant contract contains jurisdiction clause referring disputes to the Supreme Arbitration Court of Ukraine; there is an international agreement that provides for relevant disputes to be considered by the Supreme Arbitration Court of Ukraine; a defendant is situated in Ukraine, and there is no contractual jurisdiction clause, arbitration arrangement or international agreement. Thus, under the above Explanation of 03.12.92, if one of the above conditions is met, it was possible to sue a non-resident company in the Ukrainian arbitration court, although only in the Supreme Arbitration Court of Ukraine. Particularly, we would like to draw your attention to the point that if, say, a lease contract comprises a jurisdiction clause referring to the Supreme Arbitration Court of Ukraine, the latter would entertain a suit. In our view, even if the clause mentioned "Ukrainian court" without specifying the Supreme Arbitration Court, the latter would still hold itself competent to consider a case. Later on, the Supreme Arbitration Court cancelled the above Explanation #01-6/1459 and issued Explanation #01-6/1025 dated 21.09.93, whereby disputes involving foreign legal entities in the absence of international agreements may be considered by arbitration courts of Ukraine subject to a proviso that enforcement abroad is not guaranteed. On 18.11.97, the Supreme Arbitration Court issued Explanation #02-5/445 that introduced changes to the above Explanation #01-6/1025. In accordance with these changes, the current Explanation #01-6/1025 as amended reads that arbitration courts of Ukraine shall not entertain legal suits against non-resident legal entities unless otherwise provided by international agreements of Ukraine. This means to say that the Ukrainian arbitration court will entertain a suit against a non-resident company only if there is an international agreement between Ukraine and the country where this foreign entity is resident, and under this international agreement the Ukrainian arbitration court is considered to be a competent court due to agreement between the contractual parties or due to other reasons. Primarily, what is meant by international agreements is so-called legal assistance agreements, the number of which is very limited, comprising mainly former socialist countries. Ukraine does not have such agreements with developed western countries, to say nothing about offshore zones. Therefore, presently, unless there is a relevant international agreement, it is not possible to sue a non-resident company in a Ukrainian arbitration court. Also, one should note that the above Explanation would override a contractual jurisdiction clause, i.e. a Ukrainian arbitration court would not entertain a legal suit even if there is a jurisdiction clause in a contract referring disputes to Ukrainian arbitration court. On 08.02.96, the Supreme Arbitration Court issued Explanation #02-5/62 that reaffirmed the above rule that Ukrainian arbitration courts are to hold themselves incompetent to entertain legal suits against non-resident legal entities unless there are applicable international agreements. Therefore, the conclusion is that a legal entity, whether Ukrainian or foreign, cannot bring a legal action against a foreign legal entity in a Ukrainian arbitration court. The exception would be a rather limited number of countries with which Ukraine has so-called legal assistance agreements. This should be taken into account by those making international contracts as for some companies the above is beneficial, and for some it is not so good; but in any event, both the former and the latter should be aware for to be forewarned is to be forearmed. In our practice, we came across a number of companies which learned that they cannot sue a foreign entity in a Ukrainian arbitration court only from the arbitration court’s ruling declining a suit; and that was a surprise for them too. Although to get to know such matters is a thing to be done before a contract is made, not when you are preparing to sue. If parties wish a dispute to be considered in Ukraine, the only alternative to arbitration courts would be ad hoc international commercial arbitration or International Commercial Arbitration Court, or Marine Arbitration Commission under the Chamber of Commerce and Industry of Ukraine. To provide for the jurisdiction of the above arbitration bodies, the parties have to specifically stipulate relevant arbitration arrangement either in the business contract or in a separate agreement. The key difference is that the above mentioned arbitration bodies operate according to arbitration procedures; also the case is submitted to them subject to mutual agreement of the parties, whereas arbitration courts operate as normal state court bodies. In the light of the above, we would recommend those making international leases in Ukraine to pay special attention to the issue of jurisdiction in case of a dispute. Although this would apply to any international business contract in Ukraine. © 2000 Peter Hackett and Partners (05.08.2000)

THE POWERS OF THE GDIP AS TO REAL ESTATE TRANSACTIONS

