How to invest in real estate during martial law?
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The war drastically changed the Ukrainian business climate and had a significant impact on the construction and real estate sectors. With the beginning of the active phase of military aggression of the Russian Federation against Ukraine, the Ministry of Justice closed access to most state registries for security reasons. It was impossible to register ownership of an apartment, house or premises.
Now we can observe the first attempts at economic recovery and even some shifts in the investment direction. In real estate we are seeing a change of focus on the western regions of Ukraine. Many expect explosive growth in housing and commercial properties in the near future. In response to demand, legal mechanisms for real estate transactions under martial law have been developed. Not all are safe, and most of the tools we are familiar with have new caveats.
The Ministry of Justice is gradually restoring access to the State Register of Immovable Property Rights, but with many caveats and prohibitions. Not every notary, and not in all areas of Ukraine, can conduct registration actions, there are nuances to registration of contracts and powers of attorney. We know all the innovations and peculiarities, and in this publication we will explain the basic legal aspects of buying real estate in the new conditions.
Who can certify the real estate contract of sale?
Real estate contracts should be certified by state or private notaries, but during martial law the Cabinet of Ministers of Ukraine by its Resolution No. 209 limited the range of persons who can be addressed on this issue. Now there is a list of persons who have the right to conduct registration actions. Moreover, with regard to a particular person in such a list, there may be restrictions of authority. A notary can be in the list but have a ban on state registration of real estate rights, we know such examples.
After the notary certifies the agreement, he (she) makes corresponding changes in the State register of real estate rights: after the purchase of the property you must be registered as the new owner of the object. If the notary does not have access to the register, then the contracts certified by him/her will not be registered even in the future. Therefore, in practice, we recommend that you be especially careful when choosing a notary.
The restrictions described here are most likely to be in effect under martial law and for a month after it ends, unless the Cabinet of Ministers of Ukraine changes the rules for transactions. We, for example, monitor for our Clients all the innovations in real time and cooperate with a list of trusted notaries.
Our firm was addressed by Clients who wanted to evaluate risks related to investment in residential real estate that was being built by a certain constructor.
The Client required not only the professional analysis of contract but also a comprehensive evaluation of risks.
In order to find out whether the constructor has all the documents that are required for beginning of construction process our expert visited the constructor and examined the following documents:
- Land rental agreement;
- Land ownership state certificate;
- Construction license of the constructor;
- Permit for construction works beginning;
- Project documentation based on which the constructor obtained the permit for construction works beginning.
All the required documents were present and in compliance with the requirements of legislation.
But the very investment contract included some risks related to possible increase of object’s cost. This is why we suggested the Client to insure possible risks.
Our advice allowed the Client to make sure that there are no risks related to formalization of construction. And he made the decision to sign investment contract. It should be mentioned that the Client decided not to insure risks related to possible increase of object’s cost.
Can I buy real estate throughout Ukraine now?
The Cabinet of Ministers determines the list of areas for which access to state registers and registration actions is prohibited. This list is constantly changing, so it is recommended to check the changes as of the time when you decide to buy real estate.
As of 05.05.2022 the list of territories with closed access includes Donetsk and Luhansk regions, some districts of Zaporizhzhia, Mykolayiv, Kharkiv and Kherson regions, Crimea and Sevastopol city.
Do I have to go to the notary at the location of the property?
As a general rule, you can apply to a notary in the area where the property is located. If the immovable property is located, for example, in Kyiv, you can apply to a notary with an office registered in Kyiv, or at the place of registration of the parties to the agreement. For example, we know notaries who have already resumed their work in Kyiv and other regions of Ukraine.
Remember that the notary must be included in a special list, which is constantly updated and published on the website of the Ministry of Justice of Ukraine!
What additional restrictions apply under martial law?
There are restrictions on the conclusion, amendment or termination of contracts for the sale of real estate by proxy: the owner of the property must be directly involved in the conclusion of the contract. For a buyer, this rule does not apply – you can execute a power of attorney.
You will not be able to sell the acquired real estate within a month of purchase (if it does not concern the inherited or divided common property), you will not be able to register real estate as a contribution to the authorized share capital of a legal entity.
