State Registration of Special Property Rights for Real Estate Objects to Be Constructed in the Future

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The enactment of the new Law of Ukraine "On Guaranteeing Property Rights to Real Estate Objects to be Constructed in the Future" brings about significant changes in the real estate sector. The law is aimed at safeguarding rights to properties under construction and future real estate objects, introducing specific provisions for their legal transactions.

These innovations are intended to protect investors' property interests during construction projects. Therefore, during the auditing of primary real estate, we always focus on the developer's acquisition of the right to conduct construction activities and scrutinize the funding mechanisms to ensure compliance with prevailing legislation. For our clients, whether they are construction customers or developers, we strive to elucidate the key requirements of the law and the new regulations that become mandatory for Ukraine's construction market.

Property Rights to Unfinished Properties: Division of Objects

The law delineates the division of properties intended for future construction into divisible and indivisible categories. Let's delve into each one more closely.

What constitutes an indivisible residential property under construction?

An indivisible property under construction refers to real estate that will be constructed in the future (a house or building), with no other real estate objects included within its composition. Such indivisible properties can be classified into two categories:

  • Indivisible residential properties (comprising units for habitation).
  • Indivisible non-residential properties (encompassing structures like office buildings or engineering facilities).

Divisible Object of Unfinished Construction

Within the divisible object, there are provisions for at least two future real estate units. A future real estate unit is a segment of the unfinished construction project outlined in the project documentation. Upon completion of the primary construction, this segment will become an independent real estate asset eligible for property registration.

To simplify, consider planning the construction of a multi-apartment building. The project design already specifies that one segment will be designated as an apartment or another residential unit, while another segment could serve as a garage or any other non-residential space. Future real estate units are categorized as follows:

  • Those designated for residential purposes (apartments and other residential units).
  • Those intended for non-residential use (garages, other non-residential spaces).

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Construction Financing in Ukraine: Purchase and Sale Agreement and Its Audit Specifics

Clients of construction projects, developers, and construction financing management funds can raise funds for construction in accordance with current legislation through the signing of a purchase agreement, though not exclusively through this method. Such agreements are made between investors and clients or developers. Clients of construction projects can be either individuals or legal entities, while developers must be legal entities.

These agreements have several features stipulated by law, with a clear delineation of rights and obligations for each party. Therefore, during the auditing process, it's crucial to pay attention to these specifics, as failure to reach an agreement on all essential terms of the contract could render it unenforceable according to the law. Another critical aspect is the transfer of property rights from the seller to the buyer. Typically, such rights are transferred after the buyer has fully paid the amount specified in the contract. However, parties may agree to transfer these rights upon partial payment, in which case the property rights will be encumbered.

Regarding deadlines, the law sets clear timeframes for refunding funds in case of contract termination, which is 60 days. Similarly, deadlines for refunding excess payments made during the final survey of the property as a result of technical inventory also amount to 60 days from the date of state registration of property rights. However, the deadline for the buyer to make additional payments to the developer for increased areas during the final survey of the property, as a result of technical inventory, is determined at the discretion of the parties.

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Concept of Warranty in Construction and Sale of Special Property Rights

In the context of construction and the sale of special property rights, the concept of a warranty has been introduced. The purpose of this warranty is to ensure the possibility of completing construction projects by other parties in the event, for instance, of the construction client's bankruptcy or financial difficulties. The minimum size of the warranty portion is determined as follows: 10% for Kyiv, Dnipro, Lviv, Odesa, and Kharkiv, and 5% for other populated areas.

This percentage is calculated based on the total area of future real estate objects within each construction phase or launch complex. Consequently, until the objects included in the warranty portion are put into operation, they cannot be transferred or sold to other parties. This implies that the construction client or developer cannot dispose of future real estate objects that are part of the warranty portion until construction is completed and these objects are put into operation.

If the construction client decides to change the construction project from an indivisible object (such as a hotel) to a divisible one (a hotel with apartments), this is possible, taking into account the following aspects: by amending the project documentation and specifying independent real estate objects for which special property rights will be acquired.

If a special property right was registered for an indivisible object, it is terminated and re-registered for the divisible and future real estate object. Subsequently, encumbrance registration on the warranty share follows.

Conversely, if the client decides to switch from a divisible to an indivisible object, it's crucial to analyze whether the object includes future real estate objects that have already been alienated, held in trust to secure obligations, or encumbered with real rights. 

This is essential from a legal standpoint to ensure clarity and stability regarding the legal status of real estate objects during construction. In such a case, the special property right to the separate object and the Minimum Obligatory Norm are terminated, as well as the encumbrance established by the warranty.

If several individuals held registered special property rights to a divisible object, they must enter into a notarized agreement determining their shares in the unfinished construction project before registering the special property right to an indivisible object. However, it's crucial for such changes to be reflected in the relevant legal documents and correctly registered according to legislative requirements.

Upon the request of an investor or a construction client/developer, we are prepared to offer the following services:

  • Conduct an audit of the legal framework for investment attraction.
  • Prepare documents for the registration of special property rights.
  • Facilitate the transition of special property rights from an indivisible to a divisible object of unfinished construction, and vice versa, including all necessary registration procedures.
  • Draft a comprehensive purchase agreement for future real estate objects, ensuring compliance with all legal requirements and conditions.

By choosing us as your legal partner, we assure you of expert support in every aspect of this complex process, ensuring peace of mind and legal confidence.

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Publication date: 06/02/2024

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