TRANSFER OF REAL ESTATE

1 Legal system

How would you explain your jurisdiction's legal system to an investor?

Ukraine is a civil law country. The Constitution of Ukraine is the fundamental legislative act that has the highest legal force. All laws and subordinate legislation are adopted in compliance with the Constitution. International treaties ratified by Verhovna Rada (the supreme legislative body of Ukraine) are considered part of national legislation. There are three branches of power in Ukraine: legislative, executive and judiciary. It should be noted that a decision of 1 October 2010 by the Constitutional Court of Ukraine repealedthe law of 8 December 2004 that had introduced a constitutional amendment changing the system of government from a presidential – parliamentary to a parliamentary–presidential one. The court adjudicated that, from the moment of this decision, the 1996 version of the Constitution was once again valid, turning Ukraine from parliamentary–presidential rule to presidential–parliamentary rule.

The main legislation governing real estate consists of the Civil Code of Ukraine, the Commercial Code of Ukraine, the Land Code of Ukraine and the Law of Ukraine on State Registration of Rights to Real Estate and their Encumbrances. Although the precedent system is not officially established by law, in practice courts often take the previous decisions in identical cases into consideration. Moreover, the highest courts and the Supreme Court of Ukraine consolidate particularly challenging cases and such consolidated opinions of higher courts are strongly considered by the courts of first and second instances.

Ukraine is a party to many multilateral treaties and bilateral international agreements on trade and economic relations, mutual protection of foreign investments, double taxation avoidance, and so on.

2 Conveyance documentation

What are the legal requirements for documents recording conveyance?

The Ukrainian system of registration of rights to real estate is still at the development stage. The new version of the Law of Ukraine on State Registration of Rights to Real Estate and their Encumbrances, effective as of 1 January 2013, introduces a unified State Register of Real Property Rights (the Real Estate Register). The Real Estate Register will contain information on rights to real estate, owners of real estate, technical information on buildings and structures, land plot cadastre plans and information on transactions related to real estate as well as all encumbrances imposed on the land plot or real estate object. It should be mentioned that Ukrainian law distinguishes between title to a land plot and title to a building or capital structure. This means that the building and the underlying land plot can be owned by different persons. However, the provisions of Land Code have been amended to the effect that the person acquiring the building simultaneously acquires the ownership or use rights to the respective land plot or part thereof accommodating such building; the rights to the land plot of the previous owner of the building are terminated.

Pursuant to the Civil Code, all real estate sale and purchase agreements must be executed in written form and are subject to notarisation. As of 1 January 2013, the ownership right to a building, capital structure or a land plot shall arise upon its state registration with the Real Estate Register. The ownership right to a land plot is certified by the state certificate on ownership right to a land plot (the State Act). However, if a privately owned land plot is acquired without changes in its borders or zoning (or both), the ownership right to a land plot is certified by the sale and purchase agreement and the attached State Act issued in the name of the previous owner.

The following costs typically apply to real estate acquisition:

  • the state duty for notarisation of real estate sale and purchase agreement in the amount of 1 per cent of the property value;
  • the state pension insurance fund duty in the amount of 1 per cent of the property value (not applicable to land plots); and
  • fee for notary's services (at notary's discretion).

It is common practice for the parties to the agreement to share the above-mentioned costs.

3 Foreign investors

What other factors should a foreign investor take into account in considering an investment in your jurisdiction?

Provided that foreign investments are duly registered with the appropriate authorities, foreign investors are entitled to certain privileges and state guarantees with regard to changes in legislation (for a period of 10 years), nationalisation (with the exception of emergency measures), reimbursement of losses incurred as a result of improper action of public bodies, repatriation of profits and withdrawal of investments.

Certain statutory limitations apply to foreign investments, mainly related to land acquisition. In particular, according to the Land Code, foreign legal entities, foreign citizens and joint ventures with foreign participation are not entitled to own agricultural land plots. Foreign individuals are only entitled to own non-agricultural land plots within residential areas and non-agricultural land plots outside residential areas, provided that they own properties on such land plots. Foreign legal entities are only entitled to own non-agricultural land plots within residential areas for construction or business activity and non-agricultural land plots outside residential areas provided that they own properties on such land plots.

