For many years, investing in housing construction was quite risky in our country. At times, there were huge scandals when having received money from citizens, the real estate developer stopped construction and people lost money and did not get their apartments. However, there is a chance that the rights of private investors will finally be protected. The Parliament adopted draft law #5091 “On Guaranteeing Property Rights to Real Estate to Be Constructed in the Future” in the first reading.
“Now a construction project owner can resell a future apartment or give it for mortgage without the investor’s consent”
The drafters of the law assure that its adoption will create effective legal mechanisms for the state to guarantee property rights to unfinished construction projects and future real estate. That is, real estate buyers will be much better protected and receive guarantees of protection of their rights in case of, for example, suspended construction.
In particular, buyers receive the status of a guaranteed buyer instead of the investor status with risks as a result of concluding a purchase/sale contract, and, accordingly, are protected by laws on consumer protection (for individuals) and property rights. Special property rights will be registered for future real estate objects. This makes it impossible to resell them. A construction project owner/developer can start the sale of future real estate only after the registration of special property rights, separately for all apartments or other objects. This also makes it impossible to purchase residential or non-residential premises in illegally constructed buildings. A guaranteed construction share — a part of the object that the developer cannot sell before the completion of construction — will be introduced. This is an effective source to cover costs in case of completion of unfinished construction by another construction project owner. Additionally, the construction project owner/developer will be obliged to agree on adjustments in the design documentation with buyers, if such adjustments affect their interests. Also, the draft law establishes mandatory requirements for the publication of information about construction project owners and future apartment buildings.
However, it is quite difficult for ordinary citizens to understand the legal rules proposed. Therefore Facty.ua asked one of the drafters of the law — the Better Regulation Delivery Office — to explain the details. This is an independent analytical center funded by international donors, foremost by the European Union. Taisiia Baryngolts, Construction Sector Head at the BRDO, answered our questions.
— Under the approved draft law, a person who invests his/her money in real estate, receives the guaranteed buyer status. What does this mean and how does this differ from the investor status?
— Currently, an investor who invests in the purchase of an apartment in a multi-story apartment building under construction receives a formal right to acquire ownership of such an apartment in the future, after the commissioning of the completed construction project. This is the so-called right of expectation. Such a right is not registered, and it is difficult to protect it, because an unscrupulous construction project owner may resell the future apartment or give it for mortgage without the investor’s consent. The investor may alienate the future apartment only with the consent of the construction project owner.
Draft law #5091 “On Guaranteeing Property Rights to Real Estate to Be Constructed in the Future” gives people who buy apartments a completely different status. Immediately after paying the full cost of the future apartment, the buyer gains a special property right to such an apartment and becomes a special property right owner. The special property rights owner who has fully paid the cost of the future apartment has the right to alienate it to another person. The consent of the construction project owner for such alienation is not required. Also, future real estate buyers who are individuals in contrast to investors will be subject to the Law of Ukraine “On Consumer Protection”.
Moreover, the construction project owner will not have the option to change, for example, the number of storeys in the building under construction, the area of common facilities, the total apartment area by 10% or more, the apartment layout plan, etc. To make such changes, the construction project owner will need to agree on them with the apartment buyers who have paid the full or partial cost of the future real estate in such a building. In such a way, the draft law guarantees the right of buyers to receive the very same apartment in the very same building and with the very same comfort level they paid for.
“A guaranteed share can be an effective safeguard against new unfinished construction projects and, as a result, against an increase in the number of deceived or injured investors”
— What is the difference between “special property rights” to future real estate and traditional property rights?
— The Law of Ukraine “On Appraisal of Property, Property Rights and Professional Appraisal Activities in Ukraine” defines property rights as any rights related to property other than rights of ownership, in particular rights that are part of the ownership right (rights to possess, dispose and enjoy), as well as other specific rights (rights to engage in activities, rights to use of mineral resources, etc.), and rights of claim.
Under draft law #5091, special property rights to objects under construction and future real estate is a kind of property rights implying the possession and disposal of such objects wilfully, regardless of the will of other people, unless otherwise provided by law. This right arises after obtaining the right to perform construction activities, but not before the state registration of such a right. This right is terminated after the commissioning of completed objects, but not before the state registration of ownership of the relevant real estate.
That is, the special property right allows its owners not only to possess an object under construction or future real estate but also dispose of it: to sell, grant, transfer by succession or give for mortgage. Encumbrances may also be imposed on such special rights.
Special property rights will be covered by guarantees for ownership rights protection. In particular, it implies the elimination of obstacles to exercise special property rights, declaration of special property rights in case of their non-recognition, violation, contestation, declaration of ownership after the real estate commissioning.
The introduction of this type of property rights was the result of a long discussion between the drafters of the law and lawyers, construction project owners, and financial experts.
— Tell us more about the introduction of the guaranteed construction share. What is the purpose and mechanism of the implementation of this innovation?
