Starting from July 2021 the land market has been launched in Ukraine.\u00a0Many politicians claim that only citizens of Ukraine will be able to acquire agricultural land in the early stages of the reform. Later the Ukrainian legal entities will also gain the right to purchase agricultural lands; while foreign investors won\u2019t have such right (at least until respective decision is approved by all-Ukrainian referendum).<\/p>\n
Indeed, formally the Law of Ukraine \u201cOn Amendments to Certain Legislative Acts of Ukraine on the Conditions of Circulation of Agricultural Land\u201d<\/em> (the Law on Land Market) prohibits the acquisition of agricultural land in favor of foreign (or stateless) individuals and legal entities whose shareholders are foreign citizens, and foreign or Ukrainian legal entities.\u00a0It is also prohibited to conclude a preliminary purchase and sale agreements of agricultural land or to issue power of attorney for its sale in favor of legal entities while they don’t have the right to acquire such lands (Ukrainian legal entities will get such right on January 1, 2024).<\/p>\n However, professional lawyers can easily elaborate instruments for acquisition of control over agricultural land in Ukraine by institutional investors (including foreign ones) in full compliance with the Law on Land Market.\u00a0The main players in this new land market should be the Ukrainian banks1<\/a><\/sup>, control or partnership with which opens for investors almost unlimited agricultural land market.<\/strong><\/p>\n <\/p>\n In the early stage of the land market reform, namely from July 1, 2021 to January 1, 2024, it will be possible to buy agricultural land through the Ukrainian citizens.\u00a0Of course, it doesn\u2019t mean the foreign investor should find loyal local adherents who will be ready to follow all his instructions regarding the land plot registered in their ownership. However, there are effective legal instruments that will insure firm control of the investor over agricultural land, which officially will be acquired by the Ukrainian citizens.<\/p>\n Foreclosure on the mortgaged land is an exception to the restrictions and is a legitimate method for acquisition of agricultural land into ownership of a bank (sub-para. 2 of the para. 1 of the Article 130 of the Land Code, as amended by the Law on Land Market).\u00a0The Law on Land Market limits the period of bank\u2019s direct ownership of such land \u2013 there is a requirement to alienate it within the next two years after foreclosure. But this period is more than enough for the bank to find a new borrower and to repeat the same scenario with the conclusion of a credit contract, contract for the purchase of land by a citizen (this time \u2013 from the bank) and mortgage agreement. which will enable the bank to fully control the destiny of the land plot and to foreclose on the land again and again, when necessary.<\/p>\n It is also worth noting that, in the case of lease, citizens may be exempted from payment of land tax.\u00a0Particularly, individuals \u2013 who are owners of land plots and land parcels (shares) or land users \u2013 shall be exempted from payment of land tax in case such land plots (parcels) are (sub-) leased by an enterprise which is a taxpayer\u00a0of the single tax of the fourth group for agricultural producers (according to Article 281.3. of the Tax Code of Ukraine).<\/p>\n The legislation provides that the duration of leasehold of the land plot shall not exceed 50 years (part 4 of the Article 93 of the Land Code).\u00a0However, it is not prohibited periodically to extend the agreement (for example, every 10 years) so that the term of future lease from the moment of such renewal does not exceed 50 years, thus avoiding in advance the risks of approaching the end of the term of lease.<\/p>\n For convenience, the owner could issue a power of attorney<\/u><\/strong> for amending the land lease agreement which would allow to extend the lease for some time or even to renegotiate the land lease agreement in favor of another tenant company (in case if the investor has such need) without owner\u2019s participation.\u00a0Current civil legislation does not formally limit the period for which a power of attorney may be issued.<\/p>\n Recent legislative changes have simplified the procedure for renewal of lease agreement<\/u><\/strong> (under the Article 126-1 of the Land Code).\u00a0Now parties may provide for the right of automatic extension during conclusion of a new lease agreement, which will be recorded with the state register of proprietary rights. In case none of the parties applies for cancellation of automatic extension before expiration of the lease, the software of the state register will automatically renew lease agreement for the same period (on the same conditions).<\/p>\n In addition you can find experts comments of KM Partners on the renewal of land lease agreements in the article: <\/em>\u201cRenewal of the land lease: is the implied consent of the landlord enough?<\/a>\u201d<\/p>\n And finally, a word about the most significant advantages that the tenant receives.