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Is it true that the draft law on realtors will impose real estate services on Ukrainians?

For the last two weeks, the draft law No.3618 “On realtor activities in Ukraine” has been discussed by everyone interested, including anti-corruption activists, economists, lawyers, and realtors themselves. The authors of innovative ideas argue that the draft law does not oblige Ukrainians to use the services provided by realtors, but rather protect citizens from unscrupulous real estate agents, whose activities also lead to a loss of revenues to the state budget. Opponents say the draft law will oblige Ukrainians to use the services provided by realtors on a fee-paying basis in case of sale or lease of real estate while duplicating the scheme related to a paid evaluation database (infamous “Yatsenko’s platforms”), but now it is related to realtors.

Lawyers and analysts of the Better Regulation Delivery Office (BRDO) have analyzed the text of the draft law, the explanatory note to it, and arguments of the drafters, and offer an expert assessment of the regulation proposed.

Why is this draft law needed and what problems does it solve?

Having analyzed the arguments of the drafters, we concluded that the draft law aimed to address the following issues:

  • sellers and buyers, tenants and landlords suffer from the actions of unscrupulous realtors;
  • Ukrainians suffer from the fact that the shadow economy covers a significant part of realtors’ services, and this causes a loss of revenues to the state budget of Ukraine;
  • honest realtors suffer from competition from unscrupulous realtors.

We did not analyze the scale, dynamics, and severity of these problems and did not determine their causes. We also did not find this analysis in the supplemental materials and explanations of the drafters, who promised to provide an analysis of effects and their calculations later. At the same time, I emphasize that this analysis of problems and their causes is a key element because the effect of the draft law cannot be measured without assessing its impact on the problems it has to solve, as well as without comparing this assessment with the assessment of its implementation costs and negative side effects it creates.

For example, the drafters argue that the draft law is aimed at making the provision of real estate services official and increasing revenues to the state budget of Ukraine. However, no documents state the current level of the shadow economy in the sector and the expected level that will be achieved as a result of policy implementation. There are also no specific figures regarding the growth of state budget revenues. Finally, it is not specified which executive body will be responsible for implementing this policy.

The draft law and supplemental documents do not contain answers to the questions, which are important for market participants. Will consumers of real estate services pay more in case of real estate transactions? Will real estate agents be forced to increase the cost of their services due to the need to gain access to the profession (as mandatory certification and professional accreditation of realtors are introduced)? What is the expected cost of entering the profession? How will this affect the cost of real estate services? The lack of answers to these questions does not allow us to fully assess the advantages of adopting the draft law.

Additionally, the introduction of some regulation in the sector where there were no state rules before requires constant close consultation with stakeholders, such as market participants, consumers, and realtors. This is a fairly simple but effective principle for effective public policy: nothing for me without me. Taking into account the maximum number of positions of those who will be affected by the regulation, it is possible to avoid unwanted mistakes, improve the market situation, legitimize the rules for those who should comply with them. It can be concluded from this report that no such consultations were held.

While the public waits for the analysis from the drafters, we can analyze at least the content of its provisions and assess whether they meet the declared purpose and what potential risks they contain.

Does the draft law really protect consumers of real estate services from unscrupulous realtors?

Yes, the draft law contains some rules to protect the rights of consumers of real estate services:

  1. quality control of real estate services provided through mandatory certification of realtors and control of a self-regulating organization by analogy with other regulated professions;
  2. creation of a database to publish information about real estate units offered by realtors as well as register real estate contracts;
  3. obligation of realtors to work in good faith and in the interests of consumers, provide them with reliable information, maintain confidentiality and maintain records;
  4. requirements for the dissemination of information about real estate by realtors, including through advertising;
  5. administrative liability for violation of the law on real estate activities.

Some of these suggestions are useful, while others create significant risks, which are discussed below.

Does the draft law impose the use of realtor services in case of the sale or lease of real estate?

Part 1 of Article 1 of the draft law extends its effect, in particular, to legal relations arising in the process of real estate transactions related to the purchase, sale, lease (rental) of real estate.

The draft law does not contain a direct obligation to use the services provided by realtors to buy or rent real estate. At the same time, certain provisions of the draft law still make it impossible to conclude a real estate transaction without contacting a realtor.

Article 34 of the draft law states that the condition to sell or lease the real estate to a new owner is the inclusion of information about the property and registration of its information card in the Unified Information Database.

