Security of creditors’ obligations is an effective tool developed to protect the creditors’ rights and to ensure the repayment of funds provided. That is why it is so important for banking institutions to decide on the most effective type of collateral before signing a loan agreement.
Given the recent changes as to opening of the agricultural land market, banks are allowed to acquire ownership of agricultural land by way of collateral foreclosure from July 1, 2021, with no area restrictions.
It is expected that with the entry of legal entities into the land market (from 2024), the price of land will only increase, thus making it a profitable asset, which could be sold by the bank without loss in price if necessary.
Currently, mortgages are the most common type of commitments security. However, the new mechanism, trust ownership, which has been recently introduced into Ukrainian legislation, is designed to protect the creditor’s rights.
Let’s figure out, what kind of collateral will minimize the creditors’ risk related to the repayment of bad debts and will be applicable to the security in the form of land.
A mortgage is a pledge of immovable property, at which title to assets remains with the mortgagor. Nowadays, namely, banks have the exclusive right to be mortgagees of the agricultural land. Please note that such right is not applicable to all financial institutions but to banks only.
Thus, a bank in the legislation of Ukraine is defined as a legal entity having the exclusive right to provide banking services under a banking license, information about which is entered in the State Register of Banks. Therefore, only the banks registered in Ukraine and having a license issued by the NBU will be able to get Ukrainian agricultural land as collateral.
Given that, unfortunately, foreign banks cannot accept agricultural land as collateral, as they do not meet the definition of “bank” under the Ukrainian legislation.
If the mortgage object is the right to use a third party’s land plot for agricultural purposes (emphyteusis) or for construction (superficies), the law allows the mortgagee to acquire such a right through fulfilling the main commitment or through the assignment of such a right to any person on one’s own behalf.
The bank, as the mortgagee, acquires the right to foreclose the mortgage object in case of breach by the mortgagor of its obligations under the mortgage agreement, non-performance/improper performance of the principal commitment by the debtor, as well as following bankruptcy or liquidation of the mortgagor.
Foreclosure on the mortgage object may be initiated on the basis of a court decision, a notarial writ of execution, or under the agreement on the satisfaction of the mortgagee’s claims.
Mortgage law also sets the mortgagee obligation to notify the mortgagor of the former’s intention to enter into an agreement of mortgaged property sale to comply with the pre-emption right to such property.
As to agricultural land, the legislation sets the bank obligation to sell the land plot, which is subject to foreclosure at the land auction, within 2 years from the date of acquisition of the respective property rights.
The sale price of the mortgage object is set by agreement between the mortgagor and the mortgagee, or on the basis of property valuation. By January 1, 2030, when selling an agricultural land plot, the price may not be less than the standard monetary value of such a land plot.
Unlike a mortgage, trust ownership can secure commitments only under a loan or credit. Both movable and immovable property can be transferred to trust ownership.
An important difference between trust ownership and mortgage is that the establishment of trust ownership involves the termination of ownership right to such property of a person transferring it (trust founder) and the acquisition of trust ownership on such property by the creditor (trust owner).
Despite the acquisition of trust ownership right as to the property by the creditor, the right of possession on such property transferred is somewhat limited, as it cannot be alienated or sold by the creditor until foreclosure on it. As to agricultural land, until January 1, 2024, such land cannot be transferred to trust ownership of the bank. The Land Code of Ukraine allows banks to acquire ownership of land only following relevant foreclosure as collateral. However, trust ownership is not classified as collateral, but as a kind of property right. Thus, the transfer of agricultural land to trust ownership can become an efficient security for credit commitments only from 2024.
When transferring land to trust ownership, a trust founder or another person, whose right of use is made legal under the Land Code of Ukraine may remain the user of such land. However, such use does not prevent satisfying the creditor’s claims, as the user loses the right to use the land from the date the notice on the trust owner’s decision to apply foreclosure on such land is received.
The trust owner has the right to foreclose on the trust property item if the debtor’s delay in performance is more than 20 calendar days, or the performance of part of the principal commitment is more than 30 days overdue. As is the case with a mortgage, if a debtor violates a trust ownership agreement, the trust owner may demand early performance of the principal commitment.
Moreover, upon receipt of the property in trust ownership, the bank does not risk losing such property in the event of bankruptcy/liquidation of the trust founder, as such property is not included in the liquidation estate of the latter.
As is the case with a mortgage, trust ownership presupposes compliance with the pre-emption right by way of a written notification of the debtor, the user, and the trust founder, indicating the minimum sale price. At that, these persons have only 5 days to exercise their pre-emption right, in the course of which it is required to transfer the minimum sale price on the notarial deposit.
Unlike a mortgage, the sale price of the trust ownership object is set by the trust owner alone, without the requirement to assess it, which to some extent speeds up and facilitates the satisfaction of the creditor’s claims.
Given the above-mentioned, the tool of trust ownership is mostly designed to protect the creditor’s rights and is more effective when selling the secured property.
When transferring property to trust ownership, the bank has the opportunity to get ownership rights on the land plot from the date of the relevant agreement execution, which prevents any manipulation with such property by the debtor.
Also, the Civil Code provides relative freedom to the parties to the agreement on the establishment of trust ownership when determining its terms and provisions. For example, it is possible to determine the grounds for the right to apply foreclosure to property in trust ownership or to regulate the minimum sale price of such property.
It should be remembered that until 2024, banks will not be able to accept agricultural land as security by way of transferring such land to trust ownership under a loan agreement. In fact, given the Land Code limitations, trust ownership is not a collateral.
Unless otherwise approved in a referendum, foreign banks also will not be able to acquire trust ownership rights on agricultural land.
As for mortgages, this method of collateral is still the clearest for creditors and debtors, and given that from July 1, 2021, Ukrainian banks can acquire ownership right of agricultural land by way of its foreclosure as collateral subject, the mortgage will remain one of the preferred types of commitment security.