Special Aspects of Legal Regulation over Renewal of Land Lease Agreements

Land lease is one of the most common forms of land use in Ukraine and around the globe. The social significance of land lease defines certain special aspects of its legal regulation. In addition to the common industry codes — Civil Code and Land Code — the specialised Law of Ukraine On Land Lease, enacted in 1998, regulates land lease and indicates the legislature’s deep understanding of its significance. The legal principles of land leases are uniform regardless of the form of ownership (private, public or communal). The normative regulation of lease contractual relations is based on the freedom-of-contract doctrine.

The Law has been amended almost annually. The amendments eliminate shortcomings and equivocations in certain provisions that became obvious in their application. They also adjust new aspects of leased land relations, such as the adoption of the Laws of Ukraine On Amendments to Certain Legislative Acts of Ukraine on Combating Raids of 5 December 2019, and On State Support of Investment Projects with Significant Investments in Ukraine, of 17 December 2020. These two laws from 2019 and 2020 introduced significant changes to the provisions of the Law related to the renewal of lease agreements and a land tenant exercising his pre-emptive right to enter into a lease agreement for a new term.

In general terms, the renewal of a land lease agreement was introduced to establish a legal mechanism that protects the interests of a bona fide land tenant, as a more vulnerable party, in the event where a landlord unreasonably evades extending the lease term. Most lease agreements were concluded for a short time which, as a rule, did not ensure the land tenant achieved his purpose of lease (i.e., return on investment and profit). However, disputes over the renewal of land lease agreements have been among the most common categories of land disputes in Ukraine due to the peculiarity of regulatory settlement of this issue.

Article 33 of the Law regulated the renewal of land lease agreements until 16 July 2020. Its norms were somewhat specific compared with the general principles of civil and economic legislation on such issues. The specificity involved both the definition of the special procedure to extend land lease agreements and the wording of the provisions in Article 33 of the Law, written in an ambiguous way that allowed for interpretation and application. Consequently, renewal of a land lease agreement did not always ensure the proper safeguard for land tenants and landlords. There was no clear and transparent mechanism for extending the legal relations in leases, thus enabling unfair practices by both parties. Therefore, the amendments to the procedure for renewing land lease agreements, effected on 16 July 2020, aimed to ensure effective safeguards at the legislative level, which would prevent such situations

Comparing “previous practice” and “current practice” will help to illustrate these changes. Current legislation stipulates that the new rules for renewing lease agreements apply only to agreements concluded or amended after 16 July 2020. Land lease agreements concluded prior to that date shall be renewed on terms specified therein and in accordance with the rules in force at the time of conclusion.

Article 33 of the Law, as worded until 16 July 2020, provided for two cases in the renewal of land lease agreements.

•  First case: The renewal of the lease agreement, as stipulated in parts 1–5 of Article 33, so the land tenant can exercise its pre-emptive right to conclude the lease agreement for a new term. Such renewal should be possible only after the term for which such agreement was concluded expired. After expiry of this period, the land tenant, who duly performed his/her obligations under the terms of the agreement, could exercise his pre-emptive right to enter into a land lease agreement for a new term on conditions agreed by the parties. Thus, Article 33 provides for the conclusion of a new agreement rather than the renewal of the previous one.
•  Second case: The so-called “automatic” renewal of the agreement, as stipulated in part 6 of Article 33, means that provided that the land tenant continues using the land and the landlord has no objection within one month after expiry of the lease agreement, the agreement may be extended for the same period and on the conditions stipulated in the land lease agreement.

Thus, this statutory concept provides different grounds for proceeding with lease legal relations and specific means for their implementation.

Until recently, the judiciary applied the above provisions of Article 33 of the Law ambiguously, sometimes using diametrically opposing legal approaches in cases. For instance, in cases regarding part 6 of Article 33, the Civil Court of Cassation and Economic Court of Cassation at the Supreme Court supported different positions on the need of the land tenant to notify the landlord of his/her intent to exercise his pre-emptive right to renew the agreement prior to its expiry. Consequently, there have been different outcomes in similar circumstances in civil and economic cases.

The Grand Chamber of the Supreme Court resolved this issue conclusively in its decision dated 22 September 2020 in case No 313/350/16-ts. There, the court stated that the legislature, when using the concept of “renewal of the land lease agreement”, actually identified both grounds defined in Article 33 of the Law on renewal of the lease term. Therefore, regardless of the grounds for such renewal, the land tenant shall notify the landlord of his/her intent to exercise his pre-emptive right. This decision by the Grand Chamber is of great practical importance because it ensures the courts will uniformly apply the provisions of Article 33 of the Law as worded before 16 July 2020. Thus, all land lease agreements concluded before 16 July 2020 will be subject to renewal.

