Alex Frishberg, Esq.
There are no differences between investing in Ukrainian commercial and industrial properties when in it comes to the purchase procedure.
To start, a foreign investor usually finds a suitable real estate object by retaining a Ukrainian broker. Next, the investor’s lawyers will conduct a full legal due diligence investigation of the target property. This includes verification of the title documents, previous transfers of the property, zoning, title searches and a review of any leases and encumbrances on the property. An independent technical due diligence investigation is often recommended, particularly for development properties.
At the same time, the investor should analyze the tax alternatives in structuring the acquisition, including buying the assets vs. shares of the company that owns such assets. Finally, the parties negotiate the terms of the transaction and sign the sale-purchase agreement before a notary.
- Due Diligence
There is no substitute for the buyer’s due diligence, because it uncovers the many risks involved in a transaction. Sometimes third party consents or approvals are required (e.g., mortgagor’s, tenant’s consent, spousal consent if the individual seller was married at the time of buying the property, etc.). There may also be various encumbrances on the real estate, such as mortgages, arrests, tax/security pledges, prohibitions on alienation, among others. For all these reasons, an investor is highly advised to conduct an extensive legal due diligence investigation.
Fortunately, the due diligence process has become a lot simpler in recent years. The ownership of real estate is confirmed by registration in the publicly available electronic state registers. There are currently two real estate registers in Ukraine, which allow the investor fast and transparent access to property records:
1. The State Register of Property Rights to Real Estate (the “Register”), in which the ownership, lease and other property rights to land, as well as servitudes and encumbrances over land, are registered; and
2. The State Land Cadaster, in which the technical information about land is recorded (e.g., the area, zoning (designated use), owner and/or user, and restrictions and encumbrances). The operation of the State Land Cadaster is regulated by the Law of Ukraine “On the State Land Cadaster”, dated July 7, 2011.)
The State Land Cadaster and the Register are electronically connected, and information contained in one of these registers must be automatically transferred to the other.
The investor’s legal advisers, who usually perform due diligence, will conduct the following:
• verify the ownership title and its history of origin;
• identify mortgages and other liens/encumbrances, zoning restrictions, land use limitations, etc.;
• review any leases relating to the target;
• review the status of pending or threatened litigation or other claims;
• analyze tax and financial issues.
When industrial assets are involved, technical due diligence and environmental impact assessment are vital, as the assets are usually sold on an “as is” basis, and sellers usually do not provide adequate warranties regarding technical or environmental conditions.
If the investor is satisfied with the due diligence results, and wishes to lock in the investment opportunity, two options exist: (i) a non-binding letter of intent or, more likely, (ii) a preliminary agreement, which must be notarized and is enforceable in a court of law. The signing of the final sale-purchase agreement can take place anytime within one year from the date of the preliminary agreement.
- Background Documents
The most important document in any real estate transaction is the sale and purchase agreement between the buyer and the seller, which must be in writing and is subject to notarization. The essential terms (i.e., those which cannot be excluded from the agreement) include the identity of the parties, property address, description of the title documents, cadastral number, designated use, price, etc.). Payment is usually made in full, but the parties may agree to other payment conditions.
At the closing of the transaction, the parties must present the following documents:
• title/ownership documents;
• technical documentation (technical passports, layouts or land cadastral measurement documents);
• documents confirming the parties’ legal capacity (identification documents, powers of attorney, corporate authorization (e.g., board resolution), etc.);
• extracts from the state register confirming the absence of encumbrances;
• valuation/appraisal reports;
• consents of spouses, tenants and co-owners, if any.
The authority of a legal entity is verified based on:
• the company’s foundation documents;
• notarized power of attorney to an authorized representative;
• the managing body’s consent to the transaction; and
• information from the unified state register of legal entities, private entrepreneurs and civic organizations.
The property title is deemed transferred upon the state registration of the buyer’s ownership rights, which is performed by the notary certifying the sale and purchase agreement.
- Buying Assets vs. Company Shares
The seller of commercial or industrial real property in Ukraine is usually a legal entity, typically registered as a limited liability company (or, less commonly, as a joint stock company) either in Ukraine or abroad. In such cases, the investor has the option of buying either the real estate assets or the company’s shares (equity or stock).
Purchasing the company’s shares has a number of advantages: it is a faster and more flexible process, and the parties may settle their disputes via international arbitration. If the owner is a foreign entity, all payments are made outside of Ukraine with subsequent registrations of the new owners in Ukraine. Share purchase transactions are especially useful when acquiring on-going businesses because they allow the investor to continue business without having to transfer all contracts, including contactor, sub-contractor and labor agreements. If the seller company is registered in Ukraine, however, taxes can be optimized through an indirect sale (the sale of a company that owns the property) by minimizing the valuation of the share price.
On the other hand, if due diligence reveals substantial risks associated with the company that owns the real estate, or if the investor wants to cherry-pick unique property instead of being burdened with all of the company’s assets, obligations and liabilities, asset deals provide an excellent alternative. In this case, only Ukrainian legislation will apply (meaning no international arbitration) and valuation takes place via an independent registry, which sometimes inflates property values in order to increase tax collection efforts.
- Taxes and Expenses
Liabilities for taxes and transaction-related expenditures are shared according to the parties’ agreement. Unless agreed otherwise, however, the costs are commonly apportioned between the parties as follows:
The buyer usually pays for the following:
• The buyer’s agent’s fees
• The costs of due diligence investigation
• Notarial fees
• Registration fees
• Pension fund duty
The seller commonly pays for the following:
• The seller’s agent’s fees
• Income tax on any profit made on the sale of the real estate
• Military duty (unless statutory exemptions apply)
• VAT (if applicable)
• State duty (1%)
Unless otherwise agreed by the parties, the investor will also pay the notary fee and compensate other parties, such as the real estate broker, lawyers, accountants and technical experts. Other taxes involved in an asset deal between legal entities are 18% corporate profit tax for the seller and 20% VAT (if applicable).
- Conclusion
Investing in commercial or industrial Ukrainian real estate requires careful preparation, from finding the right property to performing due diligence to minimize risks and closing the deal before the notary public. Additional aspects must also be considered, such as the best way of structuring financing (loan vs. equity) and applicable taxation. For that reason, wise foreign investors usually retain a small team of professionals that includes reputable real estate brokers, experienced lawyers and reliable notaries.
We hope you found this overview useful. Please feel free to contact us if you have questions at www.frishberg.com