An important factor preventing the development of the land market in Ukraine is the temporary moratorium on alienation of agricultural land plots. Cancellation of the moratorium is scheduled for 1 January 2013; however, this term may be postponed by Verhovna Rada. Certain methods of circumventing the moratorium have been developed; however, such methods remain questionable from a legal point of view.

4 Exchange control

If a non-resident invests in a property in your jurisdiction, are there exchange control issues? What about repatriation of capital?

The use of foreign currency in the territory of Ukraine is subject to exchange control. The National Bank of Ukraine specifies the list of foreign currencies that can be used by foreign investors for the purpose of making cash investment in Ukraine. Such cash investments can be made either through a special investment account opened with the Ukrainian commercial bank, or by direct transfer of funds to the Ukrainian resident's bank account opened with the Ukrainian commercial bank.

The state bodies and banking institutions exercising currency control are entitled to receive complete information from residents and non-residents on currency operations and bank accounts opened in foreign currency. The legislation also requires reporting on currency operations.

Foreign investors are guaranteed the right to prompt and unhindered repatriation of profits and other funds in a foreign currency derived from their investments in Ukraine after payment of all applicable taxes. Such state guarantees are available to investors whose foreign investments are duly registered with the appropriate state authorities.

Within six months of the day of termination of the investment activity, the foreign investor is entitled to a return of its investments without customs duties, in the form of the investment or in the currency used to make the investment, as well as any profits derived from these investments.

5 Legal liability

What types of liability does an owner of real estate face? Is there a standard of strict liability and can there be liability to subsequent owners? What about tort liability?

The owner must use his property in a way that does not infringe the rights, freedoms and dignity of other persons and the public interest; does not pollute the environment; or make worse the natural characteristics of a land plot.

The law provides for administrative, civil and criminal liability, depending on the type of offence and the level of an offender's negligence. For instance, the Land Code of Ukraine contains a non-exhaustive list of such offences (conclusion of contracts with violations of land legislation, unauthorised occupation of land plots, contamination of lands, littering of lands with waste, locating, designing, constructing and putting into operation objects that damage the state of lands, failure to use the land in accordance with its designated purpose, etc).

The Law of Ukraine on Environmental Protection provides that the state standards for environmental protection are mandatory and defines liability for violations of ecological norms. The general concept is that liability for breach of environmental laws arises if the person is to blame for the respective breach.

6 Protection against liability

How can owners protect themselves from liability and what types of insurance can they obtain?

Voluntary and mandatory insurance is recognised in Ukraine. In order to insure protection against liability a foreign investor may obtain the following types of insurance, depending on the type of business activity conducted in Ukraine:

  • civil liability insurance against damage caused to the environment or people's health; or

  • civil liability insurance against property damage or personal damage as a consequence of property use (fire, lightning, utility gas explosion, damage inflicted by accidents connected with the water supply, collecting systems or heating systems on the property of the insured person).

7 Choice of law

How is the governing law of a transaction involving properties in two jurisdictions chosen? What are the conflict of laws rules in your jurisdiction?

According to the Law of Ukraine on International Private Law the form of the agreement, the title, the inheritance and the remedies concerning real estate located in the territory of Ukraine are governed by the laws of Ukraine.

Ukrainian courts have exclusive jurisdiction over disputes concerning real estate located in the territory of Ukraine.

8 Jurisdiction

Which courts have subject-matter jurisdiction over real estate disputes? Which parties must be joined to a claim before it can proceed? What is required for out-of-jurisdiction service? Must a party be qualified to do business in your jurisdiction to enforce remedies in your jurisdiction?

