The agricultural sector is among the most successful and profitable sectors in Ukraine. Some even compare it with a locomotive for the development of the country. But what if this locomotive is a steam one? Can it haul Ukraine from a soviet economy to the modern post-industrial highly competitive world? To pass this route the agro sector sorely needs new effective technologies and investments. Strategic investors, who seek for predictability of rules on the market and protection of their investment, face in Ukraine so-called “moratorium”. Due to its effect, for so long as 15 years, a major part of Ukrainian farm lands cannot be sold in ownership and are available for rent only.
Top officials of the Ukrainian Ministry of Agriculture acknowledge the problem but complain about sensitivity and too politicized background of the moratorium issue. These political concerns impede lifting the moratorium to allow for more or less free agricultural land market. Instead, in August 2016, the Ministry of Agriculture published on its site a draft Law “On Introducing Changes into Some Legal Acts of Ukraine regarding Agricultural Lands Turnover” (the “Ministerial Draft”). The draft law suggests changes to the Land Code, the Civil Code, the Land Lease Act, the Mortgage Act, and other legislation, aimed at bringing to the market a new asset – a right to rent an agricultural land. Under the law, a minimum term of an agricultural land lease is seven years. So, in most cases, such land lease or emphyteusis will be long-term, but within a statutory maximum of 50-years.
Currently, the Land Code defines that only a landowner can dispose or pledge a right to rent its land plot. The Ministerial Draft gives such capacities also to a tenant or another authorized person. It may be, for example, a bank that holds land as a security for a loan. An authorized person (a tenant, a bank-pledgee, etc.) who intends to dispose a right to rent the land plot must inform the landowner. If, within one month, the landowner has not consented to buy the right to rent the land such right may be sold to a third party. The landowner has the right to receive certain interest from the sale price.
Practitioners are not very enthusiastic about the perspectives of the market of rights to rent farm land. First, no right to rent a land plot, even for a long term, gives a comfort of the ownership. Hence, many investors will remain reluctant to invest in the agro sector without obtaining land in ownership. Second, from the legal procedures perspective, transactions with rights to rent lands are not clear and smooth enough to become popular among farmers, at least in the short term. Third, banks do not treat a right to rent land as a good security for crediting. One of the reasons for this is the National Bank’s official position.
The concept of marketing rights to rent a land plot is also not common in the world. In the EU, all member states allow selling agricultural lands. However, some countries have restrictions on the maximum area of land in ownership, a person of a landowner as well as set certain privileges for the local residents. In 2015, certain provisions of national laws of Bulgaria, Hungary, Lithuania and Slovakia which restrict agricultural lands turnover were subject of the European Commission’s investigation. In the Commission's view, some provisions restrict the fundamental for EU principle of free movement of capital and freedom of establishment. For Ukraine, this is important point because under the Association Agreement with the EU Ukraine committed to incorporate the relevant EU acquis into its national legislation.
Overall, we welcome the Ministry’s effort to revive the turnover of agricultural lands restricted under the moratorium. However, a right to rent farm lands will not adequately substitute an ownership right. The approach of the Ministerial Draft suggests will unlikely become a sustainable solution. We hope for the sooner launch of the civilized buy-sell market of farm land which will attract so expected investments into Ukrainian agricultural sector.
Published by Kyiv Post, September 30, 2016, vol. 21, issue 40
Author: Volodymyr Igonin