Compensation for Damaged and Destroyed Property: Analysis of Draft Law 7198

In early April, MPs adopted draft law No.7198 as a basis, which proposes to introduce compensation for damage and destruction of real estate as a result of hostilities and create a State Register of Damaged and Destroyed Property.

However, after a rather rapid consideration of the draft in the first reading — it took MPs a little more than a week from the moment of registration to the voting — its further passing of the legislative procedure got stalled. The Ministry of Infrastructure and the Ministry of Digital Transformation have already managed to present the Register of Damaged and Destroyed Property, and the number of applications received through Diia has almost reached 300,000, but the document was still being prepared for the second reading.

More than eight months passed, and the text of the draft law for the second reading was published. And the main committee, having worked on 725 submitted proposals, recommended its adoption.

The text has undergone significant changes, so, it is necessary to understand how the approach to providing compensation has changed, and what should expect those whose property suffered.

What is the case with reimbursement now?

To date, there is no legislation in Ukraine that would regulate the reimbursement of the value of property damaged due to hostilities. At the same time, there are certain rules that provide for the possibility of paying compensation to the affected persons. These are Articles 84-86 of the Code of Civil Protection of Ukraine, which determine the procedure for providing assistance by the state to persons affected by emergencies, which also include military events.

These provisions, in particular, provide for the construction/purchase of housing for victims who have lost it or if it has become uninhabitable, or monetary compensation for destroyed/damaged housing.

According to Article 86 of the Code, victims are provided with housing or paid compensation if they voluntarily transferred their destroyed or damaged housing to the state. The amount of compensation is determined not in accordance with the market value of such housing, but by the indicators of the indirect cost of its construction in the relevant region of Ukraine.

The procedure for providing and determining the amount of monetary compensation to victims of emergency situations is approved by the CMU Resolution No. 947. In 2020, this act was extended to determine the amount and payment of compensation to victims whose housing was destroyed as a result of a military emergency caused by the armed aggression of russia.

Although the said resolution remains in force, its provisions are not particularly relevant:

1. their effect extends to the territory of Donetsk and Luhansk oblasts only;
2. monetary compensation is provided only for destroyed property and does not exceed UAH 300,000.

Consequently, today, the issue of compensation for damaged or destroyed property as a result of the full-scale aggression of Russia is basically not settled at the regulatory level.

What does the draft law propose?

Compensation will be provided exclusively for property damaged/destroyed after February 24, 2022, and within three years after the cessation or cancellation of martial law in the territory where such an object is (was) located. The law will not apply to objects that were in the temporarily occupied territory on the date of the introduction of martial law.

Compensation is offered to provide only for damaged or destroyed residential real estate. This includes apartments, other residential premises (for example, rooms in dormitories), manor houses, garden and country houses, construction facilities in which support and external structures are erected. The common property of an apartment building will also be compensated for — but only in case of its damage.

Individuals — citizens of Ukraine who are owners (including members of cooperatives who bought housing but did not register ownership), construction customers, investors of damaged or destroyed real estate, as well as their heirs (hereinafter — owners) will receive the right to compensation. Condominiums, managers, housing cooperatives, or persons authorized by the co-owners of apartment buildings will be able to receive compensation for the common property.

Persons from sanctions lists, with convictions for committing crimes against the basics of national security and their heirs will not be able to receive compensation.

The approach to the methods of reimbursement in the draft law to the second reading was changed. For damaged property, it will be impossible to receive monetary compensation — for such cases, only restoration through construction work and/or the provision of building materials for them are offered.

Owners of destroyed apartments and other residential premises will not receive monetary compensation. Instead, they will receive a housing certificate — a document confirming the state’s guarantee to finance the purchase of an apartment or other residential premises (including one that will be built in the future) in the amount of the sum of money specified in such a document.

Only owners of private houses will have a choice — to receive a housing certificate for the purchase of an apartment or house or monetary compensation, which will be transferred to an account with a special mode of use to finance construction.