The Ukrainian judicial system is formed by courts of general jurisdiction and the Constitutional Court of Ukraine. General jurisdiction courts are divided into common courts and specialised courts (ie, commercial and administrative courts). In general, common courts consider civil and criminal cases. Disputes arising out of business activity are considered by commercial courts, while administrative courts decide on cases where governmental and municipal bodies are involved. As far as territorial jurisdiction is concerned, the general rule is that a case concerning real estate shall be adjudicated by a court located where property in question is located.

The parties, third parties, prosecutor, witnesses and other representatives, depending on the subject of a case, are the participants in a trial. A plaintiff and a defendant are the necessary parties to a trial.

To perform an out-of-jurisdiction service, a properly executed (certified by a notary and legalised or apostilled) power of attorney is required.

Foreign legal entities and persons are guaranteed the same rights and have the same obligations as residents of Ukraine with regard to the enforcement of court decisions. Foreign legal entities or individuals whose rights have been violated in Ukraine enjoy the right to initiate corresponding court proceedings in Ukraine. After a court has issued its ruling demanding the enforcement of judgments, the State Enforcement Agency shall ensure further enforcement in cases where the breaching party fails to follow the court's ruling without deviation. In some instances, judgments may be enforced based on a notary's executive inscription.

Ukraine is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which is applied on a reciprocal basis.

Ukrainian courts recognise decisions of foreign courts if a valid international agreement exists between Ukraine and the jurisdiction where such decision was made. Moreover, the reciprocity principle of the foreign court decision recognition is established by Ukrainian civil procedural law.

9 Investment entities

What legal forms can investment entities take in your jurisdiction? Which entities are not required to pay tax for transactions that pass through them (pass-through entities) and what entities best shield ultimate owners from liability?

The most commonly used forms of real estate investments are direct property ownership, purchase of the interest in the owing company and investments through specialised institutional vehicles. It should be noted that while direct ownership may provide the investor with a higher level of security through mitigation of risks related to previous title, the share deal may be more appropriate where the owing company holds ownership or use rights to a land plot or holds certain permits or licences necessary for project development. Institutional vehicles are mostly used in the sphere of residential property development and may provide certain tax benefits.

The Civil Code stipulates that all legal entities carrying out business activities in Ukraine must be established in the form of companies. Limited liability companies (LLC) and joint stock companies (JSC) are the most common types of companies used by foreign investors in Ukraine, since liability of the investors is limited to the amount of their investment in the company.

Both LLC and JSC may be established by a single founder or a group of founders (the number of founders of an LLC may not exceed 10 and of a private JSC 100 legal entities or individuals). An investor's interest in an LLC is expressed as a percentage of the company's charter capital. Such interest is not regarded as a security; hence, there is no requirement for registration of such interest with the State Securities Commission. Legislation does not stipulate any specific requirements as to the minimum amount of the charter capital of the LLC. The charter capital of a JSC is divided into shares of equal par value. Issue of the shares must be registered with the State Securities Commission. A minimum charter capital for JSC formation must be equal to 1,250 minimum monthly salaries (from 31 December 2012, 1,417,500 hryvnas).

A JSC may be established as a private or public company, the main difference being the possibility to trade shares of the public JSC on the stock exchange. The status of the private JSC must be changed to public should the shareholders of such JSC decide to make a public placement of its shares.

A company distributing dividends to its shareholders must pay a 19 per cent tax (for the period from 1 January to 31 December 2013) on the amount of dividends before or at the time of distribution. The amount of tax on dividends may be credited against the distributing company's income tax liabilities. Dividends distributed to foreign investors are also subject to withholding tax at the rate of 15 per cent, unless otherwise stipulated by an applicable double taxation avoidance agreement. Dividends received by Ukrainian legal entities are not included in their taxable income.

Current legislation provides for an opportunity to establish certain investment vehicles that are not subject to corporate income tax, such as a construction financing fund (CFF), a mutual investment fund (MIF), a corporate investment fund (CIF) and a real estate operations fund (REOF). Such vehicles are mainly used for the purpose of financing residential construction.

