The Turnover of the Right to Lease Agricultural Land in Ukraine: Current Practices and the Ways to Improve It

July 31, 2016

Pavlo Kulynych, Oleg Nivievskyi and Denys Nizalov

Executive Summary[1]

1. The current land legislation of Ukraine lacks sufficient regulation for turnover of lease rights for agricultural land. In particular, the legislation does not entitle tenants with the right to alienate the land lease right on the basis of civil legal transactions – agreements of purchase/sale of the lease right, exchange, donation, etc. Instead, the land legislation provides land owners with the right to alienate (purchase/sale, etc.) of so-called “right to lease out a land parcel” (i.e., the exclusive right to enter into a lease agreement), which is often confused with the land lease right (the contractual, paid right to own and use someone else’s land for a specific period of time).
2. Because of the extreme fragmentation of agricultural land in Ukraine, in order to obtain a field (a land array) for use, tenants have to enter into a large number of land lease agreements with individual owners of small plots / shares (pays) within such field. As there is no regulation on the turnover of land lease rights, in practice, the turnover of these rights takes place in shadow – via the alienation of corporate rights of farming companies which are the tenants of such leased parcels.
3. International practice shows that the alienation of the land lease rights via civil agreements is used only in those countries, where the private ownership for land is restricted, for example, in Israel. At the same time, non-agricultural land parcels in Israel are leased for a period of 49 and 98 years with a right for automatic lease extension for another 49-98 year period. Therefore, the lease right can be transferred via civil legal transactions that serve as the only legitimate method to obtain land in use.
4. An alternative right to use agricultural land, which can be alienated, is emphytheusis, i.e. the right to use someone else’s land for agricultural purposes. Current Ukrainian legislation allows virtually unrestricted turnover of emphytheusis basis of any type of civil agreements. On the other hand, there are the following obstacles for a widespread use of emphytheusis. First, almost all private agricultural land is leased out. Second, re-registration of current land lease agreements to establish emphytheusis will require significant financial resources and time. Therefore, under the existing moratorium for agricultural land sales, it is likely that both the right to lease agricultural land and emphyheusis will coexist and land market participants should have a right to choose between these two instruments.
5. From the economic point of view, the moratorium for land sale leads to a reduced rate of rent payments and, thus, to redistribution of the economic return from land use in favor of land tenants. Such state of land governance contributes to increased value of land lease rights. Once the moratorium is lifted, the rate of land rent payments is likely to increase, which would lead to a lower value land lease rights. Therefore, the turnover of land lease right and emphytheusis may be of relevance only when the land market is significantly restricted, which is observed in Ukraine during the moratorium.
6. In order to create the conditions for turnover of land lease rights, several amendments to legislation are necessary. The owner of the land lease right (lessee) should be granted with the right to alienate the lease right via civil legal agreements (sale and purchase, exchange, etc.) with mandatory notification of the land owner. The terms for such alienation should be stipulated in the lease agreement. The legislation should also identify the terms for the alienation of lease rights, in case such conditions are not stipulated explicitly in the land lease agreement. The above-mentioned amendments can be introduced by the Law of Ukraine “On amendments to some legislative acts to stimulate the civil turnover of lease rights for agricultural land.” The introduction of turnover of lease rights for the state land is much easier from a technical point as such land is more consolidated and can be used as a pilot for introduction of such turnover.

[1] Complete report (in Ukrainian) can be found at http://land.kse.org.ua