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Can agricultural land act as collateral and should it deal with ARMA assets?

19 February 2021

In preparation for the opening of land circulation, Ukraine has now reached the finish line, so many issues in this area have become relevant. In particular, will the new rules not block the institution of trust property and how will the restriction of ARMA’s powers affect the rights of owners?

 

The phenomenon of non-use

The land market was one of the key topics discussed by experts, government officials, judges and lawyers during AgriForum, whose general partner was ADER HABER Law Firm.

Thus, Oleksandra Fedotova, partner, head of the practice of agrarian and land law at ADER HABER, suggested talking about the institution of trust property as a phenomenon that has existed for some time but has no application in practice. This institute was introduced to improve the investment climate. So it’s time to understand why he is being ignored and what his future holds in the context of land market introduction.

“Until 2019, the institution of trust property existed only under the management agreement. That is, the founder of the management had the right to transfer the trust property to the manager under the management agreement. Since 2019, there is another institution – title support “, – noted the expert.

Therefore, trust ownership can now arise in two cases. First: when the debtor transfers to the creditor as collateral property in trust, which can be both under its own obligation and under the obligation of a third party.

In fact, it is very similar to the institution of a mortgage, but with the possibility for the lender to register trust ownership of the property.

“It is another case when a property is acquired by a creditor at the request of the debtor, and trust ownership of this property is registered immediately after the creditor. Also – as security for the obligation, until the debtor’s return of funds. It is also reminiscent of the leasing institution, however, the difference is that the creditor is registered trust property, “- said O. Fedotova.

So why is no one using this additional institution to secure the obligation as a transfer of property in trust? Currently, trust property in Ukraine exists in two different forms: property law, derived from the right of ownership, which arises under the management agreement, and as the title security of the obligation.

 

The disappearing owner

“The main difference between these two forms is that when registering the right of trust ownership by the manager, the founder of the management retains ownership. At the same time, if you register the right of trust ownership with the creditor as security for the obligation of the owner, the right of ownership ceases for the entire period of existence of the trust property “, – said O. Fedotova.

That is, when registering trust property as collateral, the owner actually disappears for a while. Yet this cannot be considered a derivative property law or encumbrance.

“We understand that this is very similar to property law because it follows property. But if there is no owner – then there is nothing to come from and nothing to burden. The right of ownership has ceased and will be returned if the obligation is repaid, “O. Fedotova summed up.

 

Mortgage or trust property

In the practice of the Supreme Court, there were only two solutions in this regard, and they relate to the BSF, where there is a slightly different difference. Therefore, the Supreme Court understands the registration of trust property as another property right. But this right which arises under the management contract, there, as if, and there are no questions, the expert noted. The main thing is that there is no practice of using the institute as a title support. Therefore, it is necessary to understand the difference and compare the difference between a mortgage and a trust property.

First, a mortgage can secure any obligation, and fiduciary ownership is limited to credit and credit. In the case of a mortgage, the sale price is determined by agreement between the mortgagor and the mortgagee, while in the case of a sale by a trustee, he himself determines this price and notifies the debtor.

“It turns out that the balance between the interests of the creditor and the debtor is somewhat disturbed. Because, if the debtor did not provide a minimum price in the contract, this minimum price can be any. The law does not provide for anything else, ”the lawyer ADER HABER emphasized.

Foreclosure on a mortgage is possible both in court and out of court. In the case of trust property, the law clearly provides for the possibility of sale to a third party, but the contract may provide for other mechanisms. That is purely theoretically trusting the owner can take possession of this property if it is provided by the contract, the expert said.

Regarding the difference between trust ownership of land plots, the law stipulates that all rights and obligations under lease, emphyteusis, or superficies are transferred to the trust owner. And in this case, there are many questions.

First, who will pay land tax for the plot during the period when there is only a trustee. The Tax Code does not provide for this.

Where should users receive payment? At the expense of repayment of obligations? But this is impossible because the owner has no right to income. And if we do not credit this fee to repay the obligation, we will again have an unfair situation, the expert said.

“It simply came to our notice then. However, there are no tax consequences – who pays VAT, income tax. That is, this structure is generally suspended in the air. But there is another barrier to the use of trust property – it can be used only if the debtor has not been offered other mechanisms to secure the obligation. – O. Fedotova pointed out.