The maximum amount of compensation — both monetary and in the form of a housing certificate — is absent, as well as restrictions on the location, type, and area of new housing, the construction of which will be financed through a certificate. It will also be possible to choose more expensive housing and cover the difference at one’s own expense, or use several certificates of different owners to purchase one object. One can use the certificate within five years from the date of its issuance, but it is prohibited to alienate the object for 5 years, except for inheritance.

If the price of housing is lower than the amount specified in the certificate, the under-received part of the compensation will be paid to the recipient only at the expense of funds received from russia to reimburse for damages.

The deadline for submitting an application for compensation for destroyed residential property was increased for the second reading — it can be submitted during the martial law and within one year from the date of its termination or cancellation in the territory where such an object was located, using the Diia portal or in paper form through the ASC, social protection bodies, or a notary.

A copy of the document confirming the ownership or purchase of the property and, if available, photo and video materials recording the state before or after destruction will need to be attached to the application. If these documents are not available, the consideration of the application will be stopped until the moment when they are added.

The commission for consideration of compensation issues will consider applications and make decisions on granting or refusing compensation for destroyed property. Such commissions will be created by the executive bodies of local councils, military or military-civilian administrations of settlements, which will approve the decision to grant/refuse to grant compensation.

Moreover, before the second reading, the provision was excluded from the draft law, according to which the executive bodies of local councils had to provide compensation, for which they had to transfer a subvention from the national budget.

To finance the purchase of housing, the recipient of compensation will apply to a legal entity designated by the Cabinet of Ministers of Ukraine, which will be obliged to consider such an appeal within a period not exceeding 10 working days. The priority right to receive compensation for destroyed real estate objects will be given to combatants, large families, and persons with disabilities of groups I and II.

The recipient of compensation for five years will not have the right to alienate housing purchased or invested by them using a housing certificate.

Sources of financing for compensation for damaged and destroyed property will be the following:

1. funds of state and local budgets;
2. funds of international financial organizations, other creditors, and investors;
3. international technical and/or reimbursable or irrevocable financial assistance;
4. reparations or other recovery from Russia;
5. other sources not prohibited by the legislation of Ukraine, including local funds established for the purpose of compensation and restoration of damaged/destroyed real estate.

Transparency International Ukraine, together with RISE Ukraine Coalition, met with representatives of the Ministry for Communities, Territories and Infrastructure Development to discuss this draft law and provide recommendations to it.

Shortcomings of Draft Law No.7198

1. The methods of compensation determined by the draft law oblige their recipients to direct funds exclusively to finance the construction or purchase of housing. At the same time, it does not consider the fact that some owners of the destroyed property will not intend — both within the five-year period of validity of the housing certificate, and in general — to purchase real estate or wait several years for its construction, but need funds to ensure housing needs.

First of all, this applies to those who have other housing left, or those who have already purchased or received it (including at the expense of escheat), and needs funds for arrangement, that is, to conduct repair and finishing work, purchase and install sanitary ware, heating systems, furnish, etc. The draft law does not fully consider the interests of the owners of the destroyed apartments — they will not be able to receive funds to finance the construction of their own house, even if they own suitable land plots for this.

Position of the Ministry for Communities, Territories and Infrastructure Development:

This law and state guarantees are intended to ensure the need of the population for housing that has been destroyed or damaged as a result of hostilities.

The acquisition of movable property, entrepreneurial activity contradict the essence of this state guarantee: if a person has lost their home — they receive housing, and not other material benefits.

Expanding the use of monetary compensation will negate the essence of state support and can also lead to an unfair situation where one person will start a business for the cost of housing restoration, and another will not receive funds for the restoration of the only housing they possess due to lack of financing.
The owner of the destroyed property (apartment, house, etc.) will essentially receive financial targeted compensation (either for the purchase of housing or for its construction). There are no privileges for owners of private houses.

The point is that it is impossible to build one apartment. It will necessarily be an apartment building. Otherwise, it is a private house.