When entering such information into the Unified Information Database, real estate units are assigned with an individual registration number. The draft law provides for including such a registration number in the essential conditions (agreements on the alienation, sale, or lease of real estate). Moreover, a notary will not have the right to certify such a transaction without obtaining an extract from the registered information card of a real estate unit contained in the Unified Information Database.

Thus, any real estate unit, for which a person intends to enter into a sale or lease agreement, should be included in the Unified Information Database with the assignment of an individual registration number. A person cannot conclude real estate transactions without entering information on a real estate unit into the Unified Information Database.

However, the draft law does not directly provide property owners with the right to enter information about real estate units into the Unified Information Database independently: only realtors or “other persons authorized by law” have the right to enter information about real estate units into the Unified Information Database.

This text can be interpreted in several ways: 1) a person authorized by law (realtor or other person authorized by law to enter information), 2) a representative of the person entitled to enter information (representative of a realtor or other person authorized by law to enter information). Since no law explicitly provides for the right of anyone other than a realtor to enter information into the system, the owners will not have such a right.

Therefore, although the provisions of the draft law do not explicitly stipulate the obligation to use the services provided by realtors in case of the sale or lease of real estate, it will not be possible to conduct such transactions without entering information about real estate into the Unified Information Database. Since only realtors have the right to perform such actions, property owners will be forced to contact a realtor and conclude an agreement in the provision of real estate services to enter information about a property unit into the Unified Information Database.

Does the draft law really transfer the control over realtors to a “real estate chamber”, which the entire market will pay to? 

According to the draft law, a single non-governmental regulator (National Federation of Realtors) will appear on the real estate services market. All business representatives required to pay contributions should become members of such an organization. Each realtor should undergo professional training in an accredited institution and be attested/certified/accredited by the Qualification and Certification Commission within the National Federation to be included in the federation. When realtors receive a positive assessment, information about them will be included in the Unified Register of Individuals, Legal Entities and Professional Associations in Real Estate maintained by the Federation. And only after this procedure, realtors will be able to legally provide their services. Realtors should improve their qualifications by applying to the commission on a paid basis every two years.

The National Federation undertakes to control the quality of services provided by realtors and may impose disciplinary sanctions in case of violation of the rules approved by it.

The idea of ​​professional self-management, or rather self-regulation, could be a stimulus for market development. However, the model of its implementation selected by the drafters carries the risk of an uncontrolled monopoly.

There are several aspects raised by these issues:

  1. The newly created National Federation of Realtors, as a public association, obliges all other specialized public associations to implement acts and decisions of real estate self-regulating bodies. Besides, the Federation reserves the unique right to provide representatives of the real estate services market with access to the profession.
  2. 2. The National Federation will receive significant revenues from contributions and other sources. The draft law stipulates that the funds and property will be managed by the Public Oversight Board (one of the governing bodies of the National Federation). At the same time, the draft law does not provide for safeguards to avoid the possibility of abuse. In such cases, the limits are usually set, and if they are exceeded, only the Congress can decide on the disposal of funds and property. It is also important to provide for the obligation to publish revenue/expenditure reports of the National Federation and establish an audit authority to monitor all financial transactions within the organization.
  3. The National Federation will be the unique holder of the Unified Register of Individuals, Legal Entities and Professional Associations in Real Estate and the Unified Real Estate Information Database. The register is a very good tool that ensures the publicity of information about market representatives and concluded transactions. At the same time, the procedure for its conduct, inclusion, and removal of information, liability, and other aspects is described very briefly, and this carries the risk of manipulation and abuse.

Does the draft law harmonize Ukrainian legislation with EU legislation?

Ukraine has no European integration obligations regarding legal relations in the real estate services market. By the way, mostly real estate agents of EU member states act as intermediaries in real estate transactions, providing consulting services, property valuation services, trust property management, document preparation, etc.

Summarizing the above, contrary to the intentions, the draft law provides for an unreasonably burdensome procedure for providing real estate services during the alienation and lease of real estate, which will lead to the increased prices for selling and leasing such property. Despite the drafters’ idea to establish transparent rules of the game in the real estate services market, the draft law may lead to market monopolization by a single non-governmental organization, and this carries additional corruption risks and calls the competitive principles of market development into question. However, the draft law contains some provisions that improve the protection of the rights of consumers of real estate services. The analysis of the experts of the Better Regulation Delivery Office (BRDO) shows that the support of the draft law No.3618 in the proposed version may have a negative impact on both consumers and providers of real estate services in Ukraine.