Real estate finance law in Ukraine

Introductory note: the Ukrainian real estate security instrument ipoteka is often translated into English as ‘mortgage’. However, ipoteka should not be confused with mortgages as is understood in common law jurisdictions; rather, it is a charge, a non-possessory security. It involves the creation of new proprietary rights in the creditor. The essence of a charge is that the secured property is made liable for the repayment of a debt without there being any transfer of ownership or possession from the debtor (the ‘chargor’) to the creditor (the ‘chargee’). The debtor retains both ownership and possession of the asset; the creditor obtains neither. Instead, the creditor obtains a new form of proprietary interest, a charge, over the secured property. If the debtor defaults, the creditor is normally entitled under the terms of the security agreement to initiate the sale of the secured asset and recoup the outstanding debt from the proceeds of the sale. Thus, all references to mortgage in this document are references to the Ukrainian law ipoteka as explained above.

Yes, except for (i) persons related to the Russian Federation and the Republic of Belarus, such as: citizens, legal entities registered there, legal entities at least 10% of the shares of which are directly or indirectly owned by Russian or Belarussian individuals or entities; (ii) persons included on the list of persons connected with the conduct of terrorist activities or regarding whom international sanctions have been applied; (iii) persons sanctioned under Ukrainian laws.

Lenders can take a mortgage over “real estate objects”, being land and the buildings on land. Foreign lenders may not take security over assets, which can only be owned by Ukrainian residents, e.g. agricultural land. And only Ukrainian banks can act as mortgagees regarding agricultural land.

The mortgage of a building must include the underlying land (and vice versa), if both the building and the land are owned by the same person (i.e. mortgagor). Incomplete construction work is regarded as an object of unfinished construction. The object of unfinished construction, regardless of whom it belongs to, if located on the mortgaged land, is deemed to be collateral.

Mortgage certificates (zastavna) can be issued in Ukraine, and should specify, among others, the amount of principal obligation and the term and procedure for its fulfillment. Mortgage certificates should be documented on secure forms/blanks, which can be ordered from and produced by specialised licensed enterprises. Notary fees for the notarisation of a mortgage agreement and the issuance of a mortgage certificate are negotiable and typically do not exceed 0.21% of the value of collateral.

Second ranking security over the same real estate can be taken subject to the consent of the initial mortgagee, unless such consent is not required under the initial mortgage agreement. To secure the priority of claims, all mortgages over land and buildings must be registered in the State Register of Proprietary Rights to Immovable Property. On registration, the registered mortgage will have priority over any unregistered security interests and those registered at a later date. Priority deeds are not registered in Ukraine.

No. To prevent any unauthorised transfers, the mortgage should be registered with the State Register of Proprietary Rights to Immovable Property.

No.

No.

Yes. The landlord’s right to receive rent can be charged by way of a pledge agreement.

Yes. It is customary/possible for a lender to take a charge/security over bank accounts of the borrower as the rights to funds under a pledge agreement. It is usual to contractually restrict the borrower’s rights to withdraw funds from the bank accounts.

According to Ukrainian legislation, the right of ownership, the right of lease and the right of permanent use to both private and public land take effect as of the moment of state registration. Such rights are registered in the State Register of Proprietary Rights to Immovable Property. Mortgages over the land are registered in the same register.

The mortgage takes effect from the moment of registration in the State Register of Proprietary Rights to Immovable Property. Thus, a failure to register a mortgage makes the mortgage invalid.

The mortgage agreement must be executed in writing and is subject to notarisation. Costs include: (i) notary fees (negotiable), typically up to 0.2% of the value of collateral; and (ii) registration fees up to EUR 60 depending on the urgency of making the registration action.

Under Ukrainian law, only a creditor having a valid monetary claim can hold a security. It may sometimes be seen in practice in Ukraine that the security is held by a Security Agent based on the “parallel debt” concept, where the Security Agent is granted the benefit of a separate claim and the status of an independent and separate creditor.

