Ukraine: Trust, But Check: Important Nuances In The Purchase Of Real Estate In Ukraine

Last Updated: 18 March 2019
Article by Yan Akhramovych

Hundreds of thousands of apartments were commissioned in Ukraine according to the results of 2017-2018. Despite the high interest rates at which Ukrainian banks lend funds for purchasing real estate, the demand for housing does not decrease. The demand for commercial real estate remains as high. Both ordinary citizens and companies invest in construction. The desire to ensure safety of own money by investing it in real estate is also fuelled by a relatively small real estate cost, since the average price per square meter in Kyiv suburbs in new buildings in December 2018 amounted to UAH 13,000 per m². This situation in Ukraine can only be described as "construction boom". And while economists argue about its consequences, whether or not they will result in collapse for Ukraine, the real estate market is actively operating. Unfortunately, the great demand for real estate also encourages a large number of conmen in this area. And this is not just about unscrupulous buyers and mala fide sellers, developers should also be given credit, since when trying to make money on constructing real estate by subsequently selling it, mala fide construction companies ignore master designs. Newly-developed areas do not and cannot have any satisfactory infrastructure, constructed objects are not commissioned for years and sometimes even cannot be transferred to property investors into ownership.

Let us take a closer look at what issues should be avoided when purchasing real estate and how.

Firstly, one should understand that there is not and cannot be any standard real estate due diligence algorithm. This, inter alia, is due to the fact that history of real estate goes far back before the building construction. Thus, the first step in construction object due diligence must be the clarification of its history. Presence or absence of certain facts in the history of preparation for construction and implementation of construction with experience enable to evaluate the presence or absence of adverse consequences that could occur as a result of historical gaps.

What should one pay attention to when looking into object construction history?

The first thing no construction can be started without by neither a legal entity nor an individual is a land plot. And while we cannot imagine a building without a land plot, unfortunately, construction on a land plot without properly executed documents is a very common case. Therefore, developer's title to a land plot is the first thing one should pay attention to when conducting real estate due diligence. The most common reason for a developer having no properly executed title to land is the fact that an object is constructed under improperly registered land plots or areas that may not be used for development. Neglecting such "land formalities" leads to disastrous consequences – the need to vacate a land plot by demolishing a building. It is also worth noting that sometimes the very fact of a developer having title to land is not guaranteed forever. The history of a developer acquiring such a title is subject to due diligence. It often so happens that a construction company acquired title to a land plot under illegal agreements, which can easily be invalidated. This may lead to a developer losing its rights to develop the land even before a building is commissioned.

The second basic factor, which dates back to the very beginning of construction and needs to be checked is whether or not a developer has proper construction permits. According to Article 376 of the Civil Code of Ukraine, residential housing, building, structure, other real estate are unauthorised construction if they were or are constructed on a land plot that has not been designated for such a purpose or without a relevant permit for construction works or a properly approved design, or in case of material violations of construction standards and rules. Detection by urban development regulatory authorities of an unauthorised construction may result in: refusal to commission an object, imposition of penalties on such a developer, filing a claim with court against a developer for the necessity to demolish a building and in case the claim is granted – for demolishing an unauthorised building. Therefore, if it is detected at the time of construction commencement that a developer did not have all required permits, it should be immediately clarified whether or not such permits were obtained in the future, whether or not it caused any court disputes, and should there be such disputes, what did they lead to?

The third basic element crucial for commencing construction is, of course, a developer having funds for construction. There are also aspects here worth paying attention to. Construction is almost always carried out by a developer at the expense of funds raised from other parties. It is not uncommon when at the very beginning real estate developer borrows financial assets for the construction from a banking institution secured by mortgage. Obtaining a loan by a developer for construction and simultaneous mortgaging of a construction object enable both the developer to commence construction without raising funds from potential investors, and the bank obtains the right to forfeit a new building for debt in case construction company violates the conditions of a loan agreement. At the same time, it should be noted that even if not a building under construction, but land on which such a building is constructed, was mortgaged, the mortgage will also cover a building. Finding out credit record during the construction object due diligence requires a thorough examination of circumstances of lending, repayment of loan debt and mortgage termination.

From history to nowadays. Checking object's status, its compliance with statutory regulations and buyer's requirements.

