31.07.2018

Agrobusiness in the Need of Land

Land reform and increasing valuation of land banks are still the main topic for the farm owners and potential investors. Today, the farm owners are under continuous pressure from the land owners willing to sell their land. At the same time, there was a little (if any) progress towards liberalization of the land market. The archaic moratorium on sale of arable land is where it was last year and over decade before.

In view of the looming land reform, it is important to understand the current regulation and practice in the land market. This knowledge provides valuable insights into the life after introduction of free sale of land. Many a myth are ruined by reading what the land law says today. To give just one example, there is sufficient legal protection of tenants in the case of sale of leased land plots. Importantly, transfer of agricultural land is achievable even despite the moratorium (the “Moratorium”).

It must be noted that purchase of land today is rather risky for businesses. The risk always strikes the price of relevant assets. Ukrainian arable lands are not exempted from this law. Current market (we must confess that there is a market for the lands under the Moratorium) responds by reducing land prices, thus, cutting sellers’ revenues by at least 25 to 50% comparing to what the seller could have earned in case of transparent land market.

Restrictions on Purchase of Land

The Moratorium set forth by the Land Code effectively prohibits sale and purchase agreements, preliminary purchase agreements or any other instruments aimed at disposal of the land plots in future, i.e. in case of lifting the Moratorium. The latter means that preliminary sale agreements, power of attorneys or other similar documents concluded prior to lifting of the Moratorium may be deemed void ab initio under Ukrainian law. In addition, the Moratorium prohibits any change of the formal designation (allotment) of related land plots, thus, not allowing to pull a land plot out from the Moratorium limitations.

At the same time, land pots under the Moratorium may be inherited, swapped or bought-out for public needs.

Which Land Is Currently Not For Sale?

The Land Code of Ukraine of (Land Code) provides for three types of agricultural lands which may not be sold by their legal owners. These include agricultural land formally designated for (i.e. the Moratorium):

  • commercial/commodity agriculture; and
  • private/individual agriculture and parceled from the land mass previously cultivated by state or collective farms; and
  • any agriculture use in case of state owned or municipal land plots.

Contrary to the popular beliefs, not all the agricultural land is subject to the Moratorium. Thus, the ever growing body of land privatized by individuals (with the maximum area of 2 ha available under such procedure for an individual plot) is freely transferable under Ukrainian law.

Are There Ways to Buy the Land Under Moratorium

With the number of landlords willing to dispose of their land plots steadily growing, both agribusinesses and private investors are actively buying the offered land. Indeed, the land sale is on the increase. The Moratorium makes the parties look for creative forms of sidestepping it.

Presently, there are two main strategies pursued by the parties willing to transfer land ownership:

  •  long-term land use agreements:
-  land lease agreements for the maximum allowed term of up to 50 years (as a practical matter – 49 years); and
-  emphyteusis agreements allowed under Ukrainian law without any limitation on the maximum period of land use (in contrast to land lease agreements). Emphyteuses are often concluded for the period of 100 to 500 years. Furthermore, Ukrainian law allows sale (transfer) of the right of emphyteusis from one tenant to another without consent of a land owner (freeholder).
  • transfer of ownership (freehold) on the basis of land swap agreements. The current market approach is to swap land plots, which are (i) located within same district or municipality and (ii) designated for agricultural use, irrespective of the areas of the swapped land plots.

Unfortunately, the Ukrainian authorities do not have any consistent policy in their treatment of the above arrangements. While they agree on the lawfulness of long-term land lease agreements, both emphyteusis and land swaps quite often attract criticism. Furthermore, land swaps, being once the most popular land transfer tool, were recently challenged by the Supreme Court of Ukraine.

What are the Key Issues Related to Land Reform

More than a decade of debate around land market liberalization crystalized the few issues which are essential to the proper functioning of the land market.

These include the following:

  • permitted buyers;
  • maximum number of hectares which might be owned by one permitted buyer;
  • minimum sale price;
  • preemption rights (right of first refusal); and
  • restrictions on resale of land.

Restriction on Resale. These provisions are introduced to control land speculation. Their aim is to discourage any land purchase focused solely on subsequent resale. To that end, the law might provide for heavy taxation of the land resale proceeds. Often, the applicable rate during the first years after the purchase may theoretically peak at 50 per cent.

Permitted Buyers. It is expected that the deal breaker for any parliamentary vote on the land market would be the issue of permitted buyers. Land market is a hard sell of and by itself. Even fewer people would be willing to extend the right to buy agricultural land beyond nationals of Ukraine. The majority of Ukrainians have an irrational fear of the foreigners buying all the land and evicting the aborigines. Consequently, it is widely believed that any land market reform will provide for at least an interim period of 5 or more years during which only Ukrainians will be able to buy and sell agricultural land. Of course, the Parliament may at any later time recognize the need to permit purchase of agricultural land to Ukrainian legal entities or foreign nationals.

Preemption Rights. In contrast to the previous issues, preemptive rights should protect the agribusiness more than landowners. If the land is to be put to its best use, then arguably those who managed it properly should be the first to buy it. Similar rights might have owners of adjacent land plots or family members.

Land Bank Cap. The issue of permitted buyers goes hand in hand with the maximum land bank limitation. Although the latter is less controversial, the popular approach is to limit the land bank held by one individual or legal entity. For individuals, the suggested caps range from 100 to 1,200 ha, for legal entities from 500 to 10,000 ha.

There is little theory behind any of the above limitations. As in the case of permitted buyers, it is highly likely that caps will be increased (at least for the legal entities if they are ever to be allowed to buy agricultural land).

Minimum Sale Price. The rationale behind the fixed minimum sale price is to protect unsophisticated landowners. It is believed that the often poor rural landowners might be pressed to sell their land plots substantially below their market value. While case studies do not always confirm this theory, the popular consensus is to include such protection.

What to Expect Post Land Liberalization

As many other Ukrainian reforms, the land market liberalization is long overdue. It comes at the time when the arable land is in short supply and in high demand. Even without free land market, agricultural land is at the center of multiple conflicts among agribusinesses and landowners. The price of land lease has been steadily growing over the past ten years. Currently, medium term lease of prime agriland can easily fetch USD 800 to USD 1,500 per hectare. In the other hand, we currently spectating a slight decrease of the land prices in Central Ukraine comparing to the end of 2017.

Opening the sale of agricultural land will further fuel the price of land and intensify the competition for it. Unless carefully managed and controlled, the land market might become as volatile and unpredictable as it used to be prior to 2008 (in the case of land for residential construction in and around the city of Kyiv and major metropolitan or seaside areas in Ukraine). Given the unfettered influx of cash, land speculation will quickly overtake the market.

The land market would resolve or at least expedite resolution of several problems plaguing land management in Ukraine. Land aggregation will make it possible to lease whole fields without facing sabotage from the lessees of any interrupting land plots, which is currently often the case. Furthermore, contiguous land masses accumulated by individual landowners will also make any field roads redundant. The roads would be sold by the state ending the years of controversy over their use and the relevant fiscal liabilities.

Both medium and long-term effects of the land reform should be positive. More importantly, whatever the negative consequences, which there would be quite a few, there appears to be no viable alternative to the land market liberalization. Both land lease and any other forms of land use, outside of free market, have proved unreliable in modern day Ukraine. More than fifteen years of the Moratorium demonstrated that its overall effect on the land management is largely negative.

Levterov Kirill

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