Foreign business entities, i.e. non-resident companies, are active participants in transactions as to Kyiv real estate - they purchase and sell real estate, they can be property lessors, as well as property lessees. Foreign business entities, i.e. non-resident companies, are active participants in transactions as to Kyiv real estate - they purchase and sell real estate, they can be property lessors, as well as property lessees. In July 1997 certain legal restrictions had been introduced as to the rights of a foreign entity to freely purchase or rent real estate. This could only cause disappointment and frustration on the part of foreign companies; particularly companies involved in property investment, since many real estate experts and lawyers consider a non-resident company to be an efficient vehicle for real estate investment, especially in terms of property title holding. New legal regulations were introduced on 17.07.97. by the Resolution of the Cabinet of Ministers # 670 of 28.06.97. (the Resolution ) "On the changes and additions to the Regulations "On the procedure of accommodation of diplomatic missions, consular offices of foreign states, representative offices of international and foreign organizations in Ukraine" (The Regulations). Under the new version of the Regulations General Directorate of the Services to Foreign Missions (GDIP) was vested with certain powers regarding regulation of real estate transactions in Kyiv involving foreign entities. Before the adoption of the Resolution of the Cabinet of Ministers # 670 foreign entities were free to buy or rent what they wish. After the Resolution had come into force foreign entities were imposed certain restrictions, with the GDIP becoming the regulatory body authorized to regulate the compliance with the new regulations with regard to Kyiv real estate. One should be aware of the fact that as of the moment the Resolution # 670 came into force foreign entities do not have absolute right to purchase or rent real estate in Ukraine. So let us analyze the nature of the above restrictions, what GDIP is and what its powers are as to the real estate market. GDIP is a municipal commercial entity within the structure of the Kyiv City State Administration established to provide various services to foreign entities, such as diplomatic and consular missions, offices of international and intergovernmental organizations, representative offices of foreign business entities, as well as non-governmental organizations and representative offices of foreign non-profit organizations. The services GDIP provides comprise accommodation, construction, recruitment of personnel, translation, estate agency services, entertainment and many other various services. Under the Regulations "On the procedure of accommodation of diplomatic missions, consular offices of foreign states, representative offices of international and foreign organizations in Ukraine" GDIP is authorized to regulate real estate transactions of the following foreign entities and their representative offices: foreign business entities, i.e. companies, banks; non-governmental organizations (NGO); non-commercial entities, i.e. charity funds, religious organizations, etc. In compliance with article 4 of the Regulations if a foreign entity or its representative office wishes to obtain accommodation in Kyiv, i.e. office premises, it is to apply to the Kyiv City State Administration represented by GDIP. Under article 5 of the Regulations accommodation to foreign entities is to be provided by GDIP, which means to say that foreign entities are to apply to GDIP to obtain accommodation, with the latter offering properties for lease or sale. Although some foreign entities obtain accommodation from GDIP, many of them prefer to buy or lease properties independently, i.e. on the open market. If a foreign entity is going to act independently, i.e. without GDIP’s assistance, in accordance with article 8 of the Regulations a foreign entity is obliged to notify the GDIP in the event the foreign entity intends to be involved in the following sectors of real estate operations in Kyiv: property purchase; property lease; land lease; free use of property; reconstruction of a property; change of use of a property. One has to consider that the above types of operations have to relate a property a foreign entity is or is going to be accommodated at. Based upon such notification GDIP takes decision as to the possibility of the location of a foreign entity at a particular property. GDIP’s decision is taken based upon the official opinion of a number of state institutions. A positive decision is the basis for GDIP’s consent as to a particular real estate operation by a foreign entity. Under article 9 of the Regulations a foreign entity has the right to implement its intention as to the purchase, rent, use or reconstruction of real estate only after GDIP’s consent has been obtained. We have to consider that in some situations GDIP’s consent may be subject to certain conditions. According to article 10 of the Regulations notaries certify