According to many local and western analysts, the cost of both commercial and residential real estate in Ukraine is close to its minimum. At the same time, taking into account forecasts about the growth prospects of the country’s economic indicators for the coming years, investments in the Ukrainian economy, including investments in real estate, can be quite financially justified.
It should be noted that some changes in the legislation of Ukraine, providing for the use of security legal structures in transactions, adopted over the last year, as well as the liberalization of currency legislation, which came into effect in early 2019, all of these are additional factors that can and should change the attitude of foreign investors to Ukraine.
So, where to start, if you are a foreign citizen, and decided to buy a real estate object in Ukraine? Based on our experience tracking such transactions the whole process related to the acquisition by non-residents of real estate in Ukraine, we divide into five nominal stages.
Due diligence when buying property in Ukraine
If you contact any real estate agency (even well-known and well respected) in order to find acceptable property, then probably the question of legal verification of such real estate will be relegated by realtors to the “background”, they may say not worry, when you make a deal, the notary will check everything. However, this is a categorically wrong approach to buying real estate in Ukraine.
If you have looked closely at the proposed property, and it generally suits you, both visually according to general characteristics (area, location, condition, etc.) and price, then it is extremely important for you to make sure that the object is legally “clean”. And this must be done before agreeing on the structure of the transaction, the final price, and taking any formal actions to make a purchase, for example, receive the taxpayer identification code, open an account in hryvnias or a currency bank account in Ukraine, and even more so transfer to such an account funds from abroad for the purchase of real estate. Sometimes, feeling your interest, at this stage you may also be offered to sign a so-called contract of deposit so that the property “does not go away”.
You should not do this, at least, as long as you are not exactly sure that the property you want to purchase does not have legal flaws.
First, if you still take the risk and refuse a reasonable legal verification of the asset you are interested in at the initial stage, and then the notary public examines the circumstances that impede the transaction when checking public registries, then you will lose time and may incur the costs associated with preparing to a deal that you will not be compensated for.
Secondly, you should not fully rely on the notary check, since it is carried out only in a number of registers and will not be complete. Yes, the notary will be able to confirm that the circumstances preventing the transaction are absent and it can be concluded at the moment. But since such a check is done “truncated” exclusively on state registries to determine whether there are registered prohibitions (restrictions, encumbrances) on the parties to the transaction and on the subject of the transaction, this is not a complete legal analysis of the object.
For example, the notary will not check the court registers regarding the existence of legal disputes related to the parties of the transaction. But the property you are buying may be subject to a dispute with third parties. In this case, of course, it is important to familiarize yourself with the materials of the court case in order to understand the legal perspectives of the dispute and correctly assess the legal risks of a purchase. After all, there are cases when the buyer’s carelessness leads to the need for his direct participation in litigation for the acquired property on the claims of third parties to reclaim such property from someone else’s illegal possession or to recognize the sales contract as invalid with ambiguous judicial prospects.
Thirdly, if you are persuaded to sign a deposit agreement to confirm your real intention to purchase real estate, refuse, and better confirm such an intention with real actions aimed at making a purchase. Despite the fact that realtors, following their stereotypes in their work, as a rule, recommend concluding such agreements, at present, a uniform court practice has been formed on this issue at the Supreme Court level. In particular, the position of the courts is to ensure that while no agreement was reached between the parties on all essential terms and signed in due form the contract of sale of real estate, contract of deposit can not be concluded, much less a deposit to secure non-existent obligations. This means that if you agree to sign such a contract, transferring some amount of cash as a part of future payment, in the future if the seller refuses to sell you real estate, you will have the right to demand only the amount that you unreasonably transferred to him, and not a deposit in double size. Thus, the conclusion of such a contract on the deposit in no way protects you as a buyer in the future and can only create a lot of inconvenience and lead to additional expenses.
Let’s turn to due diligence procedure
The volume of legal due diligence primarily depends on the specific nature of the asset (real estate – land, house with land, separate building, apartment, office; corporate rights to a business entity that owns the real estate object, etc.), as well as ownership history of such an asset (in which way was acquired the right of ownership, for example, through privatization, construction, purchase; was it the only owner, or the owners changed, if, yes, how long ago (did the limitation periods expire) and on what basis was the ownership of the assets acquired, or there are no registered owners at all, since the object is sold as an investment at the construction stage).
