In March this year, a group of People’s Deputies registered a draft law “On amendments to the Land Code of Ukraine and some other legislative acts on counteraction to raiding” No. 8121 (hereinafter referred to as “Project No. 8121”), which proposes to amend many regulations, in particular in the areas of land relations and state registration of rights to immovable property.
One of the new provisions of the said draft is a proposal to introduce the possibility for an owner of immovable property to establish requirement for notarization of contracts, whose subject matter is such property. Implementation of such a mechanism will be in the formulation of the relevant requirement as a unilateral transaction that will be subject to notarization, followed by its registration as encumbrance of the relevant property in the State Register of Real Rights to Immovable Property.
Considering the requirement of notarizing contracts concerning immovable property as an additional anti-raider mechanism, it should be noted at the outset that the current legislation already establishes the obligation to enter into contracts on alienation of immovable property (under which the very transfer of ownership takes place) in writing and the mandatory notarization of such contracts (Article 657 of the Civil Code of Ukraine).
That is, the possibility of establishment and state registration of the requirement of notarizing contracts concerning immovable property may have a certain benefit solely in the context of registration of legal relationship in the use of land plots. Regarding other immovable property, the problem of raidership in the relationship of use is not so acute, primarily because lease for the use of residential or non-residential premises is more proportionate in terms of the amount of benefits that the lessee derives from the use of such premises, in comparison with the amount of lease for land and possible profits from its use.
The current legislation allows concluding land lease agreements and supplement agreements to them in plain writing. Such a degree of freedom in the registration of lease relationships often leads to abuses in the form of termination of state registration of lease rights on the basis of “questionable” supplement agreements on termination of lease agreements, drawn up in plain writing, as well as the parallel existence of several valid lease agreements concerning the same land plot.
A striking example of such abuses is the termination of land lease rights by unscrupulous previous owners of agrarian enterprises after the sale of corporate rights to such enterprises, with simultaneous registration of lease rights to the same land for another controlled company. In the vast majority of cases, the grounds for termination of lease rights are agreements on termination of lease agreements concluded earlier or concluded “with open date”.
Today law provides for the possibility of notarizing any contract at the request of one of the parties (part 4 of Article 209 of the Civil Code of Ukraine), which is somewhat similar to the proposed mechanism. However, such a possibility will have much less effect in the case of combating raider capture of land, since the notarial form of the lease agreement, as practice shows, does not always prevent illegal state registration of termination of the relevant right and does not prevent registration of the lease right by a raider enterprise on the basis of another agreement drawn up in simple writing.
In case of establishing the requirement of notarizing agreements concerning a land plot, the state registrar, having regard to the existence of such a requirement in the State Register of Real Rights, will be required to refuse to register the lease right by a third-party enterprise on the basis of the agreement in plain writing.
In addition, Draft No. 8121 proposes to supplement provisions of the Law of Ukraine “On the State Registration of Real Rights to Immovable Property and Their Encumbrances” with the principle of concurrent implementation of the notarial act and state registration of rights. That is, in the case of establishing a requirement for notarizing agreements by the land plot owner, state registration of real rights (or termination of such a right) will be conducted by a notary at the time of notarization of the relevant agreement, which effectively eliminates the possibility of interested parties to “put aside” certain documents and to carry out their state registration later.
It is also to be expected that as a result of the establishment of the requirement of notarizing agreements concerning a land plot, the vast majority of notaries will, at the stage of preparation for the agreement, refuse to notarize a new lease agreement if a properly registered and valid lease right can be found in the State Register of Real Rights.
However, in spite of all the possible benefits of the proposed changes, the integrity of land plot owners as a party to lease relationship remains the main condition for the effectiveness of the proposed mechanism, since even if there is a requirement for notarizing lease agreements, the possibility of concluding several concurrent agreements will remain in case of the owner’s respective will.
Thus, the adoption of the changes proposed by Draft No. 8121 may contribute to solving the problem of abuse in the field of land lease relationships, but it should be borne in mind that the transition to notarization of all these relationships will entail a significant increase in the costs that will be predictably borne by lessees, given the difficult property situation of the overwhelming majority of land owners (shareholders).
Yuri Mosunov, Associate, Dispute Resolution practice, exclusively for “Yurydychna gazeta”