\u00a0At the same time when the land market opens, the regulation on tenant\u2019s priority right<\/u><\/strong> to purchase leased land becomes effective (part 1 of the Article 130-1 of the Land Code in the version as of July 1, 2021).\u00a0In case the tenant is unable to purchase the agricultural land \u00a0himself, he may transfer his priority right to another person.\u00a0This regulation will ensure full control of tenant corporations over the fate of the land even after the lifting of the moratorium. Eventually, this regulation will squeeze out primary individual landowners and replace them with tenant-controlled owners whose right to land will be restricted by a mortgage.<\/p>\n In general, the tenant gets almost a complete control over the fate of the land plot.\u00a0The ways of agricultural land disposal are restricted by law (under part 3 of the Article 131 of the Land Code in the version as of July 1, 2021). Among the allowed ways: in case of sale and purchase the tenant has the priority right to purchase, while the pledge or contribution to chartered capital of corporation are possible only by the consent of the tenant.\u00a0Only exchange of the land plots within one field or deed of gift to close relatives remain in the owners\u2019 sole discretion, but these options are situational and even in such case the change of ownership to land will not affect the validity and scope of the tenant\u2019s rights and override his priority (they remain mandatory for the new owner of land).<\/p>\n The Law on Land Market provides tenants with the right to alienate and pledge their right to use an agricultural land without consent of the landowner (part 5 of the Article 93 of the Land Code in the version as of July 1, 2021).\u00a0It will make easy to replace the operating entity in case the investor has such need.\u00a0In addition, the pledge of tenant right in favor of the related bank will provide additional protection against hostile corporate takeover (even in the case of loss of control over the tenant company, the bank will be able to foreclose tenant right and retain control over the land).<\/p>\n In addition you can find expert comments of KM Partners on the strengthening of the rights of tenants of agricultural lands after the lifting of the land moratorium in the article:<\/em> \u201cHow a disproportionate strengthening of the rights of tenants of agricultural land under the bill No. 2194 can turn against them and worsen the situation<\/a>\u201d.<\/p>\n Additional opportunities are opened at the second stage of the land market: from the beginning of 2024 Ukrainian legal entities will have the right to buy agricultural land as well.<\/p>\n It should be noted that agricultural land cannot be acquired by legal entities registered in Ukraine, participants or beneficiaries of which are foreign corporations and citizens. That is, the scheme of acquisition of the control over agricultural land will still require the involvement of the Ukrainian citizens, who will become shareholders of a legal entity that will be able to acquire agricultural land.\u00a0At the same time, in this scenario citizens will be even more distant from any influence on the fate of the land plots.\u00a0The relatively new regulations of the Law of Ukraine “On Limited and Additional Liability Companies\u201d (2018) will help this along.<\/p>\n Under the investor\u2019s instruction, participants of the limited liability company established for the acquisition of land will be able to conclude a corporate agreement<\/u><\/strong> in which they will waive their prior right to acquire a share of another participant, and which will provide an obligation to sell their share in the company (for example, in favor of another person identified by the investor). In addition, the corporate agreement may require parties to vote in a certain manner at the general meeting of the participants and coordinate other actions related to the management of the company.<\/p>\n To fulfil the obligations of the shareholders as parties to the corporate agreement, the shareholder could issue irrevocable power of attorney<\/u><\/strong>.\u00a0The issuance of such powers of attorney to the trusted managers and appointment of own director will insure full control of the activity of the legal entity (formal owner of agricultural land).<\/p>\n For additional security, the land could be mortgaged in favor of the bank, and the land could be transferred into lease of operating entity (with a pledge of its lease rights). Regular distribution of dividends may be a motivation for shareholders of legal entity (land owner) to continue their participation in the scheme.<\/p>\n In addition, you can find expert comments of KM Partners on the law on limited liability companies in the article: \u201c<\/em>How to cheat friends (i.e. creditors) and influence people (i.e. company, which is not belongs to you) \u2013 based upon the Draft Law<\/em> \u201cOn Limited Liability Companies and Companies with Subsidiary Liability<\/em><\/a>\u201d.<\/em><\/p>\n Therefore, the legislator has created more than enough instruments for acquisition of control over agricultural land by institutional investors (including foreign ones). Soon it will be possible to see them implemented.<\/p>\n\n
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