Therefore, obtaining monetary compensation for the construction of a separate apartment is illogical.

The owner will be able to choose — either they receive financing for the purchase of a finished apartment/house/other residential premises, or they receive compensation and builds their own house because it is impossible to build an apartment on their own.

The amount of compensation does not depend on the type of property that will be purchased or built. The amount depends on the value of the destroyed property.

2. If the amount of compensation specified in the housing certificate is higher than the cost of the purchased housing, the payment of the amount of the under-received compensation will be made exclusively at the expense of funds received from russiato compensate for losses for the destroyed real estate. We are talking about the possible reparations or recovery of funds from the aggressor by the relevant court decision. However, if Ukraine does not receive such funds, the balance of compensation will not be paid. In our opinion, it is appropriate to provide for the possibility of transferring the under-received balance to the current account of the recipient for the arrangement of housing purchased using a certificate.

Position of the Ministry for Communities, Territories and Infrastructure Development:

The essence of this law and state policy is to provide Ukrainians with housing in the first place. In this case, the state acts as a guarantor and gives people its own or borrowed funds to restore the violated rights. And then the state will deal with the issue of recovering these funds from russia.

Consequently, the state has not transferred the obligation to receive compensation from the aggressor to the people. At the same time, with this law, the state creates conditions for the restoration of violated rights “here and now,” and not after receiving reparations.

Basically, it is not Ukraine that is to blame for the destruction of property, and therefore it can legally not compensate anything in advance. However, the state does this and assumes all the risks of further receiving funds from the aggressor.

The points about the obligation to pay a person the amount of the under-received compensation in such conditions is inappropriate. 

3. Even after buying a new home, the recipient of compensation will not be able to freely dispose of it— the prohibition of alienation will be imposed for five years. It should be noted that in the original version of the draft law, this period was shorter and amounted to “only” three years. Such a condition for compensation is extremely doubtful and unfair because the right of a person to dispose of their property will be limited solely due to the fact that their home was previously destroyed as a result of hostilities. Such interference in the exercise of property rights does not comply with the provisions of the Constitution of Ukraine and the Civil Code of Ukraine, according to which the owner has the right to dispose of their property at their own discretion, and all owners are provided with equal conditions for the exercise of their rights. In addition, the sale of housing that has been owned by a person for less than 3 years is subject to personal income tax, which reduces the likelihood of alienation of housing purchased using a certificate.

The idea of the law is to provide Ukrainians with housing. And this goal is achieved by the proposed mechanism.

The prohibition on alienation of real estate is contained in the specialized legislative acts, for example, a prohibition on the alienation of housing of orphans, children deprived of parental care; a ban on the alienation of the property of a person recognized as dead for 5 years, etc.

The applied restriction is intended to preserve the essence of state support in providing housing, and not to turn it into a business process.

The restriction is applied not because the person’s property was destroyed as a result of hostilities, but because the person enjoys state support to restore the violated right in the form of financing for housing. Consequently, the logic of limited rights to alienate property for a certain period is justified. 

4. Such restrictions may be beneficial for representatives of the real estate market, and not the state or owners of destroyed/damaged property. The draft law does not provide for the mandatory reconstruction of residential real estate in cities that have suffered significant damage because the housing certificate is not bound to a particular locality. The possibility to use compensation exclusively for the purchase of residential real estate will stimulate excessive demand for it, and the subsequent prohibition of alienation will artificially keep the value of real estate on the market. At the same time, due to the limited validity period of housing certificates, citizens will be forced to agree, including to unfavorable prices, in order not to lose compensation.

Position of the Ministry for Communities, Territories and Infrastructure Development:

On the contrary, such restrictions are not beneficial to representatives of the construction market, since having received housing, a person will not be able to alienate it. This can reduce people’s demand for other apartments/houses, etc.

In the context of global destruction of the housing stock — the demand for housing is growing naturally, and not through government programs.

The use of compensation for the purchase of other real estate, in addition to residential, will contradict the idea of the legislator to provide Ukrainians with housing.

