New Opportunities for the Land Reform
After the recent presidential and parliamentary elections, the Internet was full with the news about the plans to establish the agricultural land market in Ukraine until the end of 2019. In this regard, it is relevant to analyze the risks and preparatory measures required for the efficient implementation of land reform.
Historically, the moratorium on sale of agricultural land has been extended several times, the last time – until 1 January 2020. While its deadlines are being constantly changed, resulting in legal uncertainty, the moratorium is now perceived as virtually unlimited.
One of the main grounds which guided the legislator when extending the moratorium once again was to prevent the potential threat to the national and food security, as well as to prevent Ukrainian citizens from being deprived of land. The mentioned grounds that supposedly inhibit the opening of the land market are complemented with the loud statements by opponents of lifting the moratorium. Their argumentation is based on the fear of excessive concentration of land in the hands of foreigners or individuals who have no interest in the development of farm sector, as well as the fear of land degradation due to its poor handling or because of the lack of such handling at all.
But due to the actual existence of the shadow (illegal) land market and the loss of tax revenues by the state budget, the issue of lifting the moratorium is becoming more and more urgent. Firstly, land reform will contribute to the consolidation of land, now dispersed into small and unprofitable land plots. Secondly, the cost of land and therefore the cost of its lease will increase. As a result, landowners will be able to receive a stable competitive income from their property or dispose their land plot on favorable terms. In addition, the assumed economic effect of the lifting of the moratorium indicates the possibility for the introduction of free turnover of agricultural land.
At the same time, the transition to an open land market is possible only through the adoption of the necessary package of legislative acts to ensure the phased and complete transparency of such a transition.
Balance of Interests
It is believed that due to moratorium, large agricultural companies are in an extremely favorable position, because they lease the land from villagers at low rates. However, the opinion of the agricultural companies is the opposite: management of numerous lease agreements portfolio, the need for its constant renewal, uncertainty of the status of contracts (particularly in connection with hereditary issues) where lessors are the elderly, etc., significantly complicate operations and increase costs for companies.
The situation is also worsened by the threat of raiding the leased land, most often through groundless registration actions with the use of forged documents and for the lack of control of lease agreements, and as a result – protracted litigation aimed at identification of the legal owner. Thus, changing the status from the tenant to the owner will contribute to the protection of rights and increase the interest of agricultural holdings to invest in improving the quality of land and soil on a long-term basis.
Additionally, opening of the land market will help to attract foreign investment to Ukraine, as it will set up a predictable legal environment and effective mechanisms to ensure fulfillment of obligations for foreign investors.
After the moratorium is lifted, it will be possible for the owners to pledge agricultural land and accordingly to attract mortgage loans since the land will be used as collateral. Now it is quite complex and unprofitable for farmers to receive funding from banks: due to the illiquidity of agricultural land, loans are usually provided against the further harvest, which is of high risk for both parties.
The European Court of Human Rights (the “Court”) also pointed to the unsatisfactory legal situation in this area. Thus, in its decision dated 22 may 2018 in the case Zelenchuk and Tsytsiura vs Ukraine, the Court stated that having imposed legal restrictions on owners of agricultural land Ukraine has gone beyond the limits of the given wide freedom of discretion and therefore violated the applicants’ right to peaceful possession of their property. Although the court did not award any compensation (other than court fees) to the applicants, there is a significant possibility that if the state further ignores the legal position of the Court and fails to take immediate action to remedy the situation, subsequent applicants in similar cases will be awarded with such compensation.
It is clear that the very fact of violation of the European Convention on Human Rights by Ukraine without reforming domestic legislation cannot be considered as granting permission for the free circulation of agricultural land (the legal position set out in the Decision of the Grand Chamber of the Supreme Court dated 15 May 2019 in the case No. 227/1506/18). Consequently, the development of the necessary legal acts for the introduction of agricultural land into economic circulation should now be a priority.
Ways to reform and preparatory measures
Attempts to solve the problem of the lack of an open land market in Ukraine are undertaken since 2016. In particular, the draft laws on turnover of agricultural lands were registered (No. 5535 dated 13.12.2016 and No. 5535-1 dated 28.12.2016), which, however, are still pending. Some options to reform this sector were also put forward by the specialized executive authorities – the State Service for Geodesy, Cartography and Cadastre and the Ministry of Agrarian Policy and Food.
It should be noted that almost all of the proposed legislative changes stipulate a transitional period for the opening up of the land market. As a rule, it is proposed to allow citizens of Ukraine to purchase land at the first stage, territorial communities and the state at the second stage, and legal entities controlled by citizens of Ukraine – at the third stage. However, only one of the draft laws provides for the possibility of acquisition of land by foreigners.
We agree that in order to minimize the possible negative consequences of land reform and consider the interests of landowners, it is necessary to lift the moratorium gradually. So that the funds for the purchase of land plots that are currently leased are accumulated. However, in our opinion, the imposition of a complete restriction on the purchase of land in respect of foreigners is not reasonable, since the latter will restrain the flow of foreign investment into Ukrainian agribusiness.
Therefore, in order to establish market relations in the agricultural sector, we consider appropriate:
- at the first stage 1) to open the market in respect of agricultural lands of state and municipal property after carrying out the corresponding inventory, since as of today a significant part of such plots remains unregistered and is leased illegally, 2) to grant the right to buy agricultural land to citizens of Ukraine and legal entities registered in Ukraine (both with Ukrainian and foreign founders) exclusively for the purposes of agricultural production without the possibility to change the designated purpose of the land plot, 3) to limit the area of agricultural land that can be the object of sale;
- at the second stage, after market adaptation and price formation, it is possible to 1) open the market with respect to private property land, 2) to grant the right to purchase land to foreigners exclusively for agricultural production purposes with appropriate limitation of the area and without the possibility to change the designated purpose of the land plot.
All stages should be accompanied by ensuring the transparency of the land market by means of conducting online land auctions with a transparent procedure of this mechanism for the main bidders — Ukrainian villagers. Online auctions should be conducted using fair prices, in particular, for example, by setting the starting price for the sale of land at a level not lower than its expert monetary valuation under the legislation on land valuation. When developing the appropriate regulatory framework, it is also necessary to take into account the provisions of the Law of Ukraine “On Land Lease”, which establishes the preferential right of the tenant to purchase the leased land in the event of its sale.
In addition, for the land reform to be successfully implemented, it is necessary to regulate and introduce a procedure for the use and financing of common infrastructure, namely land reclamation systems, main canals and irrigation systems, which are now, in most cases, in state and municipal ownership, as well as the regulation of the use of woods and their renewal. In addition, it is considered essential to have an efficient cadastral service and the completeness of the cadastral register.
Considering the assumed positive effect, as well as the international obligations undertaken by Ukraine, the feasibility of introducing turnover of agricultural land is not in doubt. At the same time, such introduction should be carried out consistently and carefully, with a preliminary analysis of unacceptable risks and the adoption of measures to prevent the disposition of land below its fair price, uncontrolled redistribution of the land market and legal uncertainty.
Sergiy Benedysiuk, partner, head of corporate and M&A, Yulia Yanyuk, senior associate.