Ukraine is considered to be an agrarian state for a good reason. However, those who wish to become a farmer may face obstacles. Ihor Kravtsov, head of dispute resolution practice, will tell how to attract an investor, obtain and not to lose land bank, where to find professionals, and why a farmer may need armed security.
“We should not share groundless apprehension”
— For many years agricultural land sales has been under moratorium in Ukraine. Every year parliament raises the issue of lifting the moratorium. And every year there are sceptics who assure MPs that free land sales will result in wasting Ukrainian lands. However, their opponents argue that a free land market will attract foreign investors who will develop agrarian business. What are the real pros and cons of lifting the moratorium?
I am not a moratorium supporter. We can all see that every year it causes harm to agricultural sector and Ukrainian economy as a whole. Moratorium extension has become a populist position of some politicians. Proclaiming big political mottos, even those MPs lobby the moratorium, who are not economically interested in its extension.
We should remember that our foreign partners, who understand that this will give a significant economic boost to the country, also insist on lifting the moratorium. After all, it is not just about the possibility of selling land owned by individuals. State owns a lot of land, which, due to lack of proper management, turns into dead weight. Efficient sale of this fund will replenish the state budget by a significant amount that could be used for agricultural sector development.
Thus, if state’s goal is a market economy, and not a planned one, as it once was, we need a land market. At the same time, such a market must be civilized. But another question is how to achieve it.
— We know about examples of small European countries that have opened land market, which resulted in the majority of their territories been transferred to foreigners. Should we expect the same for Ukraine?
We should not share groundless apprehension. Firstly, lifting the moratorium does not mean that there will immediately be an invasion of foreigners wanting to buy Ukrainian land.
Secondly, the Land Code provides for restrictions on purchase of land by foreigners.
Should apprehension of losing land have real grounds, I see no problem in setting forth a national legal framework in such a way as to satisfy state’s policy in this area. After all, a final beneficiary is indicated in the course of conducting business.
Even if we imagine that a foreign company wants to buy land using a Ukrainian company as nominee, this plan can be prevented.
“When signing a lease agreement, authority of parties must be verified”
— Today, in order to dispose of land at own discretion, its owners and potential buyers use lease mechanism. What should an owner pay attention to when transferring the land for use to protect his/her interests?
Lease agreement is the most popular instrument in agricultural sector. Now the situation is as follows: the absolute majority of agricultural land is owned by individuals who have received it through so-called shares upon liquidation of collective farms. Owners of a share often have no desire to cultivate it on their own. This is due to either a venerable age, or inability to cope without outside help, or staying outside the property location.
To gain at least some profit, owners of shares lease them to tenants who can efficiently conduct business using them. It is no secret that the amount of such a rent is rather small. Thus, for a reasonable amount a tenant is able to cultivate a large land bank.
A model lease agreement is usually used. If it is drawn up correctly, most of the nuances of interaction between a tenant and a landlord will be taken into account.
However, life is full of surprises. And sometimes, after having entered into a lease agreement, landlord changes his mind and wishes to terminate it. This happens mainly when a landlord receives a more attractive offer. Often such an instrument, i.e., inducing specific owners to terminate the lease, is used by competitors of a farmer. If this is the case, they select owners of land plots which are located chaotically. Lost plots form a so-called chess board, which significantly complicates holistic cultivation. Such losses are extremely painful for farmers.
— What are legal grounds for termination of a lease agreement?
Legal grounds are gross breach thereof: either multiple failures to make payments, or damage to land by using it for purposes other than designated ones. However, it happens quite rarely, since a tenant is interested in timely payment as much as a landlord is. Therefore, land owner often uses formal grounds to terminate a lease agreement. For instance, it may be a non-compliance of an agreement with a form specified in legislation. Our legislation is extremely dynamic, so an agreement which was made several years ago may not meet requirements provided for by amendments to laws. Thus, when printing an agreement used by a tenant or a landlord for several years in a row, it’s better to check it out.