It is impossible to register the title to the real estate that belongs to you after you withdraw from the legal entity. In practice, we know that the mistakes will result in a large number of court disputes in the future.
If in peacetime any person could check information about the owner of the real estate in the State register of rights to real estate, now the access to the register is difficult: only listed local notaries and state registrars are able to provide information upon your request. We can organize such a check.
Under martial law, the notary refuses to certify transactions to citizens of the Russian Federation (except for those legally residing in Ukraine) and legal entities registered in the Russian Federation, or having beneficiaries or members, both citizens or legal entities of the Russian Federation, having a share of 10 or more percent. Therefore, before concluding an agreement, it is necessary to carry out a detailed check of your counterparty.
Investing in construction in Ukraine: New aspects
Construction is resumed in regions where there are no military operations, but not all pre-war investment options are available to the investor. We know that real estate developers are still offering simple written investment agreements that do not require registration at the real estate registry.
As always, we must caution that simple written real estate investment agreements ( which promise to build a home, which you can then register for yourself), is almost the most dangerous investment option, and requires careful analysis. In the case of preliminary notarial contracts, you need to take into account the current limitations discussed above.
Read about the general risks and peculiarities of investing in new buildings here and here.
If you want to invest in real estate through co-investment institutions (CIIs) or construction financing funds (CFFs), keep in mind that they are now subject to significant regulatory restrictions. The National Securities and Stock Market Commission has partially allowed operations with the assets of ICIs, FSFs. Now they can operate only in western regions of Ukraine. Therefore, before investing through specialized institutions, it is advisable to seek professional legal advice.
Particular attention should be paid to the analysis of the real estate developer! Many companies are now citing force majeure circumstances, and thus can defer debt repayment, trying to survive. Therefore, obvious problems and defaults of real estate developers we will be able to see after the war, and the question of the stability of the real estate developer can become a “time bomb”. In our practice, we have developed mechanisms to identify the “markers” of a problematic real estate developer.
The secondary real estate market in Ukraine: What are the risks?
You can read about general secondary market property verification issues here, and we covered the nuances of notarization above. Next, we will talk about the specific wartime risks.
First: Do not buy real estate without a notarial deed – no preliminary agreements (if we are talking about secondary housing), pledges of property rights, trust ownership rights, lease contracts with an obligation to alienate in the future, letter of intent, loan agreements with the obligation to sell the apartment instead of returning the debt. Only a notarial agreement and registration of ownership in the registry immediately after the signing of the agreement and settlement.
Second: Do not conclude contracts with the seller’s representative by proxy. Fake powers of attorney are a very common practice. Moreover, we wrote above about the general prohibition on selling by proxy.
Third: Be careful with real estate that is sold by an heir. Falsified wills, the threat of litigation, illegal notarial actions with the inheritance, the inability to verify litigation (because access to the registry is closed) make this option quite risky.
Fourth: Check the seller – whether there are general signs that he or she is under the influence of dire circumstances. Simply put, if, for example, the last house in the family is sold for less than market price, then the seller will be able to appeal against the sale in court under Article 233 of the Civil Code of Ukraine (as a contract that he would not have entered into under normal circumstances). In this case, you will lose the purchased property with dim prospects of getting back the money paid for it.
What are the prospects for the real estate market in Ukraine?
We see that the real estate market is recovering and will develop rapidly. The number of residential and commercial transactions is increasing, as is the volume of legal work.
Compared to the pre-war state, investing in real estate has generated more legal risks and requires deep analysis of counterparties, legal schemes, and dynamic legal regulation. That is what we focus on with our Clients.
What do we offer?
Our company is aware of all the innovations of law and practice and offers enhanced due diligence mechanisms. You do not need to go deep into the Cabinet of Ministers regulations, look for the lists of allowed areas and reliable notaries, check if this real estate developer even has the right to sell the property now, and what power of attorney was brought to the notary by its representative.
Despite all precautions, buying a property can be legally simple and safe, we will organize the whole process. Many years of experience allow our Clients to conduct active operations in the real estate market, regardless of any circumstances.
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