That is, if the debtor is offered a trust or mortgage, he will choose a mortgage. But if the lender insists on the use of trust property, it is necessary to understand all the consequences. Who can challenge the contract? What about the fact that the debtor has agreed to such terms? Practice in this regard has yet to be formed.

As a general rule, the object of trust property can be used by the founder of trust property. But there is a difference with land – with their transfer to trust ownership and the rights of the landlord.

 

Cannot be blocked

Currently, only banks can be mortgage holders of agricultural land. There is no such restriction on the transfer to trust ownership. This makes it possible to use the land as collateral unless otherwise offered, experts say. Also, the feature of trust property is the absence of restrictions on the area.

While the formalistic approach states that because it is a kind of property right, no foreigner will be able to acquire agricultural land in trust. It is unknown how the case law will be formed.

However, O. Fedotova believes that trust ownership is unlikely to displace the mortgage as a more understandable and elaborate mechanism. However, it is trust ownership that may have a future with the introduction of the land market. After all, this tool can be used as collateral for non-bank financial institutions, and possibly in working with non-residents, depending on how the court and public authorities will react.

The expert believes that there is a risk that the use of a trust in the land market will be blocked.

 

Sale of seized assets

In her report, Yaroslava Lagan, a senior lawyer in the practice of agrarian and land law at ADER HABER, highlighted some of the issues that arise in the context of managing seized agricultural assets.

Currently, for assets transferred to the management of the National Agency for Investigation and Management of Assets Obtained from Corruption and Other Crimes, there is a price a limit of 200 minimum wages or UAH 1.2 million (assets worth not less than this threshold are transferred to management). Assets seized in criminal proceedings may be transferred to the ARMA department in accordance with the decision to determine the procedure for preserving material evidence.

ARMA’s powers allow for the transfer of assets for further management or sale. “The question arises, if the right to sell assets is not explicitly stated in the decision on the procedure for storage of physical evidence, does ARMA have the right to sell them in the future? The Supreme Court had to speak on this issue – the meeting was scheduled for February 16, but there is no decision yet, “the lawyer said.

That is, if the decision did not state that the assets can be sold, and the property was sold, how can the owner restore the violated right? Can the court invalidate the auction or the contract of sale? What is the proper way to protect the right in such a situation? All these questions, the answers to which are timely.

In this regard, a legal position has been formed at the level of the cassation instance. The court gives a scheme of actions, which methods of protection to choose the owner whose property was sold: if the property is determined by individual characteristics – the appropriate method of protection will be demand, if there are no individual characteristics – other means of protection (return of unreasonably acquired or retained property).

The owner may also demand to prohibit the transfer of property, given that the body had no right to sell. But this cannot happen by invalidating the auction or the contract of sale, because such court decisions, in the opinion of the Supreme Court, will not restore the owner’s right to property, the expert said.

But you can look at the situation through the eyes of the manager, to whom ARMA transferred the property.

“When managing such property, first of all, it should be borne in mind that the agency, in accordance with its powers, has the right to control the effectiveness of management (to conduct inspections, review documentation). Secondly, after the lifting of the seizure imposed on the property, it must be immediately returned to the owner – the property or the proceeds from it, “- said the expert.

That is, the very fact of lifting the arrest deprives the manager of his powers because it limits the rights of the owner. But it is not the owner who has to accept the property from management, but the body that transferred it – ARMA. Therefore, all these nuances need to be controlled and legal work should be carried out on these issues, said the ADER HABER expert.

 

Unspecified powers

Although the law stipulates that assets transferred to ARMA should not be depreciated before being returned to the owner, it is not uncommon for losses to occur. The cassation instance has not yet commented on this issue, but the appellate court annuls the decision of the first instance on the satisfaction of the claims for compensation.

This position was based on the fact that no remarks on the condition of the property were recorded during the transfer, and mainly that a claim for damages was filed with both ARMA and the property manager. But since the arrest orders have not been appealed, there should be no complaints to the body about compensation for damages, the expert explained.

So, summing up, J. Lagan passed the ball to the Verkhovna Rada. Bill №3335-1-d is now considered the most promising in terms of reforming the powers of ARMA. It is currently being considered by the profile committee.

The project must commit itself to clearly defining in the decision what can be done with the assets and what not – it will be solely the management or the right to further their implementation. Property management and sales procedures should also be detailed.

And how the new rules will work and whether they will solve the problems, time will tell.

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