It should be noted that state or municipally owned land plots may be sold to a foreign legal entity only subject to registration of its permanent establishment in Ukraine.

10 Foreign investors

What form of entities do foreign investors customarily use in your jurisdiction?

The procedure for the establishment and operation of an LLC is less complicated and time consuming; there is no statutory requirement as to the minimum amount of the LLC's charter capital, which makes an LLC a more popular choice as an investment vehicle. However, when a joint venture between foreign or local investors (or both) is considered, or a public offering of shares is intended, a JSC may be the more appropriate choice. Also, as there is no effective mechanism of foreclosure of the pledged interest in the LLC's charter capital, a pledge of the shares in a JSC may provide more comfort to the banks where the debt financing is sought by the investor. JSC is also more preferable if real property is transferred by the shareholder into the charter capital of the company.

11 Organisational formalities

What are the organisational formalities for creating the above entities? What requirements does your jurisdiction impose on a foreign entity? What are the tax consequences for a foreign investor in the use of any particular type of entity, and which type is most advantageous?

Establishing a legal entity in Ukraine requires registration with the local state authority, the tax authority, the statistics office, the pension fund and social insurance funds, as well as other formalities.

One of the factors that make an LLC the most popular form of legal entity is the short-term incorporation procedure. Incorporation takes approximately three to four weeks from the day the incorporation documents have been filed with the registration authority.

It is worth noting that a legal entity founded by a sole shareholder may not act as the sole shareholder in another LLC; an individual or a legal entity may be the sole shareholder in only one LLC.

Foreign legal entities are subject to tax on income derived from sources in Ukraine and income earned through a permanent establishment in Ukraine. Ukrainian-sourced income of foreign entities that do not conduct business activities in Ukraine through a permanent establishment (including proceeds from lease or sale of real estate) are subject to withholding tax at the rate of 15 per cent. Such taxes are withheld from the sums remitted at the time of such remittance. Permanent establishments of foreign entities conducting business activities in Ukraine are subject to a corporate income tax on general grounds at the standard rate of 19 per cent (for the period from 1 January to 31 December 2013).

12 Documentation

Is it customary in your jurisdiction to execute a form of non-binding agreement before the execution of a binding contract of sale? Will the courts in your jurisdiction enforce a non-binding agreement or will the courts confirm that a non-binding agreement is not a binding contract? Is it customary in your jurisdiction to negotiate and agree on a term sheet rather than a letter of intent? Is it customary to take the property off the market while the negotiation of a contract is ongoing?

A letter of intent or a memorandum of understanding are widely used forms of non-binding agreements in Ukraine. The Civil Code provides for the 'preliminary agreement', which constitutes an obligation of the parties to make a contract in the future on the terms and conditions stipulated by the preliminary agreement. The party failing to perform its obligations under the preliminary agreement shall be liable for damages caused by such failure. The preliminary agreement must be executed in the same form as the form envisaged for the main contract, thus execution of the preliminary agreement may require additional expenses for its notarisation. A letter of intent is not considered a 'preliminary agreement' unless otherwise expressly stated by the parties. It is a common practice to secure obligations of the purchaser under the preliminary agreement on the sale and purchase of immoveable property by a deposit, advanced by the purchaser to the seller.

Ukrainian legislation does not provide for an obligation of the seller to take the property off the market while negotiating a contract; however, the parties may agree to do so in a letter of intent.

13 Contract of sale

What are typical provisions in a contract of sale?

Real estate sale and purchase agreements typically contain the following provisions:

  • subject of the agreement, with details as to the address of the property, property area, description of the documents certifying the seller's right to the property, cadastral number, designated use, legal regime and area of the land plot underlying the building;
  • contract price and a procedure of payments;
  • information regarding absence of prohibitions on alienation of the property;
  • information regarding property encumbrances;
  • date of transfer of ownership right and of the property to the purchaser;
  • rights and obligations, liability of the parties;
  • dispute resolution procedure; and
  • governing law.