In any case, during the legal inspection of the object, the state registration of ownership of the object will be checked, and title documents on real estate will be studied and given a legal assessment for any legal defects or doubts. That is, in this case, the fact that the current seller has previously acquired the asset that is now selling is subject to verification. For example, if the title document is a court decision, even if it has entered into legal force, you should familiarize yourself with the case file and give a legal assessment of this decision and the circumstances in which it was taken in order to avoid unpleasant surprises in the future.
If you intend to purchase investment property at the construction site, the developer’s documents for the right to use the land, construction permits, as well as the legal mechanism for selling the real estate under construction and the documents that the developer will offer to sign to a non-resident investor will be subject to legal verification.
If the subject of the transaction will be corporate rights (share in the authorized capital of a legal entity), then, of course, the scope of legal due diligence will increase significantly, as it will be necessary to additionally check the legal entity (corporate documents, legal, accounting and tax due diligence of its activities).
Further, of course, information on all available state registries will be checked and evaluated for the presence of registered bans (restrictions, encumbrances) on the seller and on the subject of the transaction, open enforcement proceedings against the seller, as well as on the presence of legal disputes.
Also, the object will be checked as to which persons are registered in it and whether there are minors among them whose rights may be violated during the sale of the object. Accordingly, such circumstances will be given a legal assessment.
In addition, it is necessary to check the asset for the presence (or absence) of the current obligations of the owner under contracts related to its operation. In particular, the presence (or absence) of debt on utilities, for cold and hot water, heating, the use of electricity and so on.
If the legal assessment of the object confirms the absence of legal defects that may impede the future transaction, as well as legal risks that may arise in the future after the purchase, then you may proceed to the second stage.
Structure of the transaction for the purchase of real estate and the essential conditions for the purchase of the property
We proceed from the fact that due diligence did not reveal any significant legal deficiencies in the facility, and the real estate price suits both parties.
Therefore, at this stage you have to come to an agreement with the seller of real estate on a number of important conditions related directly to the implementation of the transaction, in particular, regarding the settlement procedure and currency of payments.
Previously, the majority of real estate purchase and sale transactions, if not taking transactions with cash payments, were made on the trust of one of the parties, since there were no corresponding legal structures in the legislation that would allow to observe the principle: “delivery versus payment”.
At the same time, regulations that allow the use of an escrow account contract as a mechanism to ensure the fulfillment of payment obligations against delivery have been adopted. The essence of this security mechanism is that the buyer opens an account with a special legal regime (escrow account) in the bank agreed by the parties, which transfers the agreed amount (usually equal to the property value). The seller is the recipient of funds from such an account, but he can receive funds from such an account only by providing the bank with documents confirming the fulfillment of his obligations in favor of the buyer, for example, transferring real estate to the property. All control functions for verifying the fulfillment of obligations by the seller in this mechanism are performed by the bank.
Thus, the risks of both parties associated with the sale of real estate and its payment, while using the escrow account agreement, are minimized. Note that the banking legislation explicitly states that the legal mode of escrow accounts is applicable for real estate purchase and sale transactions. Therefore, we recommend using this legal framework.
According to the national legislation, when concluding real estate sale and purchase agreements, only non-cash payments using bank accounts are allowed, that is, the buyer is not entitled to make payment under the agreement in cash.
As a general rule, on the territory of Ukraine, all payments must be made in UAH.
At the same time, the national legislation provides for certain exceptions that allow payment in foreign currency (in the future we will speak about the foreign currency of the 1st group of the relevant Classifier, that is, US dollars or euros).
Thus, non-resident investors can pay in foreign currency when investing in investment objects in Ukraine. It should be immediately noted that the operation to acquire a property in Ukraine by a foreign citizen falls under the definition of an investment, and such a person has the status of a non-resident investor.
According to banking legislation, a non-resident investor has the right to open a currency escrow account in a bank in Ukraine for investment purposes, including real estate payments, and the resident individual, in turn, has the right to open a current currency account to which funds can be credited from the sale of real estate to a non-resident investor.
Thus, the legal regimes of bank accounts, in particular, the currency escrow account of a non-resident investor (buyer) and the current currency account of a resident individual (seller) allow a non-resident investor to transfer currency from abroad directly to their currency escrow account opened in a bank in Ukraine, and then from such an account, payment for real estate under a purchase and sale agreement to the current currency account of a resident individual (seller).
It should be said that other combinations with accounts are available for a non-resident investor. In particular, opening a currency investment account or a current currency account, but this does not make sense, since then a non-resident will need to make additional bank transfers from one account to another and, possibly, pay additional bank fees. In addition, there are restrictions in the legal regime of such accounts. Non-resident individual cannot transfer funds from a current account in a foreign currency to his escrow account in a foreign currency, but it is possible to transfer funds to an investment currency account.
