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Property Management: Real Estate


Natalia Levchuk, Lawyer at Ilyashev & Partners Law Firm Source: Jurist&Zakon

An owner of a real estate object may perform the management of such object independently or by engaging an administrator (administration company). In such case if a real estate object represents a part of core assets of the owner such administration, as a rule, is carried out by the owner independently.

The matter of engagement of administrator (administration company) for management of real estate objects is of interest when such object is not included into the list of core assets, as well as when the owner of such property (by virtue of any reason) is unable or unwilling to be engaged into management of its real estate property. For example, as the owners of many trade, office and/or entertainment centers (through numerous reasons, such as, for example, unwillingness to employ oversized workforce engaged into management of such centers) consider it best to transfer management obligations to the companies specializing in real estate administration.

In this connection a question arises as to how the parties may formalize new relations between them.

One of the most evident options of formalization of the relations is execution of administration agreement. The relations arising between the parties under the administration agreement are governed by the provisions of Chapter 70 of the Civil Code of Ukraine according to which under the real estate administration agreement one party (trustor) transfers the property into management to another party (trustee) for a certain period, and the other party undertakes (on a fee settlement basis) on its own behalf to carry out administration of such property for the benefit of the trustor or a person appointed by him. At the same time the title to the real estate object is not transferred to the trustee, but it receives (if this is stipulated by the real estate administration agreement) the right of discretionary management of the property.

The real property administration agreement is subject to notarization and the state registration. On the basis of the said agreement the trustee has the right to operate without the power of attorney and enter (on its own behalf) into agreements regarding real property objects managed by him, as a third party. While performing administration of property the trustee is obliged to inform persons with whom he enters into agreement about his status of the trustee, but not the owner of the property. Agreements related to property and its transfer into management (executed in writing) indicate that they are executed by the trustee. In case of absence of such indication trustee takes obligations towards third persons independently. Trustee has the right to alienate property transferred into management, as well as enter into agreements in its regard only upon consent of the trustor.

The said option may be applied in case when the situation requires application of complex (commercial, administrative and technical) administration of real estate objects. Such option may be beneficial for the owner of the real estate property, for example, due to the fact that transfer of real estate property into management may provide additional protection to the owner of the property from application of foreclosure. Pursuant to Article 1040 of the Civil Code of Ukraine foreclosure under the debts of the trustor over the property transferred into administration is allowed only is case of recognition of the trustor as bankrupt and/or foreclosure at the request of the pledge holder in relation to the property being the subject matter of the mortgage.

In addition, execution of the real estate administration agreement allows to transfer a part of risks related to performance of business activities onto the management company as follows: (i) in case of failure to exercise proper care about the interests of the trustor the trustee is obliged to compensate the latter for the losses inflicted, and the beneficiary – for the lost profits; (ii) the trustor bears responsibility for the losses inflicted unless it proves that such loss was suffered as a result of force majeure circumstances, guilty actions of the trustor or beneficiary; (iii) trustor bears secondary liability under the indebtedness which appears in connection with execution by him of administration if the cost of property, which was transferred into management, is insufficient to satisfy claims of the creditors.

At the same time it is necessary to consider that the property transferred into management must be separated from other property and must be accounted by the trustee at the separate balance under separate accounting procedure. All the settlements are carried out through separate bank account.

With consideration for the fact that such form of property administration is quite difficult as soon as it requires notarization, state registration and special accounting procedure other (simpler) options of property administration may also be considered.

For example, among the widespread options is execution of the services agreement according to which a company (which may nominally be called a “management company”) provides services on management of a real estate object and receives remuneration for this. Such services, among other things, may imply search of tenants, conducting negotiations regarding the terms of lease agreements, search of companies providing services on technical maintenance of trade/office and/or entertainment centers, as well as search of service companies and exercising control over their activities. At the same time under the services agreement time the management company does not have the right to enter into agreements on behalf of the owner of the property. All the agreements are concluded by the owner itself or by its representative. Such option is more reasonable if the owner of the property wishes to save the functions of control over the management of the property, however, not wishes to hire its own staff for such management. As a rule, apart from the services on management of a real estate object (for example, trade center) the owners also engage companies for provision of the related services, for example, legal services – for supporting day-to-day activities of the company, as well as technical/engineering services – for making reconstructions, repair, and technical maintenance of a real estate object etc.

If the owner of real estate property is unwilling to independently manage such property it is also possible to consider an option with transfer of the real estate object into lease with further transfer of such object (trade/office and/or entertainment center) or, of its parts, into sub-lease. Among the deficiencies of such option are as follows. In such case it would be advisable to conclude the lease agreement for a longer period. The reason for this is that the term of sub-lease agreement must not exceed the term of the lease agreement. As a rule the lessors are interested in long-term lease as soon as in general they bear expenses related to repair of the premises and they will have to, at very least, to cover their expenses. In addition the lessees wish to have a possibility to transfer the leased premises/buildings into sub-lease which, in this case, will be impossible. The agreement on lease of immovable property executed for the period of three and more years is subject to notarization and state registration. It means that the parties will bear additional expenses related to settlement of the state duty and notarial fees. At the same time it might be difficult to terminate the lease agreement. It will also needs to be considered that in case of termination of the lease agreement the sub-lease agreements entered by the corresponding lessee will also be terminated and the owner of the immovable property will have to conclude such agreements once more.


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