  • As it was already mentioned above, there is no standard real estate due diligence algorithm. The number of items by which due diligence is conducted varies depending on the object history, experience and creativity of a person conducting it. Meanwhile, due diligence must always be conducted by certain items. And even if the object history raises no doubts that it is risky to purchase it, you will not leave out its current status without due diligence. What exactly is a current status of a real estate object and what should one really pay attention to when conducting due diligence?
  • Properly executed documents on a building. Both during the registration of title to a construction object, and during the preliminary registration (execution) of rights to a real estate object, documents are often executed in violation of legislation or with errors. Such shortcomings of documents may subsequently lead to complications during the purchase of real estate, or even indicate greater fraud-related issues.
  • Lack of required technical conditions. For successful commissioning a building must comply with the standards set by law and have all utility systems connected pursuant to a design. In case a developer has no properly executed technical conditions for connecting utilities, it may cause issues with commissioning a building. It is worth mentioning that since 2019 the State Architectural and Construction Inspection authorities prohibited to accept into service buildings and structures not equipped with inclusiveness facilities. New state building standards on ensuring the inclusiveness of buildings and structures, public places and infrastructure facilities have became effective in September 2018. In particular, DBN B.2.2-12: 2018 "Planning and Development of Territories", DBN V.2.2-4: 2018 "Buildings and Structures. Pre-School Education Institutions", DBN V.2.2-3: 2018 "Buildings and Structures. Education Institutions", DBN V.2.3-5: 2018 "Streets and Roads of Settlements". Furthermore, DBN В.2.2-40: 2018 "Buildings and Structures. Inclusiveness of Buildings and Structures. Basic Provisions" will become effective on April 1, 2019. Together, requirements of all these regulations will make it impossible to commission buildings, the inclusiveness of which does not comply with law. Nevertheless, it should be noted that so far many buildings are constructed based on old designs without considering the above-mentioned DBN (State Construction Standards).
  • Seizure of real estate object. An object may be seized in connection with violation of construction legislation, which de facto makes it impossible to sell it on lawful grounds.
  • Legal disputes regarding an object. One should keep in mind that legal disputes may be initiated in respect of real estate (both a building and land under it) even if we are talking about purchasing a real estate object on primary market. Moreover, a developer and state authorities may also have disputes regarding the legality of construction. The foregoing imposes a significant risk for a buyer, which can be avoided by conducting developer's due diligence and checking whether or not there are any disputes in respect of an object. If we are talking about purchasing an object on secondary market for selling real estate, due diligence of the status of legal disputes regarding an object and a seller must be even more thorough. Such a due diligence can be conducted by using pay databases of court decisions. Unfortunately, the only state register of court decisions does not provide for such a option, since data in such register is anonymized and it is impossible to search by surname or object address.
  • Tax arrears. Should a developer have tax arrears, it may be a reason for the emergence of tax pledge, including in respect of a construction object. The existence of such a pledge in respect of an object makes it impossible to purchase it on legal grounds.
  • Restrictions on property disposal. In addition to property seizure, there may be other restrictions on disposal thereof. It is not common when purchasing an object from a developer, but happens more often when purchasing real estate on secondary market, especially from an individual seller. Persons other than the owner, such as a spouse, may have rights to real estate. Such rights might not be reflected in the Unified State Register of Property Rights to Real Estate, but obtaining such persons' consent at the signing of an agreement is mandatory.
  • Third party property rights to a real estate object. While you will hardly face such an issue on primary real estate market, when purchasing real estate, especially residential housing on secondary market, there is every chance you will. Registration in an apartment of minors or legally incapable persons poses a risk and can create significant issues for a buyer related to the necessity to evict such persons through a court procedure.

Due diligence of the future.

Even after thoroughly looking into the history of an object you chose and making sure that its current status meets the requirements of law and your expectations, due diligence may not yet be deemed complete. Safety of your investment and future ownership of real estate also depends on actions to be taken in the future, namely the legal mechanism for purchasing real estate.

Data from the state register of court decisions show that almost half of infringements of real estate buyer's rights are connected with the procedure for registering the transfer of rights to real estate from a seller to a buyer. Today, the courts are overoccupied with cases on invalidating agreements, recovery of property from someone else's illegal ownership or recognizing a title to real estate, in which investors or buyers attempt to prove the legality of their property rights to real estate. By conducting future agreement due diligence one can at least reduce the risk of visiting a court, if not avoid it all. Be sure to pay attention to the conditions of an agreement set out in writing, check them for meeting your expectations, do not jump to conclusions, if some aspects are unclear – discuss them a developer or seller. Check thoroughly whether a person to act on seller's behalf when entering into an agreement has required authority. The lack of authority to enter into an agreement (sometimes even by virtue of law) may serve as grounds for cancelling an agreement in the future.

The last, but not the least, make sure that you select counterparties carefully based on your inner belief. Sometimes you do not even need a lawyer to know that someone is a conman. In order to reduce the risk of being shafted — do not allow other people to join your agreements. Keep in mind that the more parties there are to an agreement, the greater the risk of invalidating such an agreement.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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