Of course, the option of transferring funds in foreign currency to an escrow account in a Ukrainian bank (without intermediate bank transfers in Ukraine) looks optimal from any point of view.
The option with payments for real estate in UAH can be also considered. At the same time, if, for any reason, the transaction does not occur, the non-resident will suffer substantial losses related to bank commissions, first when selling foreign currency and then back when buying it for the purpose of returning abroad.
Therefore, it is logical to carry out a transaction for the purchase of real estate in foreign currency.
If agreement is reached between the parties, and they agree to use the escrow account agreement and conduct the transaction in foreign currency, you can proceed to stage three and four, which can be implemented in parallel.
Formal procedures when buying property by a non-resident in Ukraine
At the third stage, all the formal procedures necessary for conducting the transaction in the future are carried out.
Obtaining a registration number of a taxpayer’s registration card in Ukraine by a foreign citizen
In order for a foreign citizen to have the opportunity to be a party to a real estate purchase transaction, he must receive a taxpayer identification code, which is assigned by the appropriate state fiscal service authority.
In general, such a identification number will be needed by a non-resident not only to participate in the transaction, but also to open an escrow account (or other accounts) in banking institutions in Ukraine, conduct business activities in Ukraine, employment (obtaining employment rights), training and etc.
A non-resident can obtain a tax number independently or by entrusting it to an authorized person. To do this, the appropriate body of the state fiscal service shall submit an application in the prescribed form and a passport of a foreign citizen with a translation into Ukrainian with the signature of the translator notarized, as well as a notarized copy of such translation (if the documents are filed by a representative, then the corresponding power of attorney for the representative, notarized is to be attached).
Determining the market value of the property (Real estate valuation)
Under national law, the sale of real estate can not be carried out at a price below the market. To confirm the conformity of the value of the property agreed by the parties with its market price, expert valuation by certified appraisers is required.
The validity period of the expert valuation is indicated in the report. In any case, it may not exceed 6 months from the date of the valuation, subject to the report having been entered by the appraiser in the official register.
The market price of real estate from the appraisal report is indicated in the real estate purchase and sale agreement, and the notary when verifying the transaction is obliged to check the availability of information about the report in the official database.
The absence of a real estate appraisal report or data from such an appraisal report in the official database will be the basis for the notary’s refusal of the notarization of the transaction and its state registration.
Consent of Commission for Minorities
In the event that minor children are registered in the property (apartment) and the seller does not have any other housing, then the seller must additionally receive the appropriate permission to sell the property (apartment) from the Commission on Minors (they act with local authorities). It should be noted that this procedure may take more than one month.
Approval of a notary who will conduct all registration actions related to the transaction
It is advisable to decide on the notary’s candidacy in advance.
Since the escrow account transaction is complex and requires careful study of documents and a sequence of registration actions, the notary should be involved at the stage of agreeing all conditions and procedures, not to mention the fact that it is important at this stage to agree on the drafts will be signed by the parties.
In addition, the notary may prefer to pre-check the parties and the object in all public registries to ensure that there are no legal obstacles to the transaction.
Consent of one of the spouses on the alienation of real estate
In that case, if the property is framed on one of the spouses, but it is their joint property (acquired in marriage at the expense of the family), before the transaction is necessary to obtain the consent of the other spouse for alienation of property, certified by a notary.
Determination of the bank that will conduct all operations related to the implementation of the transaction
Since the mechanism for the implementation of the transaction requires the direct participation of the bank, yes, and not all banks in Ukraine work with escrow accounts, you should seriously consider the question of finding a suitable banking institution. And the search for such a bank is desirable to do at the stage of resolution of all preliminary formalities, so as not to lose time later.
Matching escrow operation conditions with the bank draft contract for the sale of real estate and opening a conditional storage account (escrow)
If a bank that is ready to service operations on your transaction has been found, then before preparing draft agreements, you should meet with the banking performers, who are technically responsible for the support of banking operations.
At such a meeting, it is desirable to discuss the principal provisions that must necessarily be included in the contract of sale of real estate and the contract for opening an escrow account, in particular, amounts, terms of escrow, bank rights, and other material conditions.
It is also immediately necessary to determine and agree which of the documents will become the basis for the bank when transferring funds from an escrow account in favor of the seller of real estate. Since banks are scrupulous about taking control functions and responsibilities, especially in customer operations, it is important that the document on the basis of which the bank can unblock an escrow account in the future should be subject to a formal assessment of the availability of necessary information.
