Apartment purchase in the primary market

Rimslin Chambers continues guiding you through the peculiarities of the Ukrainian real estate market on your way to buying an apartment.

In the previous article, we have considered in detail how to purchase an apartment in the secondary market. You could easily check it here.

In this article, we will focus on purchasing an apartment in a new building.

The stages of apartment purchase are as follows:

♦  Verification of all the available information and documents on the apartment or ‘due diligence’.

♦  Choosing the way of investment and signing the agreement.

♦  Registration of the ownership rights.

 

Stage 1: Due Diligence

 

Prior to signing an apartment sale and purchase agreement, it is advisable to carry out the due diligence procedure of this apartment. There is no obligation to do so, but we always analyze any potential risks relating to the deal in order to be sure whether it is reliable for our clients to contribute funds in purchasing such an apartment.

If you want to be sure that the potential investment object is trustworthy and your money is not to be wasted, the due diligence procedure is a must.

What exactly should be checked? 

1) information on real estate developer (general contractor)

The history of the works, reputation, other projects, the real estate developer members, whether it has any debts to the state or other persons, including tax debts, whether there are no arrests and other encumbrances, whether it is not bankrupt or engaged in other court proceedings.

For this purpose, it is necessary to monitor the State Register of Legal Entities, the Register of Enforcement Proceedings, Unified Register of Debtors, the registers of the State Fiscal Service of Ukraine, Unified State Register of Court Decisions, other registers and databases.

It is also important to check the Unified State Register of Court Decisions on the information concerning the object of construction and the land plot, whether the buyers have sued the developer for breach of the obligations.

2) the legal regime of the land plot, on which the house is built or under construction

It should be borne in mind that the land plot on which construction takes place should be allocated for the specified purposes (see the Public Cadastral Map of Ukraine) – the construction and maintenance of a multi-apartment residential building, and the appropriate purposes should be indicated in the town planning documentation. Otherwise, a permit for the construction of such a house may be appealed to the court, leading to years of litigation and construction may not be completed.

You should verify whether the land plot is in the ownership or temporary used, who the owner or leaseholder is (check the respective lease agreement, certificate of land ownership, superficies agreement, etc.) If the land plot is not in the ownership, the lease term should not be less than the approximate term of the house completion and occupancy permit. The developer or constructor shall be indicated as the owner or tenant.

The relevant documentation regarding the specifics of the land plot itself (documents for changing the intended use of the land plot (if any available), technical documentation for setting the boundaries of the land plot, its division and/or consolidation, etc.) should also be checked.

3) permission documentation

You should verify whether the developer has any urban conditions and restrictions (for buildings located in Kyiv, such is checked with the Urban Cadastre of Kyiv). It is a crucial point since the city conditions and restrictions specify the number of floors in the building, the distance from the building to other elements, etc.)

There occurred a precedent in Kyiv recently when a developer was obliged to demolish several floors of the building to comply with the urban conditions and restrictions and obtain all the necessary documents to legally complete construction.

The next point of verification – whether there is a permit to perform construction work (NB! The declaration of the commencement of construction work is not a permit); the contractor’s license for construction; the project documentation; the document confirming the mandatory examination of construction projects: the liability classes (consequences) of the objects of the type CC2 (average consequences – houses up to 100 m high, from 20 to 300 permanent residents) and the type CC3 (significant consequences – from 100 m high and 300 permanent residents). The agencies approved by the government for conducting the mandatory examination of the construction projects can be checked here.

Other permitting documents include permits for special types of work, an order for a building address assignment to a new construction object, approval of construction conditions by the general contractor, the permission of specialized departments when the construction is executed in historic and architectural zones, exclusion zones, etc.

Often enough, a developer may downgrade the liability classes (consequences) such as indicating CC1 class (private house construction) instead of CC2 (construction of an apartment building up to 100 m high) for their own purposes, e.g. to avoid obtaining the costly license mandatory for CC2 and CC3 objects. However, this may result in an inability to legally commission the property and register the title.

Said another way, the higher the consequences class, the more difficult it is to bring both the legal and project aspects of the facility construction in compliance with the requirements of the legislation.

Hence, when selecting the object type CC2, and especially CC3, all the documents shall be checked as carefully as possible.

Depending on the status of the facility, you should also verify:

♦  An agreement on urban utility services communication, with heat, water, and energy supply included. The supporting documents may include contracts for public utility services;

♦  Certificate on completion of construction;

♦  A technical passport for an apartment;

♦  Certificate on facility commissioning;

♦  Certificate (an order of the district administration) on the postal address assignment;

♦  An agreement with the city council on payments of the share contribution to the city infrastructure (NB! Without payments under such an agreement the building may fail to receive the postal address, which will lead to the failure of the investor’s title registration).

Construction permits, construction completion certificates and commissioning certificates shall be verified with the State Architectural and Construction Inspection Register of permitting documents.

