Practice Areas Review: Real Estate

Developments in Ukrainian Real Estate Law in 2015

Bate C TOMS

Bate C TOMS

Managing Partner, B.C.Toms & Co. Legal education: Yale Law School (J.D., 1975); Magdalene College, Cambridge University (Law Tripos I; 1972-1973). Mr. Toms is admitted to legal practice in the District of Columbia and Virginia, USA, and in France.Chairman, British Ukrainian Chamber of Commerce

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B. C. Toms & Co

Address:
18/1 Prorizna Street,
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Tel.:
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B.C. Toms & Co is a multinational law firm of Ukrainian and Western lawyers specializing in Ukrainian law. It was the first Western law firm to open a Kiev office, having focused its practice on Ukraine at its independence in 1991. The firm has handled, for example, the land leasing for many of Ukraine’s largest agricultural and oil and gas projects, as well as acquisitions of land for commercial property developments. We also handled the legal work for the first, and the most, IPOs to raise funding for Ukrainian companies, as well as the first true project financing in Ukraine. Based on our over 25 years of experience in Ukraine, we can provide, with our legal advice, practical commercial advice on how to establish and develop a business in Ukraine.

The firm has recruited and trained its Ukrainian lawyers from students at Ukraine’s leading law schools, most of whom have also studied at UK and US law schools as Chevening, Pinchuk, Fulbright and Muskie fellowships. Based on the firm’s practical experience, it has written numerous articles on Ukrainian law, including the legal section of the book Doing Business in Ukraine.

The principal practice areas of B. C. Toms & Co include real estate and land development, energy, natural resources, agriculture, banking and finance, M&A, environmental, labor, bankruptcy and administrative law. The firm also has a successful litigation and arbitration practice, having successfully handled many of Ukraine’s most important cases, including in all Ukrainian courts and before the Permanent Court of Arbitration in The Hague. The firm regularly advises on Ukrainian tax law, including from a multinational tax planning perspective.

B. C. Toms & Co has prepared a wide variety of documentation for clients, including Ukrainian law share purchase agreements, asset purchase agreements, joint venture agreements, construction contracts, project financing documentation, production sharing and oil and gas license agreements, airport investment and management agreements, hotel management agreements, private placement agreements, real estate acquisition agreements, loan agreements, leases and agency, distribution, franchise and licensing contracts.

 

The Problem for Apartment and Shop Owners because of the Multi-Apartment Buildings Law

 

(1) The Problem

The most important change in law affecting real estate in 2015, that will likely harm most owners of residential apartment and non-residential premises in multi-apartment buildings in Ukraine, results from Act  No. 417-VIII, of 14 May 2015, On the Peculiarities for the Realization of a Right to Property in a Multi-Apartment Buildings (hereinafter – the Multi-Apartment Buildings Act1). This Act will, effective from 1 July 2016, permanently deprive owners of apartment and non-residential premises in a building of all management control over the common parts of their building, and of the land underneath and adjacent pertaining to the building, property that they should instead jointly own and control.

This is because the owners have until 1 July 2016 to register a condominium (commonly referred to as an OSBB) or make certain other arrangements for the management of their buildings. If they do not meet this deadline, then their buildings are to be managed by private mangers appointed by designated local government authorities under contracts that may, according to their terms, automatically be forever renewed, except as such contracts may be terminated, and the managers replaced, by the appointing local government authorities. The premises owners will not be involved in such decisions on management fees and other terms, services or termination, though by law these owners must pay these managers whatever fees the managers decide to charge.

As a practical matter, presently it can be hard to organise such OSBB’s and obtain their registration, or to complete other real estate management arrangements, before this 1 July 2016 deadline for many reasons, including because: (1) there may be legal issues and ambiguities in the ownership of some premises and the delineation of common areas and land, and (2) a number of legal acts that are required in principle for the Multi-Apartment Buildings Act to be implemented are not yet in place, in particular for the transfer of rights to the land underneath and adjacent that pertains to a building. 