In real estate transactions, the best document for the purpose is to extract real rights to immovable property from the state register of registration of ownership of a nonresident buyer. This is an official document that is available in the public register, and if the transaction is successful, then neither the seller nor the bank may encounter any obstacles to receiving this document. Thus, the seller is guaranteed to receive funds placed by the buyer on the escrow account.
If the parties and the bank have previously made progress in agreeing on all the essential terms of the real estate purchase and sale agreement and the escrow account opening agreement, you should start drafting such agreements. And it is important not to forget, to agree them in advance also with the notary who will accompany the transaction in order to take into account all his wishes.
Yes, and if the bank has already performed operations with escrow accounts, ask him for a sample of such a contract so that when preparing a draft contract for opening an escrow account, use that version of such a contract that will fully comply with standardized approaches to contracts approved the bank.
If the parties, the bank and the notary have agreed on the drafts of all the documents, as well as all the formal permissions and consents for the real estate transaction, then you can proceed to the procedure of signing contracts and closing such a transaction.
Signing contracts and closing a deal of buying a property in Ukraine
First, one should sign a contract for opening an escrow account (escrow), on the basis of which a non-resident investor will open an escrow account in foreign currency. This contract can only be signed between the buyer and the bank or with the participation of the seller.
The procedure for opening such an account to a non-resident investor is governed by the relevant bank instruction. In any case, this technical procedure will take several days (provided that the non-resident investor submitted all the documents required by the bank).
If the escrow account is open, a non-resident investor can transfer funds from abroad. When funds are credited, the seller should have no doubt that the buyer does not plan or can not pay for the property.
Secondly, the payment of income tax (if paid), the war tax (if paid), the Pension Fund tax, the notarization fee for the sales contract, the administrative fee for notary registration actions and the notary fees.
According to statutory tax rules on personal income (PIT), the military fee and payment to the Pension Fund are paid before signing the transaction at the notary (the notary must check for receipts of their payment before the transaction is made), and all other costs – on the day of the transaction, but not necessarily before signing it.
When selling real estate, the personal income tax payer (5% of the price of real estate) and military tax (1.5% of the price of real estate) is a real estate seller. It should be noted that tax legislation establishes exceptions and, under certain circumstances, income tax and war tax are not paid. Accordingly, this question is clarified at the very beginning, when it is known which subject matter of the transaction.
The obligation to pay the Pension Fund tax (1% of the price of real estate) is legally assigned to the real estate buyer.
The rest of the costs associated with the execution of the transaction, including the cost of notary certification of the contract of sale of real estate (1% of the price of real estate), are divided between the parties equally or as agreed.
Third, if all of the above is done, then on the appointed day the notary forms all necessary extracts from the state registries to make sure that no formal circumstances have arisen that interfere with the transaction on the day of the transaction, verifies the capacity of the parties (powers of their representatives). After that, the parties can sign a contract for the sale of real estate, the notary certifies the signatures of the parties, registers the purchase and sale transaction in the state registry, and then, at the request of one of the parties to the contract, registers the ownership of the property in the state registry for the buyer. Since then, a non-resident is considered the owner of the property.
Fourth, if the transaction took place and the ownership of the property is registered in the state register for the buyer, the notary at the request of the seller or the seller independently, as a rule, on the day of the transaction forms an extract from the state register of real rights to real estate about the registration of property rights for the non-resident buyer.
After that, the seller submits to the bank, in which the escrow account is opened, a statement in the form established by the bank and attaches the specified extract from the register to it.
From practice, the bank only needs one working day (unless otherwise specified in the contract for opening an escrow account) to verify the documents submitted by the seller and transfer funds to the seller’s account.
Fifth, becoming the owner of the property and accepting the keys to the doors to the premises, the non-resident is obliged to ensure its proper maintenance. To do this, without delay, you must sign a contract for the provision of utilities with a service organization (usually a private housing office), as well as a contract for hot and cold water supply, heating and the provision of real estate with electricity.
If you have gained patience and have read this article to the end, then it is safe to say that you are generally familiar with the procedures that a non-resident buyer faces when buying property in Ukraine. And now it’s up to you to decide whether you want to do it on your own, or still with the participation of an experienced external consultant.
Artur NONKO, Ph.D., managing partner of «Legal Consulting Center»
Legal consulting on raising funds in housing construction and non-residential real estate (investment)
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