Ukrainian legislation does not specifically provide for an opportunity to operate as an escrow agent in its classic form. However, there are some instruments that may secure fulfilment of the obligations of the parties. These instruments include letters of credit, suretyship agreements, bank guarantees and pledges.

14 Environmental clean-up

Who takes responsibility for a future environmental clean-up? Are clauses regarding long-term environmental liability and indemnity that survive the term of a contract common? What are typical general covenants? What remedies do the seller and buyer have for breach?

According to the Law of Ukraine on Environmental Protection, a legal entity or an individual that violated legislation in the sphere of environmental protection would bear disciplinary, administrative, civil or criminal responsibility. Thus the general principle is that liability for violations of the environmental laws arises if the person is to blame for the respective breach.

A seller may (although as a rule, quite aversely) provide some warranties in the contract that the property in question is not contaminated (in some circumstances such guarantees are given for an extended period of time). This may allow the purchaser to take recourse to the seller for damages compensation if he has suffered any losses caused by environment pollution.

In certain instances the law demands an ecological audit (bankruptcy, privatisation, transfer into concession objects in state and communal property, transfer or acquisition of objects by the state, creation of joint enterprises on the basis of objects in state and communal property, ecological insurance of objects, etc) and ecological expertise (technical and economic calculations, construction and reconstruction designs, etc).

Unless otherwise agreed by the parties, the owner bears the risk of accidental loss or damage of property until the moment when the title is transferred. Compensation for breaches and prorations may also be stipulated in the contract.

15 Lease covenants and representation

What are typical representations made by sellers of property regarding existing leases? What are typical covenants made by sellers of property concerning leases between contract date and closing date? Do they cover brokerage agreements and do they survive after property sale is completed? Are estoppel certificates from tenants customarily required as a condition to the obligation of the buyer to close under a contract of sale?

The Civil Code requires that the seller of a property warn the buyer of all third-party rights to the property. In the event of failure to meet this requirement the buyer has the right to claim purchase price reduction or termination of the sale and purchase agreement. Sale and purchase agreements typically do not contain any covenants relating to leases; however, they may contain representations as to the completeness of the information provided on leases or reference to due diligence reports.

16 Leases and mortgages

Is a lease generally subordinate to a mortgage pursuant to the provisions of the lease? What are the legal consequences of a lease being superior in priority to a mortgage upon foreclosure? Do lenders typically require subordination and non-disturbance agreements?

Before entering into a mortgage agreement, the debtor is obliged to inform the lender of all rights and claims of third parties concerning the mortgaged property. If the debtor fails to perform this obligation, the lender may demand acceleration of al contractual obligations performance and reimbursement of incurred losses.

Under the Civil Code leases survive the ownership transfer; however, the parties to the lease agreement may agree on the early termination of the lease subject to the sale of the property or enforcement of the mortgage.

In cases of bankruptcy, the mortgaged property of a debtor shall be included in the liquidation estate; however, the value of the mortgaged property may only be used for the purpose of satisfying the first claim rights of the mortgagee.

The owner is generally not allowed to lease the mortgaged property without the prior consent of the lender.

17 Delivery of security deposits

What steps are taken to ensure delivery of security deposits to a buyer? How common are security deposits under a lease? Do leases customarily have periodic rent resets?

Although Ukrainian counterparts are very reluctant to provide payment guarantees, security deposits are widely used in all types of transaction. As a rule, the amount, procedure of delivering and return of security deposits are established by the preliminary agreement, letter of intent, or other similar document. Delivery of security deposits may be ensured by using a letter of credit, a guarantee, a surety, a pledge or a mortgage. Normally security deposits accumulate no interest. Under a lease agreement the advance payments (usually in the amount of three to five monthly rents) may also be used to ensure indemnification of losses caused by the actions of the lessee. Ukrainian legislation does not provide for mandatory rent reviews; however, it is common practice for lease agreements to provide for periodic rent reviews based on inflation rates or currency exchange rates, or both. The Commercial Code of Ukraine entitles the tenant to claim a rent reduction in the event of considerable deterioration of the leased property.