Another common ground for termination is signing of an agreement by a person who had no right to sign it. Often, instead of a land owner, an agreement is signed by his children, relatives, wife, etc. Should it be revealed in court, an agreement will be invalidated. Therefore, when signing a lease agreement, it is necessary to verify authority of parties.
— And what is courts’ position, since it is not just about the land, but about the resources a tenant invests in it?
Practice varies. Normally, courts leave the crop to a tenant. However, sometimes court takes land owner’s side and compels a tenant to compensate a landlord.
“It is not correct to consider emphyteusis to be a form of sale”
— And does not emphyteusis agreement, which is de facto a form of land sales, solve this issue?
Emphyteusis institute is rather specific and not as popular as lease institute. Indeed, in a way it resembles a form of sale, where an owner can immediately get all the money for a plot. However, emphyteusis, like the lease, does not provide for a disposition right. Thus, by renting land under an emphyteusis agreement, a tenant can neither sell it nor use it as a pledge. Furthermore, emphyteusis agreement, as well as lease agreement, can theoretically be terminated at land owner’s initiative, which also carries certain risks for a tenant.
Therefore, there are not many people capable and willing to spend a lot of money, especially when they can rent the same plot for a much lower fee.
In view of the above, it is not correct to consider emphyteusis to be a form of sale. It does not solve the issue of land commerce in Ukraine.
— And what should be paid attention to when entering into an emphyteusis agreement in order to exclude the possibility of court proceedings later?
Unlike lease agreement, emphyteusis agreement is less regulated. Parties may set out the terms of entering into force and terminating it on their own. This is an advantage. At the same time one must carefully read an agreement, analyze it for compliance with legislative requirements to agreements and make sure who exactly signs it from the land owner’s side.
“More and more farmers are forced to hire security when it is harvest season”
— What difficulties should expect someone who decides to engage in agrarian business in Ukraine?
First of all, it is limited resources. Land is a resource that is limited at least by borders of our state. There is no that much of agricultural land. Moreover, the best plots have already been owned or used for a long time. Therefore, obtaining a proper land bank will be a serious problem.
Secondly, it is fund raising. A tenant is not able to make long-term forecasts, that is why investors do not hurry to support the agrarian business. The state also does not provide special subsidies. Sure, there is something. For instance, preferential tax treatment in some cases, some programs on agricultural equipment, etc. However, these subsidies are very small, and compared to subsidies received by farmers in the European Union, they are just miniscule.
Thirdly, it is the lack of staff. If we are talking about a farmstead which one cannot cultivate on his own, it involves recruiting of employees. There is a common need for qualified specialists, such as agricultural machinery drivers, technologists, etc. There are very few such specialists in villages now. Most of them have left in search of a better life. Today farmers attract those remaining by salaries, which for certain categories of employees are equal to earnings in cities. Surely, it is very good for village development. However, a beginner farmer will have to take these costs into account when drafting a budget.
Fourthly, it is misunderstandings with state authorities, including tax authorities. Complexity of working with judicial system. Currently, judicial reform continues, but agricultural sector has not yet seen its specific results. Corruption factors and problems with judgment enforcement remain the same.
Fifthly, it is a competition, sometimes an unfair one. There are many large agrarian companies in Ukraine, which are difficult for smaller farmers to compete with. Sometimes during the process of harvesting, equipment owner can take harvesters to tenant’s field and boldly harvest his crop. Therefore now, more and more farmers are forced to hire security when it is harvest season, what should also be taken into account when drafting a budget.
— Aren’t big farmers interested in getting rid of small businesses?
I think, if globally – no, they are not. Big and small agribusinesses are absolutely different categories. Big business can be compared to a plant where products are delivered from a conveyor. Concerning small business, it is a manual work. Owner knows each piece of his small plot and puts his heart into the crop. These are different market segments. At least they should be. For example, in the USA, most agricultural products come from small farms, which are managed by one family or a small number of employees.