However, the amendments introduced in the Law of Ukraine On Amendments to Certain Legislative Acts of Ukraine on Counteracting Raiding, effective 16 July 2020, significantly changed the procedure for land lease agreement renewals concluded or extended after the specified period and the statutory concept of legal provisions. In particular, the amendments distinguished between concluding a new lease agreement for a land tenant to exercise his/her pre-emptive right and ‘automatic’ renewal of the lease agreement, the procedure of which is significantly simplified.

At the same time, the text of Article 33 of the Law excludes the provision on agreement automatic renewal (part 6 in the former wording). The Law is supplemented by Article 32-2, according to which the land lease agreement shall be renewed in a manner stipulated under the new Article 126-1 of the Land Code of Ukraine. The developments are as follows:

•  In the event of extending private land lease agreements concluded before 16 July 2020, as well as a lease agreement for public or communal land with real estate located thereon, these agreements shall specify provisions for renewing the agreement and the land tenant’s pre-emptive right to conclude a land lease agreement for a new term as defined by current legislation.
•  The algorithm for exercising the pre-emptive right to enter into an agreement for a new term stipulates that the land tenant shall provide the landlord, prior to the end of the agreement and within a period established in it, but not later than one month before its expiry, with a corresponding Notification Letter (along with a draft agreement). The landlord will consider the same within a month, agree with the tenant (if necessary) the essential contractual terms, and in the absence of any objection, sign a new lease agreement. In this case, in the event of a failure to reach an agreement on lease payment and other essential contractual terms, as well as in the event of changes to the boundaries or intended use of the land plot, the land tenant’s pre-emptive right to enter into a land lease will be terminated. At the same time, the refusal to sign or delay in signing a new land lease agreement may be appealed in court.
•  Lease agreements for privately-owned land, concluded on or after 16 July 2020, will be automatically renewed for the same period and under the same conditions only if this agreement contains a provision on automatic renewal. No other additional actions (i.e., entering into supplementary agreements, notices or responses thereto) are required. In the absence of a statement by either party to remove information from the State Register of Proprietary Rights to Immovable Property on the renewal of the agreement, the agreement will be extended automatically upon the tacit consent of the parties. In this case, following the relevant end date of the agreement, the state registration of proprietary right to lease shall be extended for the same period.
•  Lease agreements for public and communal land plots concluded on or after 16 July 2020 will be automatically renewed only if there is real estate located thereon, owned by the user or acquirer of title to use the land plot. That is, the renewal of an agreement for land lease, where the land tenant does not own real estate located on such land, requires a decision issued by the relevant executive authority or local government disposing of the land within the powers defined under Article 122 of the Land Code of Ukraine. Such agreements will be free of a provision on an agreement’s renewal.
•  The party to the land lease agreement wishing to exercise the right of refusal to renew the agreement shall submit to the State Register of Proprietary Rights to Immovable Property, no later than one month prior to the end date, an application to remove the information on renewal from this register.

While these developments have positive and practical significance, there are possible issues in their implementation, especially regarding safeguarding land tenants and their protection. For example, where the purpose of leasing a public or communal land plot free of real estate owned by the land tenant is land development, then it will be impossible to provide for a renewal provision, as the law explicitly prohibits it. The question is whether the parties will reach a consensus in this case if the construction is not completed within the specified term of the lease.

The provisions of Article 126-1 of the Land Code of Ukraine do not provide for any safeguard that would prevent the landlord from exercising, immediately after the signing of the lease agreement, his/her right to refuse renewal by applying to the State Register of Proprietary Rights to Immovable Property to remove information about renewal of the agreement. The matter is ambiguous as to any obligation to define in the land lease agreement the provisions on the pre-emptive right of the land tenant to conclude a new agreement. Article 33 of the Law does not stipulate such a direct obligation (unlike the definition in relation to the condition of the lease agreement’s renewal in Article 126-1 of the Land Code of Ukraine). At the same time, submission by the land tenant of a Notification Letter of Intent to exercise his/her pre-emptive right is “linked” directly to the period of notice specified in the agreement.

There is no doubt that sooner or later these issues will be resolved and regulated in legal terms because land legislation continues to develop dynamically under land market reform. The Law of Ukraine On State Support of Investment Projects with Significant Investments, of 17 December 2020, has already supplemented Article 33 of the Law with new provisions defining an additional mechanism for protection against unfair landlords of tenants who are investors with significant investments and parties to special investment agreements signed in accordance with this law. In particular, in the event that the landlord fails to notify such a tenant, no later than 30 days before the end date of an agreement, in a corresponding Notification Letter on non-renewal, and provided that the tenant intends to continue using the land after expiry of the agreement, such agreement shall be considered renewed for the same period on the conditions specified in it, except for the amount of the lease payment.

To sum up, despite significant positive legislative developments in regulating the renewal of land lease agreements, issues regarding their implementation will continue to receive meticulous attention from both lawyers in the field and case law.