Austria: Unfinished Construction Challenges

This article has previously been published in Business Ukraine.

New legislative changes reduce registration risk but question marks remain

Developers, investors, construction bankers and other businesses engaged in development are now free to benefit from the possibility to register titles to unfinished construction objects ("UCO[s]") in Ukraine. They should, nevertheless, be cautious with the temptation to overestimate the possibilities of this newly gained freedom.

Transferring, mortgaging and otherwise disposing the UCOs has become vital in today's development business. It allows for sale of distressed UCOs, financing and refinancing of development projects, as well as obtaining bank guarantees secured by the mortgage of UCOs.

In order to sell, mortgage or otherwise dispose of a UCO, it is first of all necessary to register the title to it with a relevant Bureau of Technical Inventory ("BTI[s]"). This is where a major problem used to arise.

Inconsistent and problematic legislation

The practice of state registration of titles to UCOs has been inconsistent so far. BTIs have, particularly, taken controversial positions on the possibility to register such titles. Some BTIs, especially that of Kyiv, normally registered titles to UCOs only on the basis of court orders, pursuant to article 19 of Law of Ukraine on State Registration of Proprietary Rights to Real Estate and Their Encumbrances, dated 1 July 2004, No. 1952-IV ("Law"). These BTIs generally refused to register titles to UCOs on the basis of any other documents.

To overcome this problem, it was necessary to file a lawsuit for a court to order the BTI to register the title to the UCO. As a matter of practice, it was expedient not to bring the BTI as a defendant in such a case. Otherwise, there was always a risk that the BTI would obstruct its state registration as much as possible. It was thus practicable to devise an artificial litigation over the title between the parties involved in the construction of the object.

Other BTIs, in contrast, registered titles to UCOs not only on the basis of court orders, but also on the basis of land right and construction documents, pursuant to paragraph 2 of section 3 of article 331 of Civil Code of Ukraine, dated 16 January 2003, No. 435-IV ("Civil Code"). This was common practice, for example, at the Kharkiv City BTI.

Due to this inconsistent practice, there was always a risk that any given BTI might deny registration. Yet even if a BTI registered the title, there was still a risk that such registration would be subject to invalidation through court action.

Latest advances

Long-awaited-for improvements to the procedure for state registration of titles to UCOs have just come onto the scene. First, the Ministry of Justice has improved the registration procedure by adopting Order on Regulation of Relations regarding State Registration of Real Estate Titles, dated 17 February 2010, No. 324/5, amending the Temporary Regulation on the Procedure for Registration of Real Estate Titles, approved by Order of the Ministry of Justice, dated 7 February 2002, No. 7/5 ("Regulation").

Second, the Law and Civil Code undertook considerable amendment by Law of Ukraine, dated 11 February 2010, No. 1878-VI. The new Law not only facilitates registration of UCOs, but also conceptually replaces the state registration of real estate transactions with the state registration of real estate titles. The Law, specifically, switches the moment of transfer of a real estate title from the moment of registration of the transaction to the moment of registration of the title. Although this switch will take effect on 1 January 2012, the Law, once it has become effective, has already entailed certain title transfer risks.

Benefits of greater transparency

These recent improvements minimize the risk of denial of registration that had previously posed such a threat to the development of the market. The Regulation now explicitly provides for registration of UCOs. BTIs now lack – albeit not entirely – the legal grounds to deny registration of titles to UCOs for absence of registration procedure. The latter is already in place. This should benefit not only those owners who alienate UCOs, but also the banks-mortgagees who seek to foreclose on mortgaged UCOs.

In order to register a title to UCO, its owner is now to provide the relevant BTI with a land-right-evidencing document, construction permit and some other documents.

While this legal reform has advanced the state registration of titles to UCOs, there are a few intricacies that may impede such registration. The introduction of the word "transaction", for example, could prove troublesome as this term lacks relevant definition within Ukrainian law.

Risk remains the key word

Ministry officials have thoroughly amended the Regulation, even replacing wording such as "self-willfully" with "arbitrarily", "head" with "chief" etc. Amid these numerous changes, however, the Ministry has failed to eliminate one risk-retaining word in Section 1.6, which states that only real estate objects the construction of which has been finished and which have been commissioned are subject to registration. The tricky word here is "only". It literally means that nothing else, i.e., no UCO, may be subject to registration. This single word creates an inconsistency in the same section of the Regulation. On one hand, the Regulation only permits the registration of titles to real estate objects. On the other hand, it also provides for registration of titles to UCOs, which are distinctive from real estate objects.

Implementation of legislation with such new and inconsistent wording may inevitably run into certain obstacles. There is, in particular, still a loophole for the BTIs – at least theoretically – to protract or, in the worst case scenario, even deny registration of titles to UCOs. BTIs which normally refused to register titles to UCOs on any basis other than court decisions may consider that this inconsistency requires a further input from the Ministry of Justice. BTIs may, for instance, wait for clarification or even subsequent amendments of the Regulation. This is because BTIs, as mentioned above, naturally prefer to stay away from becoming defendants in court cases. It is thus yet to see whether BTIs, especially the one in Kyiv, will now feel comfortable registering titles to UCOs. Hopefully, they will.

Linguistics and legality

In case of subsequent transactions with a UCO, the Regulation allows registration of the title to it pursuant to the same procedure. The Regulation, however, employs an inadequate Ukrainian term for the meaning of "transaction". This furnishes BTIs with considerable leeway to consider whether a certain deal is really a transaction.

To go further into detail, Ukrainian law persistently used the term "pravochyn", which is an equivalent of the English term "transaction". For some reason, the Regulation chose a different path by introducing a substitute term "tranzaktsiia". This term has no corresponding definition in either the Regulation itself or anywhere else in Ukrainian law. As such, BTIs may formally need interpretation or instruction from the Ministry of Justice on what the new term actually means.

These latest improvements to the country's real property legislation are clearly beneficial for the construction industry in Ukraine. By providing for the state registration of titles to UCOs and hence eliminating the major risks, these improvements are constitutive steps on the way towards the free transferability of UCOs. Despite these promising signs, nonetheless, there remains some work to do to clarify just what the small print of the Regulation will mean in practice.

Dmytro Biryuk, an Attorney at Law with Schoenherr Ukraine, specialises in land, real estate, construction, commercial and M&A law. Dmytro graduated from the Kyiv National Economics University, where he earned his Bachelor's and Master's degrees in law with distinction. Dmytro also obtained an LL.M., with honours, from the Saint Louis University School of Law, USA.

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