Author: Ulyana Luchkevych, lawyer at F&P
Relevance of disputes between investors and developers in Ukraine
Every year, the number of disputes between investors and developers in Ukraine increases, which can be attributed to the instability of the legal framework for attracting funds for new construction. Investing in real estate involves the use of specific legal instruments that may contain various risks and peculiarities. A thorough risk analysis and checking of the developer before signing agreements increase the chances of successfully obtaining ownership of the new property but do not provide absolute protection. In cases where investors do not receive the proper property and negotiations with developers do not yield results, they are forced to go to court. Judicial practice shows positive trends for investors, although the outcomes of court cases can vary depending on the circumstances and specific case.
Methods of attracting funds for construction and judicial practice
- Investment through a Construction Financing Fund (CFF)
One of the main mechanisms for attracting funds for construction in Ukraine is participation in a Construction Financing Fund. Within this mechanism, the developer (the construction customer), the fund manager (a bank or another financial institution with a license), and the investor (the trustor) sign relevant agreements. The manager supervises the construction, and after the facility is put into operation, the investor registers ownership rights. In case of a breach of the contract terms, for example, failure to complete construction on time, the investor has the right to go to court to recover funds. Judicial practice generally supports investors in such cases if they have fulfilled all obligations and provided the necessary confirmations. For example, the decision of the Grand Chamber of the Supreme Court dated January 23, 2019, in case No. 712/21651/12 confirms this. Judicial practice also supports investors when they go to court to recognize ownership rights for objects that have already been built, but the developer has not submitted documents to state authorities for registration. This can be seen in case No. 487/7152/21, where the Supreme Court ordered the developer to transfer ownership rights to the investor.
- Investment through a Housing Construction Cooperative (HCC)
Another way to attract funds for construction is investment through a Housing Construction Cooperative. In this case, an agreement on participation in the cooperative is signed between the buyer and the cooperative, and ownership of the housing is initially registered to the cooperative, and then to the buyer. If the developer breaches the terms of the agreement, the courts generally side with buyers, recognizing their rights to the property, as seen in the Supreme Court’s ruling dated December 21, 2022, in case No. 569/5399/20.
- Attracting funds through a preliminary sales contract
A preliminary sales contract is another way to attract investments for construction. In this case, the parties agree to conclude the main contract in the future. If the developer breaches the terms of the preliminary contract, courts often rule in favor of the buyers, ordering the return of funds that were unjustifiably received. However, negative rulings may result from mistakes in the execution of such contracts, such as the absence of notarization or unclear timelines.
Preventive measures to protect the interests of investors
Investors involved in construction should take steps to minimize risks:
- Due diligence: Before entering into an agreement, it is important to thoroughly check information about the developer, their project documents, permits, and the status of the land where construction is taking place. This includes checking court registers for possible ongoing legal disputes.
- Contract review: Carefully study the contract drafts before signing and ensure their compliance with the legislation.
- Verification of signatories’ authority: It is important to ensure that individuals signing agreements on behalf of the developer have the necessary authority.
- Payment control: It is crucial to verify the developer’s bank account details and match them with the agreement terms to avoid potential financial violations.
- Document retention: Keep all documents, including contracts, receipts, and applications, until the property ownership rights are obtained, and at least three years after that.
- Monitoring construction progress: Regularly monitor the construction progress and news that may affect the investment, and seek legal assistance if necessary.
Of course, none of these measures provide a 100% guarantee, but they significantly increase the chances of successfully protecting the investor’s rights.
Conclusion
The legal framework for attracting funds for new constructions in Ukraine currently requires improvement. However, with proper adherence to all legal recommendations and careful attention from investors, the likelihood of successfully protecting property rights significantly increases. Gradually implemented regulations, such as the Law of Ukraine “On Guaranteeing Property Rights to Real Estate Objects,” may become an important step toward reducing risks for investors in the future.
