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Your power to winDue diligence of land lease agreements
The main asset of an agricultural company is land rights. The most common document under which an agricultural company obtains land plots for use is a land lease agreement. Lessors can be various entities, which imposes certain specifics when concluding lease agreements with each of these entities. Often, agricultural enterprises cultivate land based on lease agreements with shareholders who received land through the privatization of collective agricultural enterprises. Lease agreements are also made with local councils when leasing agricultural land from municipal property of the respective territorial communities. The State Geocadaster and its territorial bodies transfer agricultural land plots from state ownership into use.
As practice shows, the signing of lease agreements with shareholders happens quickly and chaotically, resulting in various violations, from minor shortcomings to grounds for declaring the agreements invalid.
The main cause of such mistakes is often the legal illiteracy of the individuals responsible for selecting land plots for lease on behalf of the agricultural enterprise and for assisting in the conclusion of the relevant agreements.
Very often, the terms of lease agreements do not comply with the requirements of the legislation governing land lease relations. Frequently, the parties do not carry out the state registration of lease agreements, which may tempt an unscrupulous lessor to enter into another lease agreement with another party. Often, the documents that should be attached to the agreement, such as technical documentation or boundary establishment acts, are missing. In some cases, land plots that are not suitable for agricultural use are transferred. There are also instances of double registration of the same lease agreements.
To identify and correct such violations, it is necessary to conduct a legal audit (Due Diligence) of land lease agreements.
verification of land title documents (lease agreements, state acts for permanent land use, state acts for ownership rights, temporary land use agreements);
analysis of compliance of the terms of the agreements with land legislation requirements;
investigation of land rights (extracts from state registries, verification of land planning documentation, tracking the registration procedure of land plots and rights to them);
verification of the correctness of information about the land plot, lessor and lessee, and the registration of lease and sublease agreements;
identification and description of non-standard and/or burdensome terms of agreements, possible risks of losing land rights (termination of lease agreements, compulsory alienation) and methods of avoiding (minimizing) such risks;
determination of the maximum term of lease agreements and the procedure and timeframe for their renewal;
verification of the correctness of rent payment for the land;
checking restrictions on land use and encumbrances on land rights (land plot purpose, existing restrictions, encumbrances, pledges, mortgages, servitudes, coastal protective strips and protected zones of water objects).
Proper preparation for a legal audit of land rights primarily involves organizing the legal documents for their subsequent transfer to the auditors. To this end, it is necessary to have a register of all legal documents, such as a register of land lease agreements and all attachments to them, as well as documents confirming the state registration of land rights.
To minimize possible negative consequences when entering into a land lease agreement, it is advisable to take the following actions:
- Clearly define the amount and procedure for paying the lease. Payment can be made in monetary or natural forms, as well as in the form of services provided to the lessor.
- Pay close attention to the terms of the contract and the conditions for termination. It will not be beneficial if the contract allows the other party to terminate the agreement unilaterally.
- Notarize the lease agreement. While the law allows for a lease agreement without notarization, involving a notary adds reliability to the transaction since the notary is obligated to verify the authority of the parties to enter into the contract, the presence of legal documents for the land, and the compliance of the contract terms with legal requirements.
The leased land plot or part of it may be subleased by the lessee without changing its intended purpose if this is provided for in the lease agreement or with the lessor's written consent (except for cases defined by law or the main lease agreement). If the lessor does not send a written notice of consent or objection within one month, the leased land or its part may be subleased. The terms of the land sublease agreement must be limited by the terms of the land lease agreement and not contradict it. The sublease period cannot exceed the term specified in the land lease agreement. If the lease agreement is terminated, the land sublease agreement is also terminated.
At the end of the lease term, the lessee who has properly fulfilled their obligations under the terms of the agreement has a preferential right over other persons to enter into a new lease agreement for the land (renewal of the land lease agreement). The lessee intending to exercise their preferential right to enter into a new lease agreement must notify the lessor before the expiration of the lease term, within the period specified in the agreement, but no later than one month before the lease agreement expires.
The lessor must notify the lessee in writing of their intent to sell the land plot to a third party, specifying its price and other terms of the sale. The lessee, who by law can own the leased land plot, has a preferential right to purchase it if the land is sold, provided that they pay the price at which it is being sold. If the land is sold at auction, the lessee’s offer must be equal to the highest bid made by other auction participants. If the lessee refuses to exercise their preferential right to purchase the leased land, the rights and obligations of the lessor under the lease agreement will transfer to the new owner of the land.
Before submitting the lease and sublease agreements, take the following steps.
- Prepare in advance a detailed list of all the land plots that the company leases, along with the corresponding lease or sublease agreements.
- Prepare copies of the land lease and sublease agreements signed by the company.
- Critically assess the lease and sublease agreements in terms of the business feasibility of using the respective land plots.
- Check the duration of the contracts.
- Recall and document any known disputes or other issues related to the land plots.
According to the Law of Ukraine "On Land Lease," land lease and sublease agreements are subject to state registration in accordance with the procedures established by law.
The essential terms of a land lease agreement include:
- the leased property (cadastral number, location and size of the land plot);
- the term of the lease agreement;
- the rent, specifying its amount, indexation, method and terms of payment, deadlines, the procedure for paying and revising it, and liability for non-payment.