18 Due diligence

What is the typical method of title searches and are they customary? How and to what extent may acquirers protect themselves against bad title? Does your jurisdiction provide statutory priority for recorded instruments?

Owing to certain factors such as acquisition of property through the privatisation process, a developing title registration system and non-transparency of the land market, properties with questionable title are not rare in Ukraine; therefore, thorough due diligence before acquisition is a must for a foreign investor.

The due diligence procedure varies according to the type of real estate project in view, and typically covers the following:

  • analysis of documents evidencing title to real estate;
  • extracts from the register of ownership rights, register of mortgages, register of real estate disposal bans, register of transactions (to be replaced by extracts from the uniform Real Estate Register from 1 January 2013);
  • search on possible statutory limitations of land use;
  • study of compliance with the legislation of the design approval
  • and construction permits;
  • corporate-document research in the case of a share deal, and so on.

Title insurance is gaining in popularity; however, currently this kind of insurance is rarely obtained and is very expensive.

State registration of a mortgage establishes its priority over third-party claims to the mortgaged property.

19 Structural and environmental reviews

Is it customary to arrange an engineering or an environmental review? What are the typical requirements of such reviews? Is it customary to get representations or an indemnity? Is environmental insurance available? Is it customary to obtain a zoning report or legal opinion?

Engineering and environmental reviews are customarily held at the parties' discretion. The legislation allows any kind of review initiated and arranged by mutual consent of the parties. The Law of Ukraine on Ecological Audit provides that voluntary ecological research may be conducted by a certified ecological auditor concerning any organisation.

It is recommended that the investors undertake an engineering review of the property, since unauthorised changes of structure or interior planning are not uncommon and may complicate or prohibit registration of the title.

Such concepts as representations, warranties or indemnities are not commonly used in Ukraine and are rarely enforceable unless substantial security is provided by the seller.

Environmental insurance is available, although not widespread owing to the unsaturated and undeveloped insurance market.

Obtaining zoning reports is not common, and legal issues pertaining to permitted uses of property and other related issues are most likely to be covered in the legal due diligence report.

20 Review of leases

Do lawyers usually review leases or are they reviewed on the business side? What are the lease issues you point out to your clients?

In order to prevent possible complications, the parties usually entrust reviewing the whole documentation package to lawyers.

Under the Civil Code, a lease agreement of a building or other capital structure is subject to notarisation and the right of lease is subject to state registration if entered into for a period of three years or more. The term of lease of buildings and premises is not subject to limitation.

Foreign individuals and legal entities may lease land in Ukraine. It should be noted that in most cases state and municipal lands can be leased only on a competitive basis unless a lessee owns a property that is located on a land plot in question. Other exceptions when an auction need not be held include the lease of land plots designated for:

  • development of infrastructure, energy, transport projects and road construction;
  • diplomatic missions or religious organisations; and
  • natural resources extraction under special permit etc.

The term of the land lease may not exceed 50 years. Property owned by a foreign entity can be let to a third party either through permanent establishment of such foreign entity or through a legal entity resident of Ukraine acting as an agent of such foreign entity.

21 Other agreements

What other agreements does a lawyer customarily review?

It is important that a seller provides all relevant documents relating to the purchased object including all agreements (facility management contracts, lease agreements, public utilities supplies agreements, etc). In cases where a property is purchased through a share transaction it is highly recommended that a lawyer reviews the documents regarding all aspects of the owing company's activities, including statutory documents and corporate history, significant agreements including loan agreements, financial documents, litigation, and so forth.

22 Closing of transaction

How does a lawyer customarily prepare for a closing?

A lawyer typically prepares and presents documents for examination of a notary including:

  • documents evidencing ownership rights to the property;
  • a certificate from the Bureau of Technical Inventory (for building or capital structure);
  • a certificate on the absence of encumbrances;
  • an expert assessment of the land plot;
  • the spouse's consent to alienation if the seller is an individual;
  • statutory documents; and
  • documents evidencing the powers of the person executing the agreement if the seller is a legal entity, and so on.

