Generally, Ukrainian law recognizes the following types of security: mortgage of immovable property, pledge of movable property, guarantee, sureties and trust ownership. The most common types of security for the real estate finance are mortgage of existing or future real estate object, pledge of shares of companies holding real estate as well as security over rental income from the property, bank guarantee and suretyships from parent companies. In most cases the security structure includes combination of several types of security.
Last modified 22 Mar 2024
Ukrainian law provides that land, buildings/structures on it, unfinished construction works (subject to appropriate registration) as well as rights to use buildings/structures or land are considered to be real estate for the purposes of granting security to a lender to secure the repayment of money or other obligations.
Last modified 22 Mar 2024
For a long time, Ukraine as a civil law jurisdiction did not recognize trust structures. In September 2019, the Ukrainian Parliament adopted amendments to the Civil Code of Ukraine introducing the concept of trust ownership as a new security instrument. Thus, the debtor's obligations under the loan agreement may be secured by transfer of the property owned by the debtor or a third party to trust ownership of the creditor (being a trustee). Once trust ownership has been registered with the State Register of Property Rights over Immovable Property, the legal title to the trust property is transferred to a trustee. However, a trustee is not allowed to alienate such property, except for the enforcement purposes.
Ukrainian law envisages that prior to granting a loan secured by the transfer of immovable property to a trust ownership, the creditor is obliged to offer the debtor the opportunity to secure these obligations in another way.
Last modified 22 Mar 2024
Debt secured by mortgage can be assigned to the other lender if not prohibited by a relevant loan or mortgage agreement. The assignment is usually done by way of execution of a relevant assignment agreement to the loan and security agreements.
The transfer of the mortgagee's rights under the mortgage agreement to the other party should be confirmed by a notarized transfer agreement accompanied with state registration. The mortgagor's consent is not required for such transfer (unless the mortgage agreement establishes otherwise) but the mortgagee shall notify the mortgagor on such transfer. It should be noted that the transfer of debt shall be performed simultaneously with the assignment of the principal obligation to the new mortgagee.
Based on the mortgage agreement, the parties may agree to issue a mortgage note (a kind of debt security), which can be dealt with by the lender. Such lender may transfer, dispose or by other means alienate the security (mortgage note) to any third party. The mortgage note transfers to its holder all rights under the mortgage agreement and principal agreement. The mortgagor's consent is not required for such a transfer of security. The transfer of mortgage note should be effected by way of endorsement and state registration is required.
Debt secured by trust ownership can be assigned to a third party upon consent of a trustor unless the trust agreement establishes otherwise. Such trustor's consent shall be in writing and notarised.
The transfer of debt shall be normally documented by an assignment agreement to the loan with simultaneous amendments to the trust instrument, which need to be notarized and registered with the State Register of Property Rights over Immovable Property.
Last modified 22 Mar 2024
Generally, Ukrainian law does not prohibit mortgaging and transferring into trust ownership of real estate and land (except for agricultural land) to foreign lenders. Such security instruments are recognized as enforceable. Mortgage and trust ownership over agricultural land is not practically possible due to moratorium on transfer of such type of land.
According to the recent legislative changes known in Ukraine as "Opening up of the land market in Ukraine", the acquisition of agricultural land by foreign lenders and, consequently, the establishment of a mortgage over such land in favour of foreign lenders can be allowed only by a Ukrainian referendum.
Ukrainian law further provides for that Ukrainian agricultural land cannot be owned (which effectively means that the establishment of a mortgage over agricultural land in favour of the below listed persons is not possible) by, among others:Ukrainian law further provides for that Ukrainian agricultural land cannot be owned (which effectively means that the establishment of a mortgage over agricultural land in favour of the below listed persons is not possible) by, among others:
Last modified 22 Mar 2024
Under Ukrainian law mortgage agreements and trust ownership over immovable property, as well as any amendment thereto, are subject to notarization. The state duty for notarisation of these security instruments amounts to 0.01% of the cost of the immovable asset (although in practice may be charged at a rate of up to 1%).
A mortgage as an encumbrance and trust ownership are subject to state registration in the State Register of Proprietary Rights over Immovable Property. The state registration shall be performed by state registrar or notary by entering relevant information to the State Register of Property Rights over Immovable Property. Currently, the administration fee for mortgage registration constitute around UAH 119 (approximately US$4). Whereas the current administration fee for trust ownership registration equals to UAH 238 (approximately US$ 9).
Last modified 22 Mar 2024
Ukrainian law does not recognize concepts such as ‘financial assistance’ rules or ‘corporate benefit’ rules.