As for the binding to the locality — there is a great demand for the population to live in their hometown, and therefore the reconstruction of these cities will naturally take place.

In addition, already now the state has certain developments and plans for the reconstruction of cities, but this is a parallel line that cannot negate the provision of housing right now.

At the same time, a person has the right to independently choose a location for the use of a housing certificate within its amount. And the key indicator in this matter is only the amount of funds that will be commensurate with the value of the destroyed property.

5. It is also impossible to receive compensation for the damaged object in the form of monetary resources— it will be provided by performing work related to its restoration (in particular, the development of project documentation, its examination, construction work) and/or the provision of construction products for such work. At the same time, the draft law does not clearly outline the range of entities that will provide such compensationand, accordingly, will be procuring entities of works and building materials. Unlike compensation for destroyed property, where the recipient will independently search for and select the object for purchase/construction, the draft law does not provide for the right to choose a contractor to perform works or provide/receive goods to compensate for damaged property.

Position of the Ministry for Communities, Territories and Infrastructure Development:

The draft law (Article 10, part 2) stipulates: “The procedure for providing compensation for damaged real estate is determined by the Cabinet of Ministers of Ukraine.”

This issue will be resolved during the creation of bylaws to comply with the requirements of the law, and it will be possible to provide proposals for resolving this issue.

As for the impossibility of obtaining monetary compensation. Yes, the person will not be able to receive funds directly, but they will receive financial coverage of all repair costs, which allows them to achieve the goal of restoring damaged housing.

The primary goal is not to provide money, but to provide housing. The experience of the Donetsk Regional State Administration on the payment of ready money showed that most of these payments were not used for the purchase of housing and did not remain in Ukraine.

6. In general, the issue of compensation for damaged real estate has been improperly settled.The procedure for providing such compensation will be determined by the government, but the draft law does not even provide for general provisions on:

• the forms, terms of submission and procedure for consideration of applications for such compensation for various types of damaged real estate (apartments, private houses, etc.);
• the body that will decide on the granting/refusal of compensation.

Such uncertainty gives grounds for the conclusion that the issue of compensation for damaged objects may fall on the shoulders of local authorities. In particular, among the sources of financing compensations before the second reading, local budgets and local funds for compensation and restoration of damaged/destroyed real estate appeared, and according to the proposed amendments to the Law of Ukraine “On Regulation of Urban Development,” the executive bodies of local councils will be able to be procuring entities of construction (except for new construction) related to the restoration of damaged real estate objects that are not in municipal ownership.

Position of the Ministry for Communities, Territories and Infrastructure Development:

All interested entities will have the opportunity to express their proposals to regulate the issue of compensation for damaged objects at the stage of development of the Cabinet of Ministers resolution.

Financing will be carried out at the expense of the sources defined in Art. 13 of the draft law, which applies to both destroyed and damaged objects.

Therefore, the corresponding funding a priori cannot be assigned only to local budgets.

Empowering local councils to act as the procuring entity of construction will contribute to the development of cities and the faster implementation of the policy of restoration, including of housing stock.

7. The procedure for the formation of the Commissionfor Consideration of Compensation Issues has not been properly settled. According to the draft law, the personal composition of such a commission will be approved by the executive body of the local council, the military or military-civil administration of the settlement. The draft also provides for a list of persons who may be involved in the work of the commission by consent. At the same time, there are no formal requirements for persons who must be in the commission on a permanent basis. This may create a space for abuse in the formation of such commissions and further in their decision-making.

Position of the Ministry for Communities, Territories and Infrastructure Development:

The Cabinet of Ministers of Ukraine will approve an exemplary provision on the commission, which is provided for in Article 3, part 8 of the draft law. It will also be possible to provide relevant proposals during the development of this draft act.

Risks of abuse largely depend on the procedural issues of decision-making, which are regulated by law in terms of destroyed property and will be imperatively regulated by the Cabinet of Ministers in terms of damaged property. Deviation from the established methodology and procedure is prohibited.

