Real estate problem: the Verkhovna Rada wants to put a stop to construction scams

20-09-2021

Ukrainians buy apartments in new buildings trusting the word of real estate developers. How to avoid fraud?

Source: Apostrophe

Ukrainian government is going to adopt a law that will reduce the number of fraud schemes in the construction sector. Apostrophe tried to figure out how the authorities planned to protect buyers of apartments in new buildings from real estate developers and whether we should expect growing housing prices.

It is my contract: it covers whatever I want

Housing construction is one of the dynamic sectors of the Ukrainian economy. However, there have been huge scandals around numerous construction sites for many years. Sometimes real estate developers abandon their construction projects, while in other cases, suddenly it turns out that each apartment in a new building was sold to several buyers or, after the construction is completed, buyers find out that they have invested in the project that does not have the necessary permits and cannot be commissioned…

Each such case is a personal tragedy because people often buy apartments with the last of their money and get into unsustainable debts, hoping to improve their housing conditions. However, neither the public clamor, nor appeals to the government, nor the relevant lawsuits improve their chances, as there is almost no healthy way to save them from this situation.

But the state can help its citizens avoid facing new construction scams by introducing rules that regulate the sale of apartments in future new buildings. The draft law “On Guaranteeing Property Rights to Real Estate to Be Constructed in the Future”, which has been recently considered and approved in the first reading by the Verkhovna Rada, is aimed at addressing these issues.

The purpose of this draft law is to provide the best protection for the rights of people who buy apartments in the future or unfinished construction objects.

“If we carefully study the texts of contracts signed today by investors and real estate developers, we can see that they have one important thing in common: they all are made in the interests of real estate developers, while buyers virtually have no rights,” Oleksii Dorogan, BRDO (Better Regulation Delivery Office) CEO and one of the drafters of the law, told Apostrophe. “And if real estate developers decide that they cannot complete their construction projects or provide investors with apartments for some reason, buyers can hardly protect themselves.”

In fact, the good will of real estate developers is the only guarantee for investors. Of course, they can go to court, but without much hope of winning a lawsuit, because the texts of contracts are made by highly qualified lawyers who try to exclude the responsibility of developers.

News rights – new guarantees

The drafters of the law propose to solve this problem by introducing a special right to objects under construction – a special property right.

“Initially, it was proposed to introduce the ownership of future construction objects. However, under civil law, the right of ownership provides for the right to possess, dispose of and enjoy property objects. But in this case, we are talking about property objects that do not yet exist. Therefore, it is not possible to enjoy them. In such a way, it was decided to introduce a new concept – a special property right. It is somewhat narrower than the ownership right and provides for the right to possess and dispose of property,” Oleksii Dorogan said.

Under the draft law, a real estate developer will have to notarize special property rights for each apartment or commercial premises that are part of the future building even before the sale of apartments in this building. A special open state register will contain all records of this right.

When selling apartments, this right will be transferred to buyers through a notary contract. Thus, buyers of apartments in future buildings will no longer be investors who invest in a potentially risky object. They will the buyers who have a legal right to their purchased objects, can confirm this right with documents and defend it in court.

It is important that the draft law obliges notaries to check whether real estate developers have all the necessary documents and permits to launch construction works by using the databases of the State Architecture and Urban Planning Inspectorate of Ukraine at the initial registration of special property rights. In such a way, a company that decides to launch construction works without proper documents will not be able to register such a right, and therefore will not be able to sell apartments. According to the drafters, this procedure should help reduce the number of illegal construction cases.

Also, the introduction of special property rights should prevent using another construction fraud scheme – the sale of one object to several buyers. Today, the right to an apartment in a new building is confirmed only by a contract between investors and real estate developers. So, when buying an apartment, it is almost impossible to find out whether it has been sold to someone else before. But after the law is adopted, the special property right for each apartment will be officially registered in the open state register. Therefore, when registering the apartment purchase, both notaries and buyers will be able to make sure in advance that the apartment has not been sold to anyone before.

Under the draft law, property rights will be transferred from real estate developers to buyers when they pay the full cost of future apartments.

“This decision was a necessary compromise. It is aimed at preventing abuse by buyers who may decide that they no longer need to pay for an apartment after obtaining the right to it,” Oleksii Dorogan explained.

