"Turbulence in the financial sector contributes to the transfer of liquidity from banks to development"IHOR OPADCHYI, PARTNER AND ATTORNEY AT JN LEGAL, EXPLAINS
— After a slight calm, the construction market in Ukraine has once again become active. How much does the volume of questions on construction increased?
— Construction in Ukraine, which did not stop even during the most difficult period of 2014–2015, is currently gaining momentum. In conditions of banking system instability, Ukrainians continue to consider square meters of housing as a more reliable way to preserve money. In turn, the construction boom has made it possible to more easily and quickly overcome the economic decline and crisis which lasted until the end of 2017. Related manufacturers were stimulated via this industry and new jobs were created in related areas. A lot of work was generated for everyone, including lawyers.
I believe that construction and IT are the most promising areas now for the Ukrainian legal market. A lawyer practicing in this area needs to have strong basic knowledge and knowledge of construction standards, various instructions, and technical specifications. The lawyer needs to be an expert, to understand rather complicated legislation and practice of its application. And, admittedly, there are very few professionals on the market who really know the ropes and law-enforcement practice. The IT area, on the contrary, requires a creative approach in the application of law. Often, the issue is about the application of law analogy and not about a specific positive (written) law.
— What legal issues do developers usually encounter?
— Frankly speaking, construction consists of many legal issues and business risks. First, discrepancies between regulatory documents of different levels, rapid change in the regulatory framework and a large number of regulatory agencies.
The inconsistent policy of bodies issuing permits deserves separate mention. The situation when an investor, having received the entire required set of documents is, as a result, not able to implement its development project due to the decision of law-enforcement agencies or because one of many state or local authorities changed their decision, is possible only in Ukraine. Therefore, legal expertise in this area should be as thorough as possible, a lawyer should be able to choose the right ways to protect the client’s rights: those that will lead to the desired result.
— Why is it so difficult to attract funding for real estate projects?
— The banks are still reluctant to finance development projects. Speaking from the perspective of the banks, construction involves a large number of risks, including those mentioned above. Obtaining all the necessary documents does not guarantee completion of the project.
As a rule, the banks fund construction companies with a rich history of successfully implemented projects and a large pool of sites or projects where construction has already begun on the terms of a large-scale security. Developers prefer to attract funds from private investors, property buyers or speculators. Turbulence in the financial sector contributes to the transfer of liquidity from banks to development.
— How will the attitude of the Supreme Court affect relations with developers as to the right of construction financing funds to halt participation in financing on "technical" grounds?
— Via a decree dated October 3, 2018 the Supreme Court established that not only do construction financing funds have obligations to the actual investor, but the investor shall also fulfill its obligations and adhere to the procedures agreed by the parties. It seems to me that in this particular case, due to negligence or overconfidence, the investor did not exercise its right to monitor the construction of the investment object.
Since the investor has not chosen the method of notification of the completion of construction and commissioning of the ready-built facilities (by entering the appropriate clause in the terms and conditions of the agreement), then, having agreed that the way of notification shall be determined directly by the manager, had to track all the methods of notification.
In fairness, it should be noted that the decision as a whole will not contribute to the growth of private investment in the construction area, but we will consider it an isolated incident.
— Kyiv City Council has announced its intention to complete the construction of several uncompleted construction projects. How realistic is this in light of the fact that many apartments have been sold several times?
— Due to shortcomings in legal regulations and chaos in the law-enforcement practice, legal and economic "knots" have arisen out of uncompleted projects and the rights of cheated investors in many cities and towns of Ukraine. In Kyiv, municipal government took responsibility for their untying.
This is not an easy matter due to the need to develop detailed territory plans for each construction. The goal is to satisfy the interests of affected investors in appropriate way, although the city is not responsible for the actions of private individuals. Currently, one of such facilities is the subject of tender procedures carried out with the use of ProZorro platform to determine the general contractor. As for the establishment of legal owners of future apartments, Kyiv City Council now collects and analyzes the relevant documentation.
However, prevention of such situations should be the more important area of work. For this purposes, free online resources have been launched allowing the documents for each facility under construction in the city to be checked.
— Does the sale of property and mortgage items of liquidated banks affect the market?
— Any supply reduces demand. But, as a rule, during the liquidation of banks, it is not real estate items that are sold, but the rights of claim secured by mortgage. And even if there is a sale of a piece of real estate item, this is a specific market with a few participants. This property often becomes the subject of separate legal disputes and not every investor is willing to take such risks.
Consider, for example, the sale of the "Republic" mall. The market’s low level of interest in such items is explained by the large risks associated with purchase. First of all, the rights of claim are sold under two loans of a liquidated bank, Nadra Bank, secured by a mortgage on an uncompleted mall. Now the court has satisfied the claim of the National Bank of Ukraine against Berlinotto Limited, a company registered in Cyprus, for recovery against a share of the corporate rights in Megapoliszhilstroy LLC (Kyiv), which took out a loan from Nadra Bank, but this does not mean that in future there will be no new claims from former and/or temporary owners or co-owners of the mall. And foreign investors want to see the legal and financial predictability of the purchase. Due diligence of such an item scares away any, I would say, "classic" investor.
— What are the prospects for the market?
— Many people are waiting for further falls in real estate prices, but time will show the justifiability of these expectations. A large number of factors affect the price of real estate items. But one can foresee that the prices of high-quality real estate in good locations are not likely to decrease. This is indicated by all new regulations in the construction industry. New construction regulations introduce a wide range of restrictions on population density, altitude, and social infrastructure. These changes will lead to a decrease in the volume of construction in central regions, which will, in turn, raise its value.
The availability of mass mortgage lending to the general public will be the litmus paper of price stabilization and their further growth. At present bank loans cannot be called affordable and, to stimulate demand, developers offer their own loyalty programs in the form of long-term credits.