Prospects for the Agricultural Land Market in Ukraine

Andriy Lytvyn, Attorney at Law, Insolvency Receiver, Head of Kharkiv Office

Source: The Ukrainian Journal of Business Law

Today, the phrase “Buy land, they’re not making it anymore” remains relevant. This quote from Mark Twain has been proving its relevance for Ukraine of the XXI century for a long time despite the fact that a moratorium on the sale of agricultural land has been in place in our country since 2001. This moratorium was introduced only as a temporary measure, but it has been repeatedly prolonged under the guise of protection of national interests.

The moratorium on sale of agricultural lands was extended again by the Verkhovna Rada of Ukraine till 1 January 2020. In the Law of Ukraine On Introduction of Amendments to Section X Transitional Provisions of the Land Code of Ukraine on extending the prohibition for alienation of agricultural land of 20 December 2018, in addition to the extension of the moratorium, the Cabinet of Ministers of Ukraine was obliged to elaborate and introduce a Draft Law of Ukraine On the Circulation (Turnover) of Agricultural Land for the consideration of the Verkhovna Rada of Ukraine by 1 March 2019. However, things have not moved forward an inch, as the Cabinet of Ministers of Ukraine has not yet submitted the draft law to the Verkhovna Rada of Ukraine.

The “protection of interests” of our state and its citizens in this way is quite doubtful. For 18 years, (the so-called adulthood of the moratorium), a significant number of proposals on how to protect national interests and allow persons who own agricultural lands exercise their right for property, as well as how to dispose of their land plots in a legitimate way, have been developed.

The legitimate way means transparent conclusion of agreements on the purchase and sale of land plots under conventional contracts, but not with the use of one of many schemes thanks to which the “shadow land market” exists.

The European Court of Human Rights, in its Judgment of 22 May 2018, in the Zelenchuk and Tsytsyura v. Ukraine case decided that the moratorium on the sale of agricul¬tural lands violates Article 1 “Protection of property” of the First Protocol to the Convention for the Protection of Human Rights and Fundamental Freedoms.

The Judgment of the European Court of Human Rights states that: “The Court concludes that the applicants have been made to bear as individuals the burden of the failure of the authorities to meet their self-imposed goals and deadlines. In view of the weakness of the reasons given for the choice of the most restrictive alternative available to the authorities over less restrictive measures, the Court considers that the burden imposed on applicants is excessive. In view of the above considerations and the Government’s failure to advance sufficient reasons to justify the measures applicable to the applicants’ land, the Court concludes that the respondent State has overstepped its wide margin of appreciation in this area and has not struck a fair balance between the general interest of the community and the property rights of the applicants…”.

As practice shows, an industry in which the state cannot cope with the functions entrusted to it, operates in the shadow, since it is necessary to weasel one’s way out somehow. So, what are the schemes used at the conclusion of deeds in the “shadow land market”? Here are some concise examples:

First, the conclusion of perpetual lease agreements. Usually, when someone was offered the chance to buy land, the parties concluded a perpetual lease agreement, namely an agreement for the right to use a land plot for agricultural purposes. This agreement may be either refundable or non-refundable, as until 1 January 2019 they were of indefinite duration, etc. At present, the maximum term for the right of use of a land plot under perpetual lease agreements concluded after 1 January 2019 is 50 years.

Second, conclusion of long-term lease agreements. Typically, they are concluded for 49 years. The difference between perpetual lease agreements and long-term lease agreements was that the latter were always fixed-term and overregulated by the state. Overregulation of this type of agreement is undoubtedly connected with the absence of opportunity to buy land.

Third, the exchange of one land plot for another. Usually, a smaller land plot is exchanged for a larger one and an additional payment is made. In this regard, there have been some negative court precedents. However, given the judgment in the Zelenchuk and Tsytsyura v. Ukraine case it has changed for the better and turned to the side of those who carry out such transactions.

Fourth, the receipt of land for agricultural purposes for “straw men”. Every citizen has the right to receive two hectares of land for private households free of charge. As is said, every little makes a mickle. This principle applies here too. There is a pool of people who can use the rights granted to them for two hectares of land free of charge and then, for a fee, the appropriate power of attorney is drawn up and long-term lease contracts are concluded. However, a scheme remains a scheme.

Despite the fact that the aforemen¬tioned methods have been used for a long time, they are not safe and have certain risks, such as: not to become the real owner of the land plot, judicial reconsideration of agreements and cancellation of agreements reached with the “seller”, non-receipt of cash for the land plot “sold”, etc.

The lack of a transparent agricultur¬al land market and the existence of such schemes in the “shadow market” also generate and promote an increase in asset-grabbing in the agrarian sector. It should be understood that the simple absence of an open market for agricultural land generates a whole system of problems for land owners and many opportunities for raiders, because the more complex the scheme of acquiring your land is, the more opportunities there are available for raiders to grab profit.

The most common schemes used by raiders from which agrarians suffer are: the seizure of legal entity corporate rights, a corporate conflict, harvesting of someone else’s crops, the seeding of crops on someone else’s land, collection of a payroll pool and other schemes. Cases of similar raider attacks are increasing year by year.

Based on the above, it can be concluded that it is necessary to cancel the moratorium on sale of agricultural lands and create a transparent land market with clear rules.

So, what prevents the adoption of the relevant law and cancellation of the moratorium? The answer to this question is very simple — the fear generated by numerous myths, as for example: foreign companies will buy up all land, only large landowners and agricultural holdings will get the land, there will be a food crisis, the plots will be bought up for a pittance, etc.

However, everybody forgets that they’re not making land anymore and this resource is exhaustive and, therefore in the presence of open market competition, the price will only increase.

So, in what direction is the work of our leg¬islators, which is aimed at opening up the agricultural land market, moving? What is being proposed? These are some points currently discussed in the preparation of the draft bill, and which can debunk myths that exist in society:

First, it is proposed to limit the range of people who will be able to acquire land for agricultural purposes. The restriction is proposed to be introduced mainly on the basis of national criterion. Ukrainian land is for Ukrainians.

Second, it is proposed to make restrictions for the amount of land plots per one person in order to avoid excessive concentration and monopolization.

Third, the provision of a preferential right to purchase land for land users and owners of adjacent lands.

Fourth, the establishment of an open and market price for land in accordance with a valuation carried out by an expert.

There is no doubt that there are other warnings that are being discussed. Unfortunately, there is no clear idea of the rules in the land market. So, what conclusion can be made, having analysed the “pros” and “cons” of opening up the agricultural land market in Ukraine?

Cancellation of the moratorium and launching the land market is an urgent need. Ukrainian society is ready for this. The land market will increase the inflow of other investment into the Ukrainian economy. This is due to the fact that in the absence of such a market in order to obtain a land plot it is necessary to use the schemes stated above, which automatically reduces the value of land in the presence of unpredictable risks. The introduction of transparent and legal mechanisms in this sector will help farmers to protect and enforce their rights more effectively and lawyers in protecting the rights of clients.