FINANCING

23 Form of lien

What is the method of creating and perfecting liens?

Liens are created on the basis of a contract, the law or a court decision. Properties that may be alienated and are not excluded from the turnover may become subjects of a lien. A lien over property is perfected through execution of the mortgage agreement, which is subject to notarisation and registration with the State Register of Mortgages and the Unified Register of Real Estate Disposal Bans (both registers are to be replaced with the uniform Real Estate Register from 1 January 2013). Although such registration is not strictly required by law, it provides the priority right for the lender over third-party claims. Since recurring liens on the same property are admissible, it is recommended to register the lien.

24 Legal requirements

What would be the ramifications of a lender from another jurisdiction making a loan secured by collateral in your jurisdiction? What is the form of lien documents in your jurisdiction? What other issues would you note for your clients?

Loans provided to Ukrainian residents by a foreign lender are subject to registration with the National Bank of Ukraine (the NBU). Mortgage agreements must be executed in written form and are subject to notarisation and registration with the State Register of Mortgages and the Unified Register of Real Estate Disposal Bans (both registers are to be replaced with the uniform Real Estate Register from 1 January 2013). Ukrainian legislation does not provide for any specific restrictions on granting securities to foreign lenders; however it is not possible to grant security to foreign entities over assets that can only be owned by residents of Ukraine (such as agricultural land plots).

25 Loan interest rates

How are interest rates on commercial and high-value property loans commonly set (with reference to LIBOR, central bank rates, etc)? What rate of interest is unreasonably high in your jurisdiction and what are the consequences if a loan exceeds the reasonable rate?

Ukrainian banks typically provide commercial and property loans with a fixed interest rate without any reference to LIBOR or similar reference rate. The NBU sets the maximum allowed interest rate for loans provided by foreign lenders, based on state borrowings weighted average rate on the international capital markets. Such maximum interest rate includes all fees and charges provided for by the loan agreement.

26 Default and enforcement

How are remedies against a debtor in default enforced in your jurisdiction? Is one action sufficient to realise all types of collateral? What is the time frame for foreclosure and in what circumstances can a lender bring a foreclosure proceeding? Are there restrictions on the types of legal actions that may be brought by lenders?

The lender is entitled to enforce collateral upon default of the debtor under a secured obligation, upon failure to perform obligations under the mortgage agreement or upon initiation of the debtor's insolvency procedures. Usually foreclosure proceedings may be initiated if the debtor has failed to remedy the default within 30 days of the lender's enforcement notice. Collateral is typically enforced through public auction on the basis of a court decision or notary's executive inscription; however, the law also provides for an out-of-court settlement procedure requiring notarised agreement of the parties and providing for either transfer of the title to the mortgaged property to the creditor or sale of the mortgaged property by the creditor to a third party. It should be noted that in practice the enforcement through an out-of-court settlement procedure is problematic because of imperfect legislation in this sphere. There are no restrictions on the type of legal action that may be brought by lenders.

Enforcement of a court decision is performed by the State Executive Service. The legislation sets forth that the State Executive Office is obliged to perform all actions regarding the court's decision or notary's endorsement within six months of the date of such decision.

27 Protection of collateral

What actions can a lender take to protect its collateral until it has possession of the property?

A mortgagor is obliged to take out insurance on the collateral against accidental loss or damage in favour of the lender. Failure to perform this obligation entitles the lender to take out insurance on the collateral at his own cost with the subsequent reimbursement of such expenses by the mortgagor.

28 Recourse

May security documents provide for recourse to all of the assets of the borrower? Is recourse typically limited to the collateral and does that have significance in a bankruptcy filing? Is personal recourse to guarantors limited to actions such as bankruptcy filing, sale of the mortgaged property or additional financing encumbering the mortgaged property or ownership interests in the borrower?