— Another important innovation of draft law #5091 is the introduction of a guaranteed construction share. After the entry into force of the Law “On Guaranteeing Property Rights to Real Estate to Be Constructed in the Future”, construction project owners who intend to alienate at least one future real estate in the project under construction, such as an apartment, other residential or non-residential premises that will become an independent real estate object after commissioning, should retain a special property right for the project under construction, as well as retain or register a special property right for all future real estate objects in it to real estate developers. During such registration, construction project owners will be required to determine the guaranteed share — a certain number of future real estate in the construction project, the real rights to which are subject to encumbrances. In this case, if the project design documentation provides for construction stages or start-up facilities each of which can be commissioned separately, the guaranteed share shall be determined separately for each construction stage or start-up facility.
The guarantee share will be determined as a percentage of the total area of future real estate objects in the project under construction following the design documentation for its construction. The specific guaranteed share percentage will be determined by the Cabinet of Ministers of Ukraine.
The guaranteed share is a guarantee for further completion of construction projects, in particular, due to bankruptcy, financial insolvency of construction project owners, or real estate developers. The guaranteed share size should ensure the reservation of a sufficient number of future real estate objects to sell them and complete the construction project on the one hand, and at the same time should not become an unbearable burden for businesses while making it unprofitable to build something.
Draft law #5091 stipulates that funds for the construction of future real estate covered by the guaranteed share will be invested by real estate developers. Construction project owners and real estate developers are prohibited from selling, encumbering, or making other legal actions concerning future real estate covered by the guaranteed share until their completed construction project is commissioned.
The guaranteed share encumbrances shall be terminated simultaneously with the state registration of ownership of the first real estate object, for which the special property right to future real estate is registered as part of a divisible unfinished construction project, the relevant construction stage, or start-up facility. Early termination of guaranteed share encumbrances may be based on a court decision to complete the relevant unfinished construction project by other persons, in particular, due to bankruptcy, financial insolvency of construction project owners, or real estate developers.
We hope that such an instrument as a guaranteed share can be an effective safeguard against new unfinished construction projects and, as a result, against an increase in the number of deceived or injured investors.
“Providing regular information on the construction progress and information on apartments that have been sold and are still available for purchase is a mandatory requirement”
— What information about construction project owners and future apartment buildings will be open?
— In fact, information about construction project owners and construction objects is already open today, because, in July 2020, Ukraine introduced the Unified State Electronic System for the Construction Sector. Under the Law of Ukraine “On Regulation of Urban Planning Activities”, the information contained in the e-system is open and publicly available, except for taxpayers’ registration numbers, passport data, place of residence of individuals, service contracts, documents submitted by individuals, and legal entities to receive the services specified in this law and other information, the list of which is determined by the Cabinet of Ministers of Ukraine in the Procedure for maintaining the e-system. Information from the e-system is available on its portal at: https://e-construction.gov.ua/.
The draft law suggests that information on the construction of apartment buildings with the involvement of private funds of individuals and legal entities should be even more open and publicly available. The list of such information is quite significant and is provided directly by law. Therefore, this information should be made public and it will be difficult to limit its volume — only by making amendments through the parliament.
Under draft law #5091, construction project owners, real estate developers, or construction financing fund managers are obliged to publish detailed information about a construction project owner on their website, in particular: name of the construction project owner, EDRPOU code, legal status, information about its director and other persons who may perform actions on behalf of the developer, information about a beneficial owner (controller) of the construction project owner (real estate developer, construction financing fund manager), location, contacts, etc.
If the construction project owner, real estate developer, or construction financing fund manager is in the process of termination or bankruptcy/reorganization, such data should also be provided, along with information about the asset manager, reorganization manager, liquidator.
Serious requirements are also established for the publication and disclosure of information about construction projects themselves. For example, information on main technical specifications of construction objects in the amount not less than specified in the state e-system in the construction sector and information on general contractors should be published on the website of the construction project owner, real estate developer, or construction financing fund manager. The scheduled date of commissioning of construction objects should be clearly stated.
Providing copies of documents entitling to perform construction activities, regular information on the construction progress, including photos, as well as information on apartments that have been sold and are still available for purchase is also a mandatory requirement. And, of course, the conditions of purchase and cost of apartments or ways of its appraisal should be publicly available and be published together with a draft purchase/sale contract for future apartments.
Construction project owners will be liable for the violation of information publicity requirements. They can be fined in the amount of 10 living wages (today it is about 23 thousand hryvnias). Payment of the fine will not exempt construction project owners, real estate developers, and construction financing fund managers from fulfilling the obligations to make the relevant information public — Taisiia Baryngolts summed up.
It is worth recalling that the procedure for assessing the real estate value has changed in Ukraine. The State Property Fund of Ukraine has recently put into operation a Unified Evaluation Reports Database with a module of electronic determination of the estimated value, an electronic evaluation service, and an option for automatic generation of electronic real estate value certificates.