property purchase contracts only provided that GDIP’s consent has been obtained. "GDIP’s consent" rule applies to the registration by the Bureau of Technical Inventory and commodity exchanges. Article 11 of the Regulations reads that if a foreign entity purchased, rented, constructed or used a property with a violation of the Regulations, GDIP is entitled to require that this foreign entity waive its right as to the real estate or cease usage of such right. So, summing up the above a foreign entity or its representative office can buy, rent, reconstruct, use or implement change of use as to real property it is using or is going to use for accommodation only subject to GDIP’s consent. From the legal point of view it is important to understand that GDIP is authorized to regulate the location of a foreign entity, i.e. territorial position. That is why GDIP’s powers are relevant to real estate which a foreign entity is using or is going to use for its own accommodation. Technically GDIP can’t prohibit the transaction itself. But GDIP has the power to prohibit the location of a foreign entity in a certain property. But the mechanism of implementation of these powers is structured through the system of granting consent as to various types of operations relating to real estate. The above restrictions of foreign entities’ rights with regard to real estate are not unique to Ukraine. The Head of Foreign Representative offices Accommodation Department of GDIP Vladimir Melnichenko explained to us that similar rules exist in the USA, Turkey, Greece and in a number of other countries. Generally, GDIP has a rather flexible and constructive policy. As Vladimir Melnichenko explained nine applicants out of ten normally obtain GDIP’s consent. As to the application itself the normal term of processing and consideration is one month with a fee of 50 hrivnas. If you wish your application to be considered within 10 days the fee would be 100 hrivnas. And if you wish the application to be considered within 5 days you would have to pay 150 hrivnas. Regarding property purchase currently it is virtually impossible to circumnavigate "the GDIP’s consent" rule since you will not be able to notarize a property purchase contract and register it with the Bureau of Technical Inventory. As to property lease rather often foreign entities either are not aware of "the GDIP’s consent" rule or tend to ignore it, both of which we would not recommend to do, as a foreign entity will always be running the risk of being required to leave the rented premises. In our view it would be cheaper and quicker in the end just to apply to GDIP, obtain its permission and occupy the premises on totally legitimate grounds. © 2000 Peter Hackett and Partners (10.08.2000)

LAND ISSUE

Recently adopted Decree of the President of Ukraine opens the possibility for foreign companies and individuals to own urban land. On the 19th of January the President adopted the Decree # 32/99 «On the sale of land plots for non-agricultural use». The core of the above Decree is that Ukrainian business entities are given the right to purchase non-agricultural, i.e. urban areas land plots, provided, however, they own real property located on the land they wish to purchase. For foreign investors the implication would be as follows. If a foreign entity, i.e. individual or company, establishes a Ukrainian legal entity with 100% foreign ownership and this legal entity purchases real property, then, under the above Decree, it has the ability to purchase the land plot on which the property is sited. As a result, we have a legal formula which allows 100% foreign ownership to a land plot by the means of establishing a Ukrainian company. To date, a foreign investor had the right to own a property, say an office building or a warehouse, but couldn’t own the land beneath it and it considerably hindered investment inflow into real estate. From the economic point of view, a land plot and property constructed upon it is a composite economic resource called "real estate" and the difference in the legal status of a land plot and the property contradicts their economic unity. In this regard the above Presidential Decree is an important and long-awaited legal initiative to rectify this issue and is aimed to further encourage potential investors with an interest in the real estate market. However, as far as legal issues are concerned, when making an investment decision the investor should take a broader approach and analyze not only the relevant legislative acts, but also the legal environment in general. The latter comprises, in addition to legislation, court practice, practice of state bodies, and trends of the development of the above three factors. And as to private land ownership, this issue has always been one of the fundamentals of any economic and political system. This can be said to be true for the present situation in Ukraine, where we experience an invisible fight for how and by whom such a valuable economic resource as land shall be possessed and distributed. Currently there are two trends for the development