If a borrower fails to fulfil its obligations under a secured contract, a creditor acquires the right to enforce the collateral. The scope of the recourse depends on the provisions of the contract, secured by collateral. Typically if collateral is enforced through an out-of-court settlement procedure the recourse is limited to the collateral; if enforcement is based on a court decision the lender may subsequently go after all of the assets of the borrower.

If a borrower fails to fulfil its obligations under a contract that has not been secured, the creditor may naturally demand reimbursement from a debtor. If a debtor is unable to satisfy such demands, the creditor may file a suit and initiate bankruptcy proceedings, provided that the outstanding amount exceeds 300 minimum monthly salaries (from 31 December 2012, 340,200 hryvnas) and is due for more than three months. The minimum debt amount for initiation of bankruptcy procedures varies depending on the minimum monthly salary, which is stipulated by the Law on State Budget for the respective year and is revised quarterly. The scope of recourse also depends on the legal form of the borrower. The law requires that in cases of bankruptcy filing, the pledged property is included in the liquidation estate, although it is used to indemnify secured claims of the creditor in the first instance.

29 Cash management systems

Is it typical to require a cash management system and do lenders typically take reserves?

There is no legal requirement as to the establishment of a cash management system and it is not commonly practised. Lenders typically do not take reserves.

30 Credit enhancements

What other types of credit enhancements are common? What about forms of guarantee?

Letters of credit, suretyship agreements and bank guarantees are typically used as credit enhancement in real estate financing transactions.

31 Loan covenants

What covenants are commonly required by the lender in loan documents? What is the difference depending on asset classes?

Typically a loan agreement includes covenants of the borrower to use funds strictly for their designated purpose and to follow a loan repayment schedule. Lenders often require that change of control over the borrower must be subject to the prior approval by the lender.

32 Financial covenants

What are typical financial covenants required by lenders?

The specifics of the Ukrainian banking system are that each bank establishes its own demands and requirements for borrowers, except for those strictly established by the laws and acts of the NBU. Financial covenants may be based on loan to-value ratios, debt-service ratios or other data the bank establishes by its internal regulations. The periodic intervals of financial reporting requirements and ongoing appraisals depend on the bank's internal regulations and procedures.

33 Bankruptcy

Briefly describe the bankruptcy system in your jurisdiction.

According to the Law of Ukraine on Restoring Debtor's Solvency or Recognising it Bankrupt, an entity is considered insolvent if it is unable to meet its financial obligations within three months of the accrual of a fixed date. Companies can be declared bankrupt by first-instance commercial courts on the basis of an application filed by the company itself or its creditor. When a bankruptcy application is submitted by the debtor, it has to be accompanied by detailed information on its financial state, the list of debts and assets proving the debtor's insolvency. The court will not initiate bankruptcy if the creditors' claimed amount is less than 300 minimum monthly salaries (from 31 December 2012, 340,200 hryvnas).

34 Secured assets

What are the requirements for creation and perfection of a security interest in non-real property assets? Is a 'control' agreement necessary to perfect a security interest and, if so, what is required?

A pledge of moveable assets is widely used as a security and is executed in the form of a written agreement; however, the parties may agree to notarise the agreement. Registration of the pledge of moveable assets with the Moveable Property Encumbrances Register ensures effectiveness of the pledge against third parties and establishes its priority over any other encumbrances.

35 Single purpose entity (SPE)

Do lenders require that each borrower be an SPE? What are the requirements to create and maintain an SPE? Is there a concept of an independent director of SPEs and, if so, what is the purpose? If the independent director is in place to prevent a bankruptcy filing, has the concept been upheld?

Establishment of an SPE is a question of business policy rather than a legal concept under Ukrainian law. In practice, constituent documents of the company typically provide for a wide spectrum of a company's activities in order to avoid potential complications should the company change the character of its activities in the future. The concept of an independent director is not recognised in Ukraine.

Originally published in Getting The Deal Through

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.