Weekly analytics for 18 – 24 March

An Imaginary Attempt to Protect Property Rights Preserves the Plundering of State Assets

Event

On March 12, the Verkhovna Rada of Ukraine passed the draft law “On amendments to the Civil Code of Ukraine regarding the strengthening of the rights of a Bona Fide Purchaser” № 12089 of October 3, 2024 in the second reading.

According to the explanatory note to this draft law, its adoption is intended to delineate the mechanisms of protecting the recovery of ownership over real estate in order to achieve a balance of interests of the state, territorial communities, and private owners. The law also seeks to improve mechanisms for protecting the rights and interests of bona fide purchasers and preventing additional claims for compensation from the state in cases where property is repossessed (if the state fails to ensure the inviolability of property rights).

At the same time, the law intends to safeguard the rights and interests of the state, the Autonomous Republic of Crimea, and territorial communities by ensuring these entities have the right to claim compensation (for market value of the property) for damages from individuals directly responsible for causing it.

CPLR’s assessment

The draft law proposes amending Article 388 of the Civil Code of Ukraine (CCU) by supplementing it with Part 3, which stipulates that the state or a territorial community, except in cases explicitly provided for by law, cannot repossess property from a bona fide purchaser if more than ten years have passed since:

1) the first purchaser’s ownership rights were registered in the State Register of Property Rights to Real Estate, provided the property was transferred from state or municipal ownership to private ownership, regardless of its type; or

2) the real estate was transferred from state or municipal ownership to private ownership, in cases where legislation at the time of transfer did not require state registration of the transaction or ownership rights.

Additionally, the draft law introduces amendments to the Civil and Commercial Procedure Codes. Any public authority, local self-government body, or prosecutor filing a claim for repossession of real estate from a bona fide purchaser must deposit into the court’s deposit account an amount equivalent to the property’s appraised value based on the valuation in effect at the time of filing. Moreover, these amendments will have retroactive effect.

According to Article 13 of the Constitution of Ukraine, all owners, regardless of their legal status, are equal before the law. Article 41 of the Constitution establishes the principle of inviolability of property rights, stating that no one can be unlawfully deprived of their property. The forced alienation of privately owned property is allowed only in exceptional cases of public necessity, strictly in accordance with the law, and only with prior and full compensation for its value.

Chapter 29 of the Civil Code of Ukraine (CCU) establishes the legal mechanisms for exercising property rights, including the right to recovery of the property from unlawful possession, including from a bona fide purchaser – someone who acquires property under a paid contract without knowing, and without the possibility of knowing, that the seller lacked the legal right to transfer it.

According the Supreme Court (e.g., in its ruling of September 27, 2023, in case № 201/1051/22), an owner has the right to recover the property from unlawful possession, regardless of the defendant’s claim of being a bona fide purchaser, if the owner can prove that the property was lost from his/her possession, or from the possession of someone to whom he/she had lawfully transferred it against their will. According to the current version of the Civil Code of Ukraine, this right applies equally to all owners, whether individuals, legal entities, the state, or territorial communities.

However, the law fails to establish clear procedures for compensating an owner for lost property or identifying the individuals responsible for such compensation if a claim against a bona fide purchaser is denied. Similarly, there is no legal framework for compensating a bona fide purchaser when a court orders the return of property to its original owner (see, for example, the Supreme Court’s ruling of May 29, 2024, in case № 910/5808/20).

These legal gaps undoubtedly need to be addressed in line with the principle of legal certainty. However, draft law № 12089 does not resolve these issues; instead, it effectively legitimizes the large-scale plundering of state and municipal property.

For instance, if state property was transferred into private ownership through a corrupt scheme or illegal privatization during the Yanukovych presidency, it would be nearly impossible to return this property to the state due to the expiration of the statute of limitations. However, if these time limits have not yet passed, the return of real estate to state or municipal ownership can only happen if funds are deposited into the court’s deposit account, and these funds must then be transferred to the bona fide purchaser according to the court decision, if the ruling is made in favor of the state or the local community. Given that property disputes can drag on for years in court, such provisions would significantly strain budgets. In some cases, the lack of available funds in either the community or the state budget could make it entirely impossible to pursue legal action.

Experts of the CPLR have previously pointed out that a significant portion of Ukrainian oligarchs’ wealth was acquired through the illicit transfer of state property, causing substantial financial losses to the state. Meanwhile, oligarchs consolidated resources to enhance their influence over Ukraine’s political and public life. Numerous investigative reports have revealed how officials, exploiting legal loopholes or leveraging corrupt networks, secured valuable land on scenic lake shores or at the edges of protected forests, which they subsequently sold to fictitious companies.

However, instead of improving mechanisms for returning property to its rightful owner – whether the state, territorial communities, or private individuals and legal entities – addressing legal gaps, and genuinely ensuring the protection of bona fide purchasers’ rights and the right to property guaranteed by Article 1 of the Protocol to the Convention for the Protection of Human Rights and Fundamental Freedoms, the draft law № 12089, in essence, preserves corrupt schemes and allows corrupt individuals to continue enjoying the results of their illegal activities.