Although the content of the ‘financial assistance’ rule is partially used in Ukrainian legislation, it does not relate to establishment of the security over the real property.
‘Corporate benefit’ rule is not prescribed by Ukrainian legislation either, but relevant rules may be determined by the company in its charter.
Under certain circumstances (eg misuse of company's assets), granting of security to third parties may trigger directors' liability to the company and its creditors. Furthermore, in case of company's bankruptcy, the directors could be subject to criminal liability, if it is established that they had wilfully caused the misuse of corporate assets to the detriment of company's creditors.
Last modified 22 Mar 2024
The Ukrainian currency control rules have been significantly softened over the last two year; and the Ukrainian currency market regulator, the National Bank of Ukraine, is highly committed to continue the shift towards more liberal and investor-friendly currency regime.
However, some currency restrictions still apply before adoption of BEPS rules by the Ukrainian Parliament. For example, there are number of limits set out for payment abroad by Ukrainian residents: EUR 200,000 per year for individuals and EUR 2 million per year for legal entities. The National Bank of Ukraine envisages number of exemptions, when the above-defined limits can be overtopped. In particular, such limits do not apply to repayment of cross-border loans to foreign lenders and payments under security documents in respect of cross-border loans. It is worth noting, however, that the limits will apply, if Ukrainian company or individual pays under security given in respect of loans between non-Ukraine lenders and/or borrowers.
Still, the National Bank of Ukraine is authorised to introduce other currency control restrictive measures depending on the status of Ukrainian economy or the Ukrainian banking and financial system.
Last modified 22 Mar 2024
Secured debt can be postponed to newly created debt if the prior written consent of the lender, who holds the existing secured debt has been obtained and relevant amendments have been introduced into the security agreements. In addition, such postponement shall not affect the rights of third parties.
Another technique which is used in practice by Ukrainian banks and investors is contractual subordination of indebtedness. For this purpose,Ukrainian creditors often enter into subordination arrangements in order to change the priority of indebtedness. However, the effect of such arrangements on third parties and their enforceability against such parties in case of debtor's insolvency or liquidation are uncertain because the order of priority of indebtedness and insolvency claims is mandatory and governed by bankruptcy and enforcement laws which override and prevail over the parties' choice of the priority of indebtedness. Thus, due to lack of legislative guidance on this kind of agreement, which is not broadly tested in the practice of Ukrainian courts, there is a legal risk that a subordination agreement may be deemed to be unenforceable in Ukrainian courts.
Last modified 22 Mar 2024
Generally, the parties' choice of foreign law may be recognized and enforceable under Ukrainian law. However, in relation to Ukrainian immovable property and any security agreement over such property Ukrainian courts may and, most probably, will disregard the parties' choice of foreign law given that only Ukrainian law can regulate issues related to real estate located within the territory of Ukraine. Ukrainian law provides that all disputes over real estate which are located in Ukraine must be considered exclusively by Ukrainian courts.
Last modified 22 Mar 2024
Ukrainian law provides for the mandatory registration of the mortgage and trust ownership with the State Register of Proprietary Rights Over Immovable Property. These security instruments become effective only upon registration with the state (if the mortgage or trust ownership is not registered, it does not exist).
Last modified 22 Mar 2024
In general, Ukrainian law imposes environmental liability on the owner of real estate and not on the holder of the security interest (provided it did not cause the pollution). Liability may be imposed on the lender, if the lender becomes an owner of the real estate, for example, through the enforcement of the security. Also, if the lender takes possession of, and actual control over, the mortgaged property in the course of enforcement, it may, potentially, be responsible for the state of the relevant mortgaged property and any environmental consequences of its actions with respect to such property prior to acquiring the formal title to such property.
Last modified 22 Mar 2024
The mortgagee must deliver a default notice to the mortgagor and, if different, to the borrower with a demand to remedy a default under the underlying loan agreement or, as the case may be, the mortgage agreement within at least 30 days. Such notice should include the description of event of default, the amount of pending secured obligation, description of collateral, chosen method of extrajudicial enforcement and demand to fulfil the secured obligations within mentioned period. If the mortgagor or, as applicable, the borrower has not complied with the requirements of the default notice, after the expiry of the remedy period set out in the default notice, the mortgagee is entitled to enforce the security.
Ukrainian law provides for the following methods of enforcement of security over real estate:
The trustee is entitled to enforce the trust property by way of its sale to any third party unless the trust agreement establishes otherwise. For that purpose, the trustee shall serve on a debtor and, if different, a trustor a 30-day prior notice on its intention to enter into a sale and purchase agreement with respect to the trust property and the minimum sale price. To acquire the pre-emptive right to purchase the trust property, a debtor or a trustor shall inform the trustee on its intention to purchase the trust property and credit the indicated sale price to the notary’s deposit. It should be made within five days after receipt of a trustee’s notice, otherwise the pre-emptive right is not provided, and the trustee may sell the trust property to any other third party.
