Expert Opinion (#07-08 July-August 2017)

Farmland: Current Trends

by Viacheslav Lytvynets

Agribusiness provides more than 40% of UkraineТs exports. And this number is increasing every year. The investment attractiveness of agriculture is recognized by public policy and international investors.

The farmland market

Drivers of growth in agriculture were the elimination of collective farms and actual implementation in 1999-2004 of private ownership of agricultural land with the issue of state acts (deeds) on land plots. However, a moratorium on the sale of agricultural land has been in place since 2001. Agribusiness activity is currently based on land leasehold. Most experts recognize that the further development of agribusiness is impossible without the launch of the agricultural land market. Agricultural land is sold in all countries of Central Europe and most of Eastern Europe, particularly in Russia and Moldova. The topic of the farmland market is now part of UkraineТs relationship with the International Monetary Fund (hereinafter Ч IMF).

The main goals of cooperation with the IMF are to stabilize the Ukrainian financial system, to implement structural reforms and to set a course for sustainable economic growth. The Memorandum of Economic and Financial Policies of 2 March 2017 liberalizes the land market. It is anticipated that parliamentary approval of the law on the turnover of agricultural land enabling the sale of agricultural land will expire by the end of 2017, thereby allowing for the sale of state-owned and private land to start immediately thereafter.

At the same time, several draft laws on the agricultural land market have already been submitted to the Verkhovna Rada of Ukraine, while the Cabinet of Ministers of Ukraine plans to submit its own Draft Law On the Land Market at the beginning of summer 2017. It should be noted that in December 2016 parliamentary hearings were held on the agricultural land market and on 17 February 2017 a petition was submitted by 55 MPs for compliance with the Constitution of Ukraine paragraphs 14 and 15 of Chapter X (Transitional Provisions) of the Land Code Ukraine (regarding the legality of the land moratorium).

The aforementioned indicates that there is a high probability that the farmland market will be launched for 2018-2020. First of all the possibility of selling state and municipal land is expected. Major debates are being conducted on potential buyers of farmland and providing such opportunities at the first stage for citizens of Ukraine only and to a maximum of 200 hectares.

The gradual implementation of the land market, even with prohibition options for legal entities and foreigners, would have an effect on land lease relations for agribusiness.

Long-term lease and perpetual lease (emphyteusis)

Delaying the solution to the issue of the land market leads to the fact that not only non-agricultural businesses, but small agribusinesses and individuals are interested in practice to purchase agricultural land via land swap. For instance, a land plot of 0.01 hectares is exchanged for a land plot of 5 hectares. In such circumstances it should be noted that the Supreme Court of Ukraine has solved these issues repeatedly. For example, via the decisions of 5 November 2014 and 12 October 2016, and adopted a decision that the contracts on exchange of farmland concluded during the moratorium are invalid.

As a result of the farmland sale moratorium, there are growing number of long-term land lease and perpetual lease (emphyteusis) agreements. This impels agribusinesses to change established approaches for the lease term and rent payments upwards of rent payments in advance. Some market players even give the idea that perpetual lease (emphyteusis) for 100 or 200 years is almost the same as ownership rights. However, Ukraine is not a country in which civil rights can be guaranteed for decades, so possible negative judicial practice and a real farmland market would reduce the attractiveness of long-term lease or perpetual lease (emphyteusis) agreements.

The term of land lease

The term of a land lease is not only an essential condition of the contract that determines the validity of the contract. This also provides the correct understanding by stakeholders of the rights of third parties and respective encumbrances on the leasehold. In this aspect, contradictory judicial practice, including the practice of the Supreme Court of Ukraine does not provide certainty. Previously (before 2013), a land lease agreement came into force only upon its registration in the land registry. Due to various circumstances (making mandatory application, registration monopoly and other) the registration procedure of land lease agreements took much more time (a year, or more than one year) than the date of the contract. Not long ago judicial practice was based on the fact that a land lease agreement is concluded on the date of signing of the contract and the date of contracts registration could not change the term of land lease.

Nonetheless, the Resolution of the Supreme Court of Ukraine of 18 January 2017, provided the legal point of view that the term of the land lease agreement (signed and registered before 2013) begins after its coming into force (date of registration) and not from the mere fact of the lease agreementТs signing.

Renewal of land lease agreement

The Law of Ukraine On Land Lease (Article 33) provides a tenantТs pre-emptive right to renew a land lease agreement for a new term. The significance of the renovation procedure in land lease agreements is confirmed by the fact that in 2015 and in 2016 several Resolutions of the Supreme Court of Ukraine to resolve disputes based on renewal of land lease agreements were adopted.

When applying pre-emption rights to a land lease agreement, it is extremely important to comply with the renovation procedure, including filing notice to the lessee prior to the expiry of the term of land lease agreement within the period specified in the agreement, but not later than one month before the land lease agreement is set to expire. A draft of the additional agreement must also be sent.

The Supreme Court of Ukraine has concluded that the tenantТs pre-emptive right, which is protected under Article 3 of the Civil Code of Ukraine will be primarily at the conclusion of the land lease agreement: (i) with a new tenant with written notice of the previous tenant of intention to apply the pre-emption right; (ii) in the case of signing of a new land lease agreement with a new tenant on the same terms as for proposed previous tenant on the implementation of pre-emptive right; (iii) in the case of signing a new contract with a new tenant if the grounds of refusal for the previous tenant was notification about the need of the owner to use the land plot for their own needs.

However, the tenantТs pre-emptive right to renew the land lease agreement is not absolute and cannot be implemented if the owner does not transfer the land plot to the next lease.

Disposal of municipal and state land

The territorial authorities of the State Service of Ukraine for Geodesy, Cartography & Cadastre currently dispose of agricultural land outside settlements. Local government reform (decentralization) and the relevant amalgamation of territorial communities need, objectively, to empower local councils with managing not only the land within settlements, but also the territory of local communities outside settlements. Although the aforementioned issue seems to be supported by everybody, the corresponding draft law (No 4355) has not been adopted yet by the Ukrainian Parliament.

Consolidation of agricultural land

A major challenge of sustainability issues of farmland use for agricultural entities is consolidation of farmland fields consisting of 30-150 individual land plots with different owners. Due to inheritance a land plots it already seen as multiple owners for one land plot. A large number of land plots are not owned by specific individuals and are unclaimed (idle land). Often within a single farmland field there are 3-5 different agricultural entities as a co-tenant of land plots, and for further determination of farmland use within a farmland field considerable efforts have to be made. To govern the issue of land consolidation two draft laws were submitted to Parliament in February 2017.

The main proposals for land consolidation are as follows:

Ч additional rights determined to the leaseholder of a substantial part of a farmland field (75% of the total territory of a farmland field):

Ч pre-emptive right to renew a rivalТs land lease agreements after the expiry of the term of the current land lease agreement within the farmland field;

Ч the exchange of land possession (sublease of land) between companies without the consent of the land owner;

Ч in case of failure to reach agreement on sublease agreements Ч such agreements may be recognized by a court as concluded;

Ч lease of state and municipal land within the farmland field can be obtained without an auction.

Conclusion

Regulation of farmland use would generally depend on resolving the topic of the farmland market. However, even within the moratorium on the alienation of farmland agricultural, entities face many challenges and problems in their quest for sustainable land use.

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