Trust ownership as a security is a novelty in Ukrainian law and is not widespread in practice yet. It provides for the transfer of an asset to the creditor into trust ownership that does not entitle the creditor to alienate it, unless under foreclosure. On establishing the trust ownership, the borrower loses its title to an asset and after repayment, the title is transferred back to the borrower.

Yes. Changes to the existing agreements have to be made, unless the lenders change these by way of transfer of the mortgage certificate, by endorsing the relevant mortgage certificate.

Transfer of the lease to a new tenant (by way of sub-lease or assignment) is subject to the consent of the  borrower, unless the lease agreement provides otherwise. In the case of a sub-lease, the original tenant remains bound by the lease.

Transfer of any use rights to state owned or municipal land is not allowed by Ukrainian law, except of sublease of such lands by state enterprises.

Under Ukrainian law, a mortgage can be enforced either through: (i) out-of-court settlement, if so provided for by the agreement; (ii) notarial writ endorsed on the original execution copy of mortgage agreement; or (iii) court judgement. In practice, the first two methods significantly depend on the cooperation of the mortgagor.

Ukrainian courts have exclusive jurisdiction over matters involving real estate, including the enforcement of mortgages.

Before enforcement, arbitral awards or foreign judgements have to be recognised in Ukraine. Ukraine is a party to the New York Convention.

The most reliable method of enforcement is through a court judgement. Although enforcement without recourse to the courts is allowed under Ukrainian law (based on a notarial writ or out-of-court settlement provisions of the mortgage agreement), in practice, however, such enforcement is difficult without the cooperation of the mortgagor. It is impossible for a secured party to appoint receivers/liquidators in Ukraine. Typically, collateral is sold by public auction; however, the mortgage agreement can permit the transfer of the collateral into the ownership of the mortgagee, or the sale of the collateral by the mortgagee to a third party. The latter can also be effected through the court.

For the period of martial law and for 30 days afterwards, enforcing mortgages over objects provided to secure obligations under consumer loans is prohibited. This prohibition concerns the transfer of mortgaged property to a mortgagee, its sale to third parties (including in an e-auction) and forced eviction from residential property. The prohibition does not apply to mortgage agreements executed or restructured after 17 March 2022. 

No. The mortgagor remains responsible, unless the mortgage agreement or a court decision provides otherwise.

The mortgage agreement can provide for such an out-of-court settlement option as transfer of the collateral to the ownership of the mortgagee. However, in an event of default, this transfer is not automatic, and in practice is difficult without the cooperation of the mortgagor. Alternatively, if the real estate is not sold at a public auction ordered by the court or carried out pursuant to a notarial writ, the collateral can be transferred to the mortgagee, provided that, within ten days after the auction, the latter decides to acquire the collateral at the starting price setting off the secured claims against the value of the collateral.

Cross-border loans from foreign lenders to Ukrainian borrowers are subject to notification to the National Bank of Ukraine before the disbursement of any funds.

Currently, due to martial law, a many limitations have been set by the National Bank of Ukraine on foreign-currency transactions, including loans from foreign lenders. In particular: (і) interest rate payments under foreign loans executed before the introduction of martial law are allowed only for the period between 24 February 2022 and 10 August 2022; (ii) the maximum interest rate payments under foreign loans obtained after 20 June 2023 are allowed for any periods and are capped at 12% pa.

Early repayment under loan agreements between Ukrainian borrowers and foreign creditors is currently allowed only if:

• the loan was provided, guaranteed, insured or otherwise covered by international financial institutions or foreign export credit agencies or other financial institutions whose shareholders are any foreign state or a development bank, which in turn is wholly or partially owned by a foreign state; or
• the loan funds were credited to the accounts of the resident borrower after 20 June 2023.

Assuming real estate is held in a locally incorporated single purpose vehicle to provide an alternative to enforcement of the mortgage over real estate:

Yes.