Besides, it is advisable to check whether there exists an increased public interest and attention to the facility (public disputes, rallies, and mass protests, etc.) and whether the developers and constructors are involved in some illegal schemes of money laundering or political scandals.

You can also check the desired developer in reliability ratings published by media resources.

The due diligence procedure is rather complicated, but at the same time, it is a substantial step for apartment purchase in Ukraine. Without it, one cannot be 100% sure that there will be no problems with the purchased apartment.

 

Stage 2: Ways of Investment and Signing the Agreement

 

The legislation provides 4 ways for developers to receive funds from individuals for the construction of facilities – investing in construction financing funds, issue of target bonds, participation in collective investment institutions, and in real estate transaction funds. Developers also widely use other methods of accumulating funds for construction (presale contracts, sale and purchase agreement of property rights), which are not expressly prohibited by law but are absent in specific regulations, and are governed by general terms of civil legislation.

Every way of investment has its pros and cons. The main disadvantage of all the ways is that nobody can guarantee that the building will be commissioned on time or that the developer will not go bankrupt. To minimize these risks, checking every single thing on the stage of due diligence is the best option for the investor.

The first investment option is about entering into an agreement with the construction financing fund. The manager of the fund is a bank or other licensed financial institution that has an agreement with the constructor, which undertakes to build one or more construction projects and commission them as required by law and transfer to the fund. The fund is obliged to finance the construction according to the agreement.

The fund receives money for construction from potential investors who intend to buy an apartment. After concluding the agreement with the fund and paying the price of the property under the terms of agreement (which may be partially paid), the investor receives the certificate of participation in the construction financing fund (it shall indicate in details all the features of the apartment – area, floor, number, etc.) After the building has been commissioned, an investor has to sign the apartment acceptance/transfer certificate or refuse from signing and hold a demand against the developer on the elimination of construction defects. After signing, the investor receives another certificate, under which the ownership right is registered.

The main advantage for the investor is that the use of money by the developer is monitored and controlled. In the event of non-fulfillment of the obligations, the fund may even change the developer. However, there may be cases when developers are closely linked to and influenced by the funds in a way that funds do not even aim to control the progress of construction and track the use of money for its intended purpose. This can lead to long-term construction.

The second option is to invest in target bonds. The lot of such bonds corresponds to the area of one apartment. The target bond indicates only its series, number, the number of square meters and does not specify an apartment itself (with a description of its exact location). Therefore, it is necessary not only to purchase a lot of target bonds but to conclude with the developer the ‘booking’ agreement regarding a particular apartment where area equals the number of square meters indicated in the bond.

Once construction is finished the developer repurchases the bonds and the investor receives the apartment. The bonds are issued under the control of the National Securities and Stock Market Commission (NSSMC).

Participation in collective investment institutions is similar to a construction financing fund with the only difference being that the bank (in construction financing fund) as a third party between an investor and developer is replaced by an asset management company (in collective investment institutions).

The potential investor concludes a forward contract with the asset management company. Such a contract is registered on the stock exchange. Under this agreement, the investor acquires property rights to the apartment, pays the asset management company, and undertakes to pay the established price to the constructor after the building is commissioned. The forward contract shall include such important features as the payment deadline, the terms of construction completion, commissioning date, apartment number, floor, area, etc. After the building is commissioned, the contractor and investor conclude the main agreement under which the apartment is being transferred to the investor based on the existing property rights.

Funds of real estate transactions are not common in Ukraine, though they are considered a legitimate form of investment.

Presale contracts and agreements on the sale and purchase of property rights (title deeds) are a bit risky forms of investment. They allow the developer to sell the same apartment twice and more since such agreements are not registered anywhere and may have standard and vague terms that do not specify the apartment that is purchased at the time of the start of construction.

The investor should remember that the standard contract is always in favor of the developer. Therefore, it is always a good idea to consult a lawyer about the terms of the particular agreement proposed by the developer.

At the stage of construction, you do not acquire any ownership rights or receive any title deeds by concluding any of the above contracts. For these reasons, it is crucial to study every document regarding the constructor and developer, and carefully read all the terms of the proposed agreement before signing. Otherwise, you risk wasting your investment or being engaged in long-term litigation, or waiting for decades for the building to be finally constructed or commissioned.

 

Stage 3: Registration of Ownership

 

Once the title has been registered, the investor becomes the rightful owner of the apartment. The registration can be done through the Administrative Services Center.

Before the registration, you will also have to obtain a technical passport for the apartment. You should also request the developer to provide you with certified copies of the document confirming that the building has been commissioned and assigned an address.

The package of the documents required for registration depends on the way of investment you have chosen (e.g., in case of investing in target bonds, you have to submit the target bonds purchase agreement and the ‘booking’ agreement).

Rimslin Chambers has extensive experience in real estate deals in both the primary and secondary real estate markets and is always ready to advise you on all and any issues you have concerning apartment purchase at any stage from choosing a reliable property to signing the agreement and registering ownership rights.