While public tenders are supposed to be held to select the private managers that are to be appointed by the local government bodies, it is not clear how promises of various levels of service and prices by different bidders will actually be evaluated or verified by the local government bodies taking the decisions. There are also no clear standards provided for the implementation and supervision of these management contracts with the government appointed private property managers. It appears that in Kiev and many other locations, the ZHEKs, the state management bodies that now generally have reduced responsibility, are effectively being privatized in order to resume providing general management to the buildings they used to manage, but as private managers for much higher fees starting on 1 July 2016.

This new government buildings management system, that will apply to all of those buildings that fail to meet the 1 July 2016 deadline, may also create a risk of corruption, as for such buildings the local officials involved will enter into contracts with private managers to agree terms for each building’s management, the fees for which will have to be paid by the owners of the building’s premises, although as noted, the owners will have no control over this cost or the quality of the services.

If an owner fails to pay, then the privatized ZHEK can sue and enforce against the non-paying owner and his or her premises, with the risk that the owner may be evicted and his or her premises may be forcibly sold to satisfy a judgments for unpaid fees2.

In this context, it should be especially noted that, due to the poor services of many ZHEKs in the past, many buildings have accumulated serious problems that presently need expensive repair work. There is, therefore, a risk that the new government appointed building managers may quickly impose such capital repair costs on ordinary owners, many of whom, during the current economic situation, will not be able to easily bear such potentially large costs, which may push many individuals into personal financial difficulty.

 

 

(2) Solutions

The Multi-Apartment Buildings Act urgently needs to be amended by Parliament to delay the 1 July 2016 deadline for OSBB registration or other private management arrangements until at least 1 July 2017. In addition, the Multi-Apartment Buildings Act should be amended so that a majority of the owners of the premises of a building can at any time (1) cause the termination of a contract for the management of their building that has been concluded by a local government authority with a private manager, and (2) replace such terminated contract manager by creating an OSBB to take over the management or to provide for management by another entity that their OSBB or they authorize (all management contracts executed by a local government should expressly provide for this termination right). There is no valid reason why, after the 1 July 2016 deadline (or the later date that it is hopefully extended to), the premises owners should not be able to take over the management of their building and the common parts and land that they jointly own if they are dissatisfied with the manager appointed by the local government authority, subject only to a reasonable notice period for transition to a new manager (except where new management is urgently required, for example, to deal with a serious water problem threatening the structure of the building or where the existing manager effectively ceases to function).

In addition, the local government officials involved should be required to take into account the views of the owners of the premises affected, that they represent. There is currently no requirement, mechanism or even encouragement for this. Ukraine’s city and regional administrations should urgently adopt legal acts to provide for such involvement of the premises owners, while waiting for remedial parliamentary action, including to reassure their residents. If the owners of the premises of a building have the right to so dismiss, replace and influence the government appointed manager, this by itself should encourage such mangers to provide better services and not to overcharge. The creation of such a termination right should also discourage any building manager from making improper payments to government officials in order to obtain or keep a management contract, since then any such local government appointed manager for a building could easily be later terminated by the premises owners if its services are unsatisfactory or its charges are unreasonably high.   

For most Ukrainian residents, their residential premises are their principal asset, so the management of their building’s common parts and related land, that they are supposed to co-own legally, is a vitally important issue for which regulation should be conducted in such a way that the owners can genuinely exercise their co-ownership rights and are not exposed to abuse.

 

1 The author wishes to thank Kateryna Krakhmalova for her legal research on the Multi-Apartment Buildings Act for this article. The opinions expressed, however, are solely those of the author.

2 Currently, the local government bodies that have largely succeeded to the ZHEKs, and the ZHEKs, have the right to charge and collect fees for their services for buildings, but they do not enforce debts for unpaid fees in court proceedings, so there have been no evictions by such local government bodies of the owners of premises for failures to pay. The new On Multi-Apartment Buildings Act and the existing laws on OSBBs, combined with new legislation on the enforcement of court judgments, will revolutionized the situation, as the newly privatized ZHEKs and other private managers will be able to evict owners and sell premises to recover payment of the presumably high fees that owners will soon have to pay, the level of whose fees most owners will have no control over, as explained in this article.