Yes. Security (of any ranking) over shares in a joint-stock company (“JSC”) must be registered with a depositary institution and the State Register of Encumbrances over Movable Property. The security over shares (being a participatory interest) in a limited liability company (“LLC”) should be registered in the State Register of Encumbrances over Movable Property and with the central depositary, if the LLC has chosen to use it to record ownership rights over the shares in its charter capital (participatory interests).

A failure to register a pledge over shares in a JSC with a depositary institution for a JSC or with the central depositary for an LLC would not prevent the borrower from the transfer of the shares to a third party. A failure to register a pledge over share(s) in an LLC/JSC with the State Register of Encumbrances over Movable Property affects the ranking of the pledge.

A pledge agreement must be executed in written form. The pledge agreement must be notarised if the parties agreed on that or at least one of the parties insists on notarisation. The costs associated with the execution of a share pledge agreement are comprised of:

1. costs related to signing the agreement. If the agreement is to be notarised, then the parties must pay a notarial fee, which will vary;
2. in the case of a pledge of shares in a JSC, the costs related to the blocking of shares and the recording of the pledge with a depositary institution. These costs will depend on the depositary institution’s internal rates;
3. in the case of a pledge of shares in the charter capital of a JSC, the costs related to the blocking of shares and the recording of the pledge with the central depositary. These costs will depend on the arrangements with the central depositary; and
4. costs related to registering the pledge with the State Register of Encumbrances over Movables Property (currently equivalent to approximately EUR 2.00).

The transfer of the shares into the name of the lender, not related to the transfer of title, is not envisaged by Ukrainian law. The shares in a JSC encumbered by the pledge remain in the pledgor’s securities account and an encumbered share in an LLC remains registered in the name of pledgor in the State Register of Legal Entities, Individual Entrepreneurs and Civic Organisations or in the pledgor’s account with the central depositary.

Enforcement can be performed through a non-judicial procedure, by way of a notarial writ (if the agreement was notarised) or court proceedings. For more details, please see section 5.1 below.

As soon as an event of default occurs and before the actual enforcement, the lender is required to send to the borrower and its shareholders (being pledgors) a cure notice. This notice must be sent at least 30 days in advance of the proposed enforcement. The notice must be registered with the State Registry of Encumbrances over Movable Property. The lender can only proceed with the enforcement of its security after the 30-day grace period has expired.

Enforcement can be performed through a non-judicial procedure, by way of a notarial writ (if the agreement was notarised) or court proceedings.

The non-judicial procedure of enforcement is only allowed if it was provided for in the pledge agreement. During a non-judicial enforcement, the title to the shares can be transferred to the lender or the shares can be sold to a third party. The course of enforcement action depends on the terms and conditions of the pledge agreement.

If no non-judicial procedure is set out in the pledge agreement, or a pledgor is not cooperative during enforcement, the lender will be forced to enforce the pledge through court proceedings. As a general rule, shares enforced through court proceedings are sold through a public auction, unless otherwise provided for in the court judgement.

Court proceedings and a public auction are the mandatory enforcement procedure if the shares are owned by a state-owned enterprise.

Irrespective of the enforcement procedure, the lender can appoint any third party to act on behalf of the lender in enforcing the pledge. The scope of the third party’s authority will depend on the power of attorney issued by the lender.

The transfer of title to the pledged shares to a third party in the enforcement procedure may be subject to merger control clearance in cases where that is required by Ukrainian law.

Ukrainian law does not provide for the mandatory subordination of shareholder loans. Subordination depends on the terms and conditions of the loan agreement. It is not customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur. In enforcing a share pledge, a lender must consider any shareholder loans or third-party creditors.

Legal issues that would likely impact the valuation and the security of income from an investment perspective.

Land: 5, 10, 25, 49 years 
Buildings: 3 or 5 years

Land: 50 years (maximum) 
Buildings: no limits

Land

On the expiry of a lease term, a tenant who has complied with its obligations under the lease has a priority right to sign a new lease by sending the notice up to one month before the expiration of the lease agreement. In this case, the parties must agree upon the terms and conditions of the new lease.

There is no requirement for the tenant to serve a notice if it does not wish to sign the new lease agreement after the expiration of the initial term.

