On 10 October 2022, after more than a year of discussions and elaboration, Law No. 2518-IX “On ensuring the proprietary rights to real property that will be erected in the future” will come into force. This law will allow construction companies in Ukraine that work with residential real estate to attract funds for their projects using new rules, while investors in these properties will receive more protection.
The main features introduced by the law include:
- introduction of a future real estate article as a new object of rights;
- widened and detailed regulation of unfinished construction projects and their status; and
- a special proprietary right for real estate under construction.
The law defines a future real estate object (FREO) as a part of a designed apartment block, which will become a separate real property item after the completion of construction (e.g. apartment, garage box, non-residential premises, parking space).
According to the law, the special proprietary right (SPR):
- entitles its owner to hold and dispose of an object of unfinished construction or FREO;
- arises at the moment when a developer obtains the right to perform a construction work;
- ceases simultaneously with the commissioning of the building since commissioning entails automatic registration of the ownership title of the apartment or non-residential object; and
- allows its holder to claim from the developer the completion of the construction and the commissioning of the whole building.
These completely new legal concepts and underlying procedures make it possible to register the right to a future real property and encumber it (e.g. with a mortgage, freezing injunctions) in the State register of property rights. When operating with FREOs, the register will be connected with the unified state system for construction, and will ensure the correctness of all the entries from a construction perspective. Additionally, a notary must certify all transactions regarding FREOs.
These requirements and the involvement of electronic registers should protect investors and make any fraudulent transaction with a sold FREO impossible and will prohibit a developer from changing FREO's technical parameters unilaterally. They also give developers a convenient legal mechanism and transferable and mortgageable assets for attracting funds to finance residential construction.
In order to assure the rights of investors to get apartments, the law obliges each developer to allocate a so-called guaranteed share, which is the portion of the FREO of the building. The Cabinet Ministers of Ukraine will determine the minimum amount for a guaranteed share. Consequently, a special restriction will be imposed on FREOs that form the guaranteed share. These FREOs cannot be sold or disposed of in another way until the building is commissioned. Furthermore, the law states that if the project documentation for the construction establishes construction stages or start-up complexes, which can be commissioned separately, the guaranteed share will be set separately for each construction stage/start-up complex. The idea is that the value of these frozen square metres will serve as a resource for a new developer to complete the construction should the current developer fail to do so.
Moreover, the law establishes the essential terms of an agreement on construction of the FREO such as the procedure for organising and financing the construction of the building, distribution of the FREO between the land title holder and the developer, and a list that constitute the guaranteed share of the FREO.
Because this law will amount to a revolutionary change, it introduces a number of amendments to existing laws making the whole idea of FREO transfers workable.
Legislation: Law No. 2518-IX dated 15 August 2022 “On ensuring the proprietary rights to real property that will be erected in the future” (in Ukrainian language).