As the special property right is a somewhat narrow right of ownership, those who own it will have new important rights and opportunities that construction company investors do not have today. For example, this right can be sold. Therefore, if necessary, investors will be able to sell a new apartment before the construction project is completed.

Another important innovation: construction companies will be obliged to agree on any adjustments in the initial building design with apartment owners. Now real estate developers simply say to apartment buyers that the buildings where they purchased apartments do not look like in advertising brochures without asking them first.

However, if the law comes into force, developers will no longer be able to build a few extra floors in the building or change the layout of apartments as they wish. For this purpose, they will have to obtain the consent of all apartment owners, but it will be extremely difficult to do this.

Given that real estate developers often draw up purchase/sale contracts for unfinished construction objects as they wish, neglecting the interests and rights of buyers, the draft law establishes some mandatory requirements for such documents. They should contain a lot of information that is essential for consumer protection. In particular, it includes a cadastral number of the land plot, on which the building is located, an entry number confirming the right of ownership or use of this land plot, technical specifications of the building, a design-based building plan, references to all entries in state registers confirming the legality of construction, the apartment price, the estimated schedule of its commissioning and many other details that should provide the buyers with the opportunity to make sure that they are dealing with a reliable partner and will be able to protect their rights in case of troubles.

Additionally, apartment owners will have the right to dissolve purchase contracts at their initiative if the real estate developer delays in fulfilling its obligations for more than 6 months. Probably, this rule will allow at least some investors to withdraw their investments in suspicious construction, without waiting for its transformation into hopeless long-delayed construction projects.

Let’s see the color of your money first

It should be mentioned that there is a proven and much easier way to avoid all of the above problems.

“In many countries, real estate developers are prohibited to sell unfinished construction objects. A project developer should first complete a building, commission it, and then can sell apartments that you can move into immediately,” Oleksii Dorogan said.

Of course, in this case, buyers do not worry that their apartments will be sold to someone else at the same time or the developer will fail to meet construction deadlines or will change the building design. They do not worry whether the developer will complete construction or will disappear with the money.

However, in the Ukrainian reality, such a decision is hardly possible, because in this case, real estate developers would have to take loans for construction. Of course, they would include the loan interests and all the possible risks in the cost of finished housing. So, this would lead to a significant increase in real estate prices. With low people’s incomes, this would lead to the housing construction collapse.

Therefore, the rules proposed by the draft law allow reducing the existing problems significantly, while keeping the existing market prices.

Of course, real estate developers will have to spend extra money on the services of a notary who will register special property rights before the sale of apartments. But the cost of notary services is very low compared to real estate prices, so it is not worth mentioning.

However, the introduction of new rules may still lead to higher prices in a particular sector.

“It’s no secret that some developers start construction activities without all the necessary permits. Therefore, investing in such projects is a risky business due to the high probability that the building will not be completed or commissioned. And, of course, developers set somewhat lower prices than the market average ones to attract buyers to such dubious projects. Accordingly, if new rules that make all real estate developers worry about the legality of their projects are applied, such companies will be forced to register permits like any other business entities and increase the price of their housing. Well, I think such an increase will not be an excessive payment for reduced risks,” Oleksii Dorogan said.

Safeguard against unfinished construction projects

A few more words about unfinished construction projects. In Kyiv and other cities of Ukraine, there are many buildings with apartments completely sold (sometimes more than once). The real estate developers involved simply disappeared. Such buildings have been empty for many years. Construction companies do not want to complete these projects, as they have no interest in them.

In this case, the draft law provides for the introduction of a mechanism that will be a certain safeguard against such situations. This is a guaranteed share that implies a certain number of apartments that cannot be sold until the construction project is completed and commissioned.

If for any reason a real estate developer failed to complete the construction, it is possible to propose another company that will be able to sell a guaranteed share of apartments for its benefit and cover the expenses to complete the project.

“Construction companies are not charitable organizations. They work to make a profit. Therefore, they will not complete abandoned construction projects without hoping to make money. And if they have a chance to earn money by selling some apartments, the probability that such projects will be completed is much higher,” the co-drafter of the law explained.

Of course, even if this draft law is finally adopted and enters into force, it will not solve all the systemic problems existing in this sector. And it will not help the situation of people who have already become victims of construction scams. However, there is great hope that the rules proposed by legislators will reduce the number of abuses in this sector.

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