Ukrainian law explicitly allows the parties to envisage different enforcement procedure in the trust agreement.
Last modified 22 Mar 2024
The special law on financial restructuring provides for special consensual workout procedures pursuant to which the borrower in the early stage of distress can agree with the creditors the restructuring plan and enjoy certain tax benefits. To implement the restructuring, the debtor and the creditors may mutually agree on the moratorium on the enforcement of security held by the creditors for the duration of the restructuring procedures. Ultimately a moratorium is tied to the statutory timeframe of the financial restructuring, which is 90 calendar days from the posting date, but can be extended up to 180 days. The law is effective until 19 October 2022 and has been introduced as a temporary measure to overcome a huge volume of non-performing loans in Ukrainian lending space.
Last modified 22 Mar 2024
Ukrainian law stipulates that acceptance by a Ukrainian court of a decision to commence the insolvency procedure against the borrower shall be automatically considered as an event of default under the security agreement.
In this case, the lender gains the right to enforce its security against the defaulting borrower, regardless the maturity of the principal obligation, unless agreed otherwise between the lender and the mortgagor.
The property granted as a collateral under the mortgage agreement shall not be included to the pool of liquidation assets and shall be used solely for the enforcement of the relevant security. The proceeds of enforcement shall be directed to fulfil obligations before the mortgagee under the relevant mortgage agreement.
In respect of trust ownership, the Bankruptcy Code of Ukraine explicitly states that the trust property shall not be included in the liquidation estate neither of a trustee, nor a trustor. There is also a carve-out for the trust property ringfencing it from moratorium on enforcement of the secured property under the insolvency law.
Moreover, any transactions or dealings with property by the debtor during the three years preceding the commencement of a bankruptcy case or after its commencement may be declared invalid or rescinded (provided that they caused damage to the debtor or lenders) by a commercial court as part of the proceedings on the application of the arbitration manager or bankruptcy creditor on the following grounds:
In addition, any transactions or dealings with property by the debtor during the three years preceding the commencement of a bankruptcy case may be declared invalid or rescinded by a commercial court on the application of the arbitration manager or bankruptcy creditor also on the following grounds:
If transactions are declared invalid or if the debtor's property dealings are rescinded on any of the grounds indicated above the creditor must return the property it received from the debtor to the pool of liquidation assets or (if the property cannot be returned in kind) pay the cost at market value assessed as of the time of the transaction or property dealing.
Last modified 22 Mar 2024
The property granted as a collateral under relevant security agreement is used solely for the enforcement of the relevant security and satisfaction of claims of the relevant lender, who holds such security.
If more than one creditor holds the security interest over the real estate asset, creditors who hold a first-ranking interest under a security agreement will receive the enforcement proceeds/ be entitled to acquire the title to the collateral as a result of enforcement before those creditors who hold second-ranking security interests over the same asset.
Last modified 22 Mar 2024
Is secured debt traded between lenders? If so, how is a transfer of the debt to another lender effected?
Debt secured by mortgage can be assigned to the other lender if not prohibited by a relevant loan or mortgage agreement. The assignment is usually done by way of execution of a relevant assignment agreement to the loan and security agreements.
The transfer of the mortgagee's rights under the mortgage agreement to the other party should be confirmed by a notarized transfer agreement accompanied with state registration. The mortgagor's consent is not required for such transfer (unless the mortgage agreement establishes otherwise) but the mortgagee shall notify the mortgagor on such transfer. It should be noted that the transfer of debt shall be performed simultaneously with the assignment of the principal obligation to the new mortgagee.
Based on the mortgage agreement, the parties may agree to issue a mortgage note (a kind of debt security), which can be dealt with by the lender. Such lender may transfer, dispose or by other means alienate the security (mortgage note) to any third party. The mortgage note transfers to its holder all rights under the mortgage agreement and principal agreement. The mortgagor's consent is not required for such a transfer of security. The transfer of mortgage note should be effected by way of endorsement and state registration is required.
Debt secured by trust ownership can be assigned to a third party upon consent of a trustor unless the trust agreement establishes otherwise. Such trustor's consent shall be in writing and notarised.
The transfer of debt shall be normally documented by an assignment agreement to the loan with simultaneous amendments to the trust instrument, which need to be notarized and registered with the State Register of Property Rights over Immovable Property.
Last modified 22 Mar 2024