Member Article

Over the past few years, the Ukrainian agromarket has been rapidly developing. The vast potential of our nation's agricultural sector together with the intensifying situation in the global foodstuffs market has furthered this process. Both international and domestic players have played an active role. Despite the fact that each has their own behavioral strategy in the market, they all look the same – creating a solid raw material base, thereby forming a corpus of designated agricultural land, Due to the moratorium on the sale of agricultural land, the most companies must resort to leasing land.

The Law "On Land Lease" has been in existence for more than ten years now. However, many legal problems in lease relations still remain unsolved. This article examines several of the more substantive problems that arise when entering into a contract for the lease of agricultural land (it is worth noting that the most conclusions made fully apply to the lease of other categories of land as well). All conclusions have been made taking into consideration established judicial practice.

State Registration.

According to Article 125 of the Land Code and the Law "On Land Lease", state registration is mandatory upon entering into a land lease. Furthermore, according to the latest modifications to the Land Code dated 5 March 2009 the right to lease a parcel of land arises only upon state registration. However, in practice the issue arises as to where such registration should be carried out: in the State Registration Book of Land Leases or in the State Land Registry. This issue also comes up in connection with a notarization wherein there is a conflict of legislative norms.

According to Article 18 of the Law "On Land Lease" and Order of the Cabinet of Ministers of Ukraine No. 2073 dated 25 November 1998, lease agreements must be registered in the State Registration Book of Land Leases. At the same time, in the framework of the establishment of the national registry by Article 202 of the Land Code, Decree of the President of Ukraine No. 134 dated 17 February 2003 and the temporary procedure for conducting the State Land Registry, land lease agreements must be registered in the State Land Registry, which is carried out by the State Land Registry Center, a state enterprise.

Since both of the aforesaid registries are provided for by valid normative acts, land lease agreements must be registered in both registries. In order to avoid such "dual registration", the State Land Inspectorate, in its Letter No. 6-8-783/342 dated 18 April 2007, recognized that the State Land Registry has priority. Looking at the established practice in Ukraine over the past several years, it can be seen that in most cases agreements are registered in only one registry – the State Land Registry.

This analysis of the judicial practice demonstrates that state registration at only one of the registries is not grounds for invalidating a lease agreement. After all, the very fact that even one registration has occurred already confirms that such agreement is valid. However, there still is a formal requirement for registration in both registries, and there are potential negative consequences, if this requirement is not observed, including a challenge to its validity. Furthermore, one must also take into consideration that in each individual region the situation is different with regard to carrying out the aforesaid registrations.

Essential Terms of the Contract

From the analysis of judicial practice, it follows that the most common grounds for challenging an agricultural land lease agreement is the absence of essential terms in the contract. If one looks at Article 15 of the Law "On Land Lease", then one can find a rather long list of terms that are deemed essential, namely:
-        the object being leased (the location and the size of the land parcel);
-        the validity period of the lease agreement;
-        the lease payment indicating its amount, indexing, form of payment, terms, procedure for making and renegotiating payment, as well as liability for non-payment;
-        conditions for use and intended purposes of the land parcel that is being leased;
-        conditions for maintaining the object being leased;
-        conditions and terms for transfer of the land parcel to the lessee;
-        conditions for returning the land parcel to the lessor;
-        existing restrictions (encumbrances) concerning use of the land parcel;
-        determining which party shall bear the risk of accidental damage or destruction of all or part of the object being leased;
-        liability of the parties; and
-        conditions for creation of a mortgage and entering into the statutory fund the right to lease the land parcel.

As judicial practice shows, should any of the conditions listed above be omitted, an interested party may successfully challenge the agreement. In the most cases, a court will grant a claim that is based on such a violation. The same can also be said about the absence of documents, which, according to the same Article 15 of the Law, are an integral part of the lease agreement.

Minimum Lease Payments – Recommendation or Requirement?

The Decree of the President of Ukraine No. 92/2002 dated 02.02.2002 established the minimum amount of lease payments. At present, it is 3% of the value of the land parcel. Interestingly, although the decree in question is apparently designed to financially protect peasants and land parcel owners, there is no restriction as to the type of entities. Thus, it applies to lease agreements between legal entities as well.

According to some land law experts, there is a popular belief that the above decree is more of an advisory nature, and therefore it is fully permissible not to observe its requirements. Typically, letters of the State Committee on Land Resources serve as grounds for such a belief, particularly Letter No. 1417-2-Êî1291/6647, which expressly mentions the advisory nature of the decree. In such a case, it is interesting that the committee's letter determines the status of a presidential decree and interprets it quite freely. It must be noted that courts are by no means always in agreement with the conclusion drawn by the State Committee on Land Resources, and therefore the desire to save when entering into an agreement creates serious risks for the lessee.

Lessor's Title Documents – Was There an Owner?

Perhaps, the most complex and unpredictable matter is verification of the lessor's documents of title to the lands being leased. Unlike sale-purchase, a lessee does not enjoy the "right of a bona fide purchase". In the event that the lessor is not the legal owner of the land, then the fate of the lease agreement is predetermined in advance. Despite the fact that verification during state registration should minimize such risks, practice shows that this mechanism is by no means always effective.

If the agreement was concluded for large land areas and for a long term, the risks mentioned above could potentially be economically disastrous for the lessee. In such a case, it is necessary to advise them, before the agreement is entered into, to conduct a legal audit of the land parcel. In spite of the expenses in carrying this out, it is the way to protect the lessee from dangerous risks.

Spousal Consent

A rather important issue may arise when entering into a lease agreement with an individual: "Is it necessary to obtain the consent of the landowner’s spouse?" This issue is governed by Article 65 of the Family Code. According to that article, a person may challenge an agreement, which his spouse has entered into, if such agreement required state registration and was concluded without the consent of such person. A lease agreement fully falls within this definition (assuming that the lessor obtained title to the land while married).

It would appear that the answer to the above question is simple, and lack of spousal consent exposes the lessee to serious risks, which are reflected in the record of the respective court decisions. Nevertheless, without denying such risks, I would like to cite the point of view of the Supreme Court of Ukraine, which is found in an order dated 21.11.2007 in Case No. 6-3481ñâ07 on a similar land issue. Supreme Court of Ukraine points to the fact that land acquired for free (meaning, which is actually a "gift"), cannot be joint property of spouses. After all, according to the norms of the Family Code, gifts are considered to be the personal property of the person who received them as a gift. With such an interpretation, the court essentially uncovers only the economic nature of the gift. Using this interpretation in our case "by analogy" may be dubious, and this viewpoint is indeed not widespread in judicial practice. Nevertheless, such reasoning may fully be used in court as defense, especially if you take into consideration that in such a situation, it is generally difficult to counter the norms of the Family Code with anything.