Unfortunately, in Ukraine, situation with small and medium agribusiness is much more complicated. Reasons for this are given above. But we can solve the situation by introducing such an instrument as agrarian receipts. I will report on advantages of the latter for the development of agrarian sector in Ukraine at the Agrarian Forum. Now, I would like to note that this instrument can really improve access of small and medium agribusiness to financial resources.
— What is an agrarian receipt?
Agrarian receipt is a lending instrument. A farmer receives certain resources (funds, commodities, etc.) under an obligation to provide future products as payment or to pay the proceeds from selling these products. Until 2018, the project has worked as a pilot one in some areas and had time to approve itself. Since the beginning of this year, agrarian receipt has been operating throughout Ukraine. More than 340 agrarian receipts have been registered, more than UAH 2.2 billion have been attracted to agricultural sector.
“Let’s hope that the resolution will bring clarity to judicial practice”
— You mentioned the judicial reform. One of the goals proclaimed by reformers at its beginning was unification of judicial practice. Earlier, there was a misunderstanding between courts of administrative, civil and commercial jurisdiction concerning the jurisdiction over disputes. Is this issue now resolved?
The Supreme Court made an attempt to solve this issue. On March 14, Grand Chamber of the Supreme Court passed a resolution in case No. K / 9901/5888/18 (363/2449/14-a).
When substantiating the verdict, having referred to requirements of the Code of Administrative Proceedings, position of the Constitutional Court, practice of the European Court of Human Rights, in particular, in Zand v. Austria case of October 12, 1978 and Sokurenko and Strygun v. Ukraine of July 20, 2006, the Supreme Court judges have come to conclusion that the jurisdiction of administrative courts includes disputes between individuals or legal entities with a state authority, local self-government body, their officer or official whose subject is verification of legality of decisions, actions or inactions of such bodies (persons) adopted or committed by them when exercising managerial functions.
According to the logic of this resolution, all other cases related to disputes concerning a right are covered by economic (in the case of a legal entity) or civil jurisdiction.
Prior to the publication of Grand Chamber’s position, civil, economic and administrative jurisdictions had their own practices supported by supreme authorities, they existed in parallel. Thus, situations would occur where a person who wished to challenge actions of a registrar would turn to administrative court and receive a refusal because court considered the dispute was within civil jurisdiction. In general, the courts, which a person would turn to, upheld the opposite position and also refused to commence proceedings. Finally, a person could not receive legal protection which violated his/her rights guaranteed by domestic and international acts.
Let’s hope that the resolution will bring clarity to judicial practice, and at least the superior courts will stop delivering judgments with opposing legal positions on the same issues.
And what role do courts play in the attractiveness of Ukrainian agricultural sector for foreign investors?
In this context, agricultural sector is no different from other sectors of Ukrainian economy. When planning to invest money, a foreign investor expects clear and transparent rules of the game at any stage of financial promotion. If this is not the case, investor’s interest fades away.
“Business that can meet requirements will be able to compete on European market”
— Will Ukrainian farmers be able to compete with European ones on equal terms?
The question is extremely wide. We already have products that occupy a prominent place in the Old World market. As a rule, these are products of large agricultural holdings with huge capacities. Over the past year, Ukraine exported grain, sunflower oil, sugar, poultry, beef, butter, fruit, berries and the like. India, Egypt, the Netherlands, Spain, China were the largest buyers. Thus, we should limit the issue to Europe alone.
On the other hand, in order to go beyond Ukraine products must meet general international requirements as well as requirements of a country to which it is exported. And sometimes these requirements are higher than recognized international standards. Therefore, any business that can meet these requirements can theoretically compete on European and world markets.
Today large agricultural holdings are most successful on this regard, since they have the necessary resources to ensure proper quality of their products.
However, if small and medium-sized agribusinesses get a boost for development, and this is quite possible with an appropriate political will, they will be able to enter European markets. Moreover, I am sure that the future of Ukrainian agricultural sector depends on small and medium-sized agribusinesses.