Moratorium cancellation: opportunities, specifics and risks for the agricultural land market

What opportunities does moratorium cancellation open?

The Law “On the Agricultural Land Circulation, which lifted the moratorium, [1]left many questions about the land market operation. Recent legislative changes in respect of the deregulation of [2]land relations and the sale of land plots and rights to them through electronic auctions[3] have clarified the rules of the land market and allowed to assess the opportunities and risks for its participants.

The Law on the Land Market has limited the number of people who can become owners of agricultural land: acquiring ownership  of such land by foreigners is prohibited, while Ukrainian companies will be able to own land from 2024. Therefore, different opportunities will open up for different categories of participants.

During the restriction for legal entities, citizens will be able to buy agricultural land cheaper, because there will be fewer buyers than the land offered for sale. Investors who buy land now will get a ready-made business with a stable income because most of the land plots are leased from agricultural companies. The latter, interested in preserving their land bank, will continue to lease the land. After opening the market for companies, investors will be able to sell land to tenants at the market price.

Despite the limitations of the Law “On Land Market”, foreign investors and Ukrainian legal entities will be able to gain access to the market through other mechanisms not prohibited by law.

Such a mechanism could be the acquisition of land in trust ownership. Individual intermediaries (co-trustees) will be able to buy land in the interests of investors, and the latter will be able to use it. To ensure control over the land, you can limit the ability of the co-trustee to sell or lease the land.

The law also did not restrict the ability of businesses, particularly with ultimate beneficial foreign owners, to obtain agricultural land for fiduciary management. In this case, the company does not become the owner but can not only cultivate the land plot, as well as dispose of it, for example, sell it, and transfer the proceeds from the sale under a management agreement to the participant of this company or its beneficiaries. Fiduciary management can also become a business model for new players in the agricultural land investment market. Management companies and funds that will have the required expertise in agriculture will be able to provide management of such investments for owners.

The Law “On Deregulation” also allows for control over the land bank, but by applying emphyteusis on privately owned land. The emphyteusis can now be alienated and pledged without the consent of the owner, and the land can be leased by the emphyteuta.

Banks acquire the opportunity to become owners of the land by way of foreclosure on them as a pledged item with the subsequent sale within two years. On the one hand, an opportunity for asset-based lending arises for potential buyers. On the other hand, banks are not very interested in this yet, as land is not a very liquid asset. Certainly, this situation may change after the opening of the land market for legal entities, when demand for land increases and the value of land becomes more foreseeable.

What will be the specifics of buying and selling land?

One of the features of the land market is the introduction of land auctions in the form of electronic auctions. Electronic auctions are a response to today’s demand, without which the land market could not be launched. They will be mandatory for the sale of agricultural land of all forms of ownership and the acquisition of lease and emphyteusis rights to such land.

The auction process itself will be as simple as possible for buyers. The owners will prepare the lot: draw up all land management documentation, ensure state registration and assessment of a land plot (rights to it). However, participants must be immediately ready financially and pay a guarantee fee — 30% of the price of land or annual rent.

The sale price should not be less than the normative monetary valuation of the land plot, buyers shall document the sources of funds from which the proprietary right is acquired, and mutual settlements will be made in non-cash form.

A feature of the auctions will also be the implementation of the priority right to purchase the leased land plot by tenants. The priority right will be subject to registration as an encumbrance on immovable property. Landowners will be required to send a notarized notice of sale to the tenant in advance. Tenants will exercise the priority right by agreeing to pay the highest price offered at the auction or agreeing to pay the price that will be the second highest. Therefore, the law provides an effective mechanism for protecting the rights of tenants.

What regulatory risks are relevant?

The Law actually restricts the ability of a business to structure the title of agricultural lands using holding structures both in Ukraine and using foreign companies. Owners of agricultural companies who are going to form their own land bank need to take care in advance of the restructuring of corporate structures, excluding offshore companies, and disclose information about the beneficiaries.

The rights of landowners in favour of the interests of land users are significantly limited. Owners will not be able to sell agricultural land to others immediately after the opening of the market due to the requirements of notarization of the sale and the procedure for exercising the pre-emptive right.

Also, despite the transparency of the auction procedure, the law does not prescribe the requirements for sales agreements, so in practice, the terms will be determined by the seller, which are unlikely to be changed after winning the auction. Refusal to sign after winning the auction threatens the loss of the guarantee fee, so buyers will have to choose: to enter into a risky agreement or lose an attractive asset.

The law also does not provide guarantees for buyers in respect of the legality of the seller’s acquisition of land ownership. Therefore, buyers will need to independently conduct a detailed analysis of title documents and the history of ownership. After all, the case law shows a large number of cases of extortion of land plots from bona fide purchasers on the grounds of violations of the procedure for allocating land to primary owners.

[1] Law of Ukraine “On Amendments to Certain Regulations of Ukraine in respect of the Conditions of Agricultural Land CIrculation” of 31 March, 2020 (hereinafter — “Law on Land Market“);

[2] Law of Ukraine “On Amendments to Certain Regulations of Ukraine in respect of the Improvement of the System of Management and Deregulation in the Field of Land Relations” of April 28, 2021 (hereinafter — the “Law on Deregulation“);

[3] Law of Ukraine “On Amendments to Certain Regulations in respect of the Sale of State-Owned Land Plots and Communal Property or Rights to Them (Leases, Superficies, Emphyteusis) through Electronic Auctions” (hereinafter — the “Law on Auctions“).