This minimizes the risks of abuse. The issue of the official composition is a secondary stage and can be resolved at the local level. We would like to note once again that the relevant principles can be enshrined in the exemplary provision on the commission.

8. The draft law defines the list of individuals and legal entities that can receive compensation, including depending on the type of damaged or destroyed real estate. At the same time, it is possible for the Cabinet of Ministers of Ukraine to determine additional categories of persons who may be compensated. This approach is risky because it provides excessive discretionary powers for the government to include persons who may not be subject to the restrictions provided for by law in the list of recipients. This, in the end, can affect the adequacy of funding and the timeliness of providing compensation to recipients whose status will be enshrined in law.

Position of the Ministry for Communities, Territories and Infrastructure Development:

The adequacy of funding may be affected by the expansion of expenditure objects (movable property, business activities, etc.), as discussed above.

The list of persons who cannot be recipients of compensation is determined by law, and they cannot be included in the circle of persons entitled to compensation at the level of the Cabinet of Ministers.

The relevant right of the Government is enshrined in order to promptly respond to the needs of certain categories of entities for compensation that may not be covered by this law, and if such a need arises. At the same time, such a right does not invalidate the essence of the law — the housing sector will be financed exclusively to provide people with housing.

Conclusion

Draft law No. 7198 is primarily aimed at providing housing to people who have lost it as a result of the full-scale armed aggression and are in dire need of new homes. The state will act as a guarantor of financing the purchase or construction of housing at the expense of its own or attracted funds, while it will have the right to claim for the compensation from the aggressor for losses for the destroyed property.

Persons whose residential property was damaged will have a choice — to receive compensation on the terms specified in this draft law, or to expect to receive compensation from the aggressor. But as long as the possibility of paying reparations or confiscating the aggressor’s foreign assets remains a matter of time, most citizens will be interested in receiving compensation from the state “here and now.”

However, the approach proposed by the legislator to providing compensation for property damaged by the aggression of russia will consider the interests of only a part of its owners. Restrictions on the exercise of the right to property will also become an additional burden for the recipients of compensation. In addition, the draft does not adequately regulate important aspects of the mechanism for providing compensation for damaged property, the formation of Commissions for Consideration of Compensation Issues.

The purpose of the draft law No.7198 is important, but we consider it necessary to note the provisions that would need to be finalized:

1. To provide the right to choose the method of compensation for recipients whose housing was destroyed, regardless of its type — a private house, apartment, other residential premises, etc.
2. To provide the recipients with the opportunity to dispose of the funds provided as compensation for the destroyed real estate, not only for the purpose of financing the acquisition or construction of residential real estate, but also the arrangement of such housing.
3. To eliminate or reduce restrictions on the prohibition of alienation of housing obtained using a housing certificate.
4. To provide for the payment of the amount of under-received compensation to the recipient in case of using a housing certificate to the account with a special regime to ensure housing problems.
5. To regulate the procedure for the formation of the Commission for Consideration of Compensation Issues, in particular, to provide for requirements for persons who may be members of such a commission on a permanent basis, and the procedure for making decisions on the granting/refusal of compensation.
6. To exclude the possibility of the Cabinet of Ministers of Ukraine to determine additional categories of persons who may be provided with compensation and to expand the circle of persons who cannot be recipients of compensation (considering the recommendations given in the text).

Authors: Andrii Shvadchak, legal advisor at Transparency International Ukraine
Volodymyr Datsenko, project manager at Transparency International Ukraine

Legal analysis was prepared with the support of the USAID “Engage” project “Support to Anti-Corruption Champion Institutions in Ukraine” and USAID / UKaid project “Transparency and Accountability in Public Administration and Services / TAPAS.”

This publication was made possible by the support of the American people through the United States Agency for International Development (USAID). The content of this publication is the sole responsibility of Transparency International Ukraine and does not necessarily reflect the views of USAID or the United States Government.