The lease agreement might contain provisions on its automatic renewal after the expiry date. In such a case, the lease is deemed to be renewed for the same term and on the same conditions provided by the original lease agreement, unless one of the parties applies to cancel the lease renewal in the State Register of Proprietary Rights one month before the lease’s expiry.

Buildings

On the expiry of a lease term, a tenant, who has complied with its obligations under the lease, has a priority right to renew the lease. In this case however, if the tenant intends to renew, it must inform the landlord before expiry of the lease.

If the tenant continues to use the premises after the expiration of the lease agreement, such lease agreement is deemed to be renewed for the initial term unless the landlord objects in writing within one month from the lease’s expiry.

No, a tenant cannot unilaterally terminate the lease unless such break right is specifically provided for in the lease agreement.

No.

The mechanics of rental payments are agreed by the parties. Market practice is that the rents are payable on a monthly basis in advance based on invoices issued by a landlord.

The rent payable under leases of state-owned and municipal land is reviewed on an annual basis, unless the lease rights were acquired at an auction. The review is undertaken in line with indexation of the normative value of the land, which is the basis for land calculations.

For non-state-owned and non-municipal land rent reviews, the parties agree the mechanics. Market practice is that rent is reviewed on an annual basis.

Market rent review and indexation are treated as different rent review mechanisms. Both mechanisms can be used simultaneously. The rent review is usually restricted to increases only.

No, there are no controls other than the review of rent payable regarding state-owned and municipal land, which is required annually, except for the lease rights acquired at an auction.

The tenant, unless otherwise specifically provided for in the lease agreement.

The landlord, unless otherwise specifically provided for in the lease agreement.

The landlord, unless otherwise specifically provided for in the lease agreement.

Insurance of land is discretional and is determined by the parties in the agreement. It is uncommon in Ukraine to insure land plots.

Insurance of state-owned real property is mandatory and should be procured by tenants.

Insurance of privately owned buildings is discretional and is subject to the parties’ negotiations. Market practice is that the landlord would be responsible for insurance of structural part of the building and external fit out, whilst the tenant will insure internal fit out and fittings and its belongings.

Yes, generally, VAT is payable on rents at the rate of 20%, except for cases where the lessor is an individual or a company not registered as VAT-payer.

However, the following rent payments are exempt from VAT:

• rent of integral property complexes of state or communal enterprises if the lessor is a state or local authority and payments under law are credited to the state budget of Ukraine or local budgets;
• rent of land plots in the ownership of the state or local communities, if the rent payments are fully credited to the respective budgets.

In addition, the Tax Code of Ukraine provides 0% VAT for rent of airport premises that are used for servicing international flights.

Subject to the agreement between the parties. State-owned property rates are regulated and depend on the property, its designation and location. The rent rate for state-owned and municipal land will not be less than the land tax and will not exceed 12% of the normative value of the land, unless the lease to the land is granted via an auction. In most cases, the rent rate for state-owned and municipal property (land in particular) is determined by an auction.

Among a tenant’s other, typical expenses, it is common to have phone and utility charges, a share in marketing (for shopping malls), fit out and internal fittings insurance, and a grand opening share (for shopping malls).

Yes. The landlord can recover the costs of external maintenance, decoration, repair and structural repair, management fees etc. via a service charge.

No. Ukraine operates in the civil law system, which means that a court will rely on the contents of the agreement and effective legislation rather than on existing precedents.

Any valuers/environmental surveyors must be licensed in Ukraine to undertake such appraisals for the appraisal to be recognised.

Yes.

No. The general principle of Ukrainian environmental legislation is that the liability for a breach of environmental laws arises if the person is guilty of the breach. Generally, a party holding security over real estate is not liable for breaches of environmental law by its owner or a third party. However, once the lender enforces a mortgage over the property, i.e., becomes its owner, it is deemed to assume all the environmental risks and liability attached to the property, unless there is an established fact that the breach of environmental laws regarding the property was caused by another person.