Land for alternative energy projects in Ukraine: inspection in details

Ukrainian renewable energy market is now a trending topic in Ukraine and probably develops faster and receives more investments than any other sector in Ukraine.

The same as abroad, investments to the renewable energy sector in Ukraine are usually made through purchase of a project – a special purpose vehicle (SPV), developed by locals. Probably every investor understands that purchase of a project without its prior inspection in most cases will lead to bad consequences and loss of investments. That is why a legal due diligence always precedes sale and purchase of RES projects.

From a formal point of view all aspects of a legal due diligence such as corporate, employment, environmental, construction, etc. are important. However, we see that the land issues are probably the major, because usually namely the land is the most valuable asset of an SPV on the stage of project purchase.

During the last several years local developers of renewable energy projects have obtained a substantial amount of lands (both into ownership and lease) to satisfy interests of investors in RES projects. Nowadays we observe a highly increased concern of the law enforcement authorities (preferentially state prosecutor’s office) regarding the breaches of land legislation. A very disturbing fact is even the initiation of a criminal proceeding, which may lead to arrest of the land plots, other property and freezing of SPV’s bank accounts. All this together leads to harm of reputation and business operation.

The following aspects shall be carefully considered before purchase of the project

Title. In many jurisdictions inspection of the title to a land plot is limited to formal confirmation of the actual ownership right to an object, for example, by obtaining an extract from a relevant register. In Ukraine the situation differs. One has not only to formally confirm the title, but also to analyze the history of land formation and acquisition, because the main risks are usually hidden therein.

The opacity of land privatization processes in Ukraine is quite a well-known issue. As a result, usually owners find out about problems with the title to their lands already after their detection by the public prosecutor's office, which of course is too late.

Designated purpose. In Ukraine renewable energy objects are allowed to be constructed on the lands with designated purpose “industrial, transport, communication lands, lands of energetics, defense and other designation”’. Thus, in order to avoid long-lasting, complicated and costly procedure of land designated purpose change it is advisable to purchase/lease land plots with the proper designated purpose.

Change of the designated purpose. Overwhelming majority of lands in Ukraine are of agricultural use. Accordingly, initially allocated/formed land plots are of agricultural use and require the change of designated purpose before their transfer to SPV’s ownership or lease.

This process has certain peculiarities and quite often is breached even by experienced land experts or officials of state and local authorities.

Among the most common breaches are inconsistencies of the land management and technical documentation with the existing general plan of the territory, non-compliance of the land management documentation with the requirements established by the laws and regulations, absence of the developed detailed plan of the territory, etc. Another quite common example is that some types of agricultural lands are subject to moratorium on alienation as well as change of designated purpose and all deals with such lands are deemed invalid from the moment of conclusion.

In case the target designation of a land plot was changed with violation of legal requirements, it can lead to the invalidation of resolutions on transfer of the land plots into ownership or lease and as the result to the invalidation of the title of the SPV to such land plots.

Land plot allocation procedure. Usually the lands are initially allocated to the ownership of several individuals as agricultural lands. The procedure of allocation is complex and requires development of land management documentation and its approval by several authorities. It is a must to check all the steps of the procedure and verify that they were carried out correctly. Breach of the procedure may lead to invalidation of the allocation and following loss of the title to the land by the SPV, even after the plant was constructed. We are well aware of several cases when due to the breach of the allocation procedure, the state prosecutor demanded cancelation of the order on land plot’s allocation and further vindication of the land plot from the current owner – a power plant.

Detailed plan of the territory. One thing that is often omitted by the land experts during land plot allocation is the necessity to strictly follow the town planning requirements, established by the law. In cases when the land plots are allocated into the ownership/lease of an SPV or during the change of the designated purpose, existence of a detailed plan of the territory or zoning plan of the territory is required. According to the legislation in case of absence of the detailed plan of the territory, allocation of a land plot to the ownership or lease of individuals or legal entities for urban development purposes is prohibited. In most cases cities and villages do not have the required detailed plan of the territory and therefore the burden of its development lies on the project developer or investor. One of the most usual breaches of the procedure for approval of the detailed plan of the territory is non-conduction of public hearings. The legislation requires necessity to conduct public hearings of the draft detailed plan of the territory before its approval by corresponding state or local body. Notwithstanding the requirement of the law, state and local authorities often approve the detailed plans without properly conducted public hearings. Consequently this may lead to invalidation of the transfer of the land plot to the SPV and following loss of the title.

Don’t develop a bias in terms of eagerness to pursue a site, just because the financial offer is very attractive. Take your time and proper legal advice, check twice all red flags and try to mitigate each of them in transactional documents. Do not forget to visit the site personally and make visual inspection.

The article has been published in KyivPost