of land legislation in Ukraine, one of, which is conservative, and the other - liberal. The conservative land policy is primarily represented by Parliament - Verhovna Rada, which has always been, at best, reluctant to embrace the concept of private land ownership as well as foreign investors in the land market. Among the legal acts adopted by Verhovna Rada in the sphere of land relations Land Code of 18 December 1990 is the most important one. "Land conservatives" are opposed by "land liberals", who are relatively tolerant to private land ownership as well as to foreign investors. Their influence is seen in the legal acts adopted by the President, the above mentioned Decree being one of the examples. What we would like to draw your attention to, is correlation of the Presidential Decrees on land matters and the Land Code. The legal problem here is that certain basic provisions of the Presidential Decrees contradict the rules lay down by the Land Code. Firstly, the Land Code and Presidential Decrees provide for different rules with regard to the right of private ownership of land by foreign individuals. Under article 6 of the Land Code and article 11 of the Law of Ukraine "On Ownership" dated 7 February 1991 foreign individuals and stateless persons can not have the right of private ownership of land plots. While paragraph 2 of the Decree of the President "On privatization of objects designated as uncompleted construction" of 14 October 1993 provides the right for foreign individuals and stateless persons to privatize the objects of uncompleted construction as well as land plots, designated as uncompleted construction. Under paragraph 2 of the Decree of the President "On privatization of petrol stations that sell fuel and oil materials only to public" of 29 December1993 foreign individuals and stateless persons have the right to privatize petrol stations as well as land plots. Secondly, the Land Code does not mention legal entities among those, which have the right of land ownership. In contrast to the Land Code, a number of Presidential Decrees envisage the right of ownership of land by legal entities. Pursuant to article 5 of the Land Code, land may be owned only by an agricultural company, while under a number of Presidential Decrees land may be owned by companies involved also in non-agricultural business. Such Decrees include the Decree of the President "On privatization of objects designated as uncompleted construction" of 14 October 1993; the Decree of the President "On privatization and lease of non-agricultural land plots for business activities" of 12 July 1995; the Decree of the President "On the sale of land plots for non-agricultural use" of 19 January 1999. Therefore, there are at least two key issues on which the legal sense of Land Code does not correspond to that of the various Presidential Decrees. These are the land ownership rights of legal entities and the right of private land ownership by foreign individuals. We do understand and support the Presidential initiative as to the liberalization of the land legislation. At the same time, there should be no illusions as to existing contradictions between the Land Code and the Presidential Decrees, which may result in serious disputes, including those with the authorities. And when considering the dispute, the court would proceed from the legal status of the colliding legal acts. Within the hierarchy of legal acts the Land Code holds higher position than the Decree of the President. The former is classified as codified law, whereas the latter is by-law. A legal act classified as by-law is to be in conformity with legal acts classified as law. Article 1 of the Land Code reads that all land relations shall be regulated by this Code and other legal acts of Ukraine, these legal acts adopted in accordance with the Code. When analyzing the legislation, one should proceed from the point that the competition between the Land Code and the Presidential Decree leads to the prevalence of the Land Code over the Presidential Decree. Technically, if the President’s Decree introduces something, which does not comply with the Land Code, the latter should be appropriately amended. Presently the Parliamentary Committees consider many drafts, including the draft of the new Land Code. But the court does not rule on the basis of drafts however good they may be, it considers only valid legal acts however bad they may be. The court also applies legal acts proceeding from the appropriate hierarchy of legislation. Returning to correlation of the Land Code and the Presidential Decree, we would say that it would be "not quite correct" for the court facing this legal collision to judge proceeding from the prevalence of the Presidential Decree over the Land Code. That is why if an investor wishes to financially commit funds based upon the provisions of the Presidential Decrees, the investor should be either very careful, or better abstain from investing until the Ukrainian land legislation becomes more stable and concerted. © "Peter Hackett and Partners" Property lawyers (09.10.2000)