Until 2020, the shadow market for renting state and municipal property had been flourishing in Ukraine. According to the State Property Fund, this has led to the fact that 28 million square meters of national real estate either stands idle or is used in opaque schemes. This is the area of 200 Olympiyskiy stadiums or all the housing placed in operation in Ukraine over the past 3 years. As a result, the state budget is short of millions of hryvnias.
Estimating losses from inefficient use of municipal property in our country is not an easy thing to do. A significant amount of community real estate simply is not properly registered in the State Register of Property Rights to Immovable Property.
However, with the adoption of the new Law “On Lease of State and Municipal Property” in 2019, and Cabinet Resolution No. 483 in 2020, which determined the procedure for leasing state and municipal property, there was hope for cleaning up the market and for transparent rules of the game.
What has changed since the adoption of the new legislation on the lease of state property?
- The transfer of property for rent takes place exclusively through e-auctions in the ProZorro.Sale trading system. This has significantly minimized corruption risks because information about the winners is made public only after the auction results are automatically published.
- Potential tenants no longer need to worry about evaluating the desired property. The starting price is determined on the basis of the book value or the evaluation is carried out by the balance holder themselves.
- Now there is a clear list of property that may be restricted for its intended use: property of educational, medical, sport, and the Armed Forces institutions, as well as institutions of sociocultural purposes, and some other state agencies and organizations.
Learn more about the new rules for renting state property in the research by TI Ukraine.
What is the procedure for leasing state and municipal property?
Stage 1. Making a decision on the intention to lease the property.
The corresponding decision is made by the balance holder of the property in agreement with the management body (if this is required by the Law or statutory documents of the balance holder). However, any person can initiate the transfer of property for rent. In other words, if you like certain premises or a building in your city, know that it is not used and would like to rent it, you can apply through the ProZorro.Sale system. The time period during which a decision will be made can vary from 10 to 40 days.
Stage 2. Entering information about a potential rental object in the electronic trading system (ETS).
After making a decision to lease the property, the balance holder must notify the applicant (if they have submitted a corresponding application) and enter information about the object in the ProZorro.Sale system.
Then the status “Awaiting inclusion in the list” will be added next to the object information. Here is, for example, information about the object of municipal property in Kropyvnytskyi.
Stage 3. Making a decision to include a potential rental object in one of the Lists.
Any property must be included in one of the two Lists that determine the terms of the lease.
The List of the first type includes property that will be leased through an electronic auction, and any person can claim it, except for those who are prohibited from being a tenant under the Article 4 of the Law (persons under sanctions, citizens, or enterprises of the aggressor country, employees of the lessor, etc.).
List of the second type is property that will be leased without conducting an electronic auction and can only be claimed by particular persons, defined by the Article 15 of the Law. For example, these are government bodies, municipal institutions, museums, sport and rehabilitational civic organizations, and so on.
However, the option of holding a competition is activated if there are several applicants for the property. Accordingly, the lessor evaluates the applications of each of the applicants, and the property is transferred for use to the one who scored more points. In particular, the steps taken by the applicant within the framework of their activity, the period of actual work, the number of employees, and the funding that the applicant receives are evaluated, etc.
Property Lists are published on the ProZorro.Sale site. The list type can be selected in the appropriate filters. Note that lessors don’t always upload Lists to the system. Therefore, one needs to search for them also on website of the SPFU and its regional branches or websites of local self-government bodies.
At the same time, general Lists of state property can be found on the website of the State Property Fund. They contain information about the objects of all regional branches. This is a rather complex search method, and therefore, we recommend using a specialized site orenda.gov.ua with a convenient map of objects.
If your goal is to rent municipal property, then you should use a similar algorithm and search for objects first on ProZorro.Sale. Here is, for example, the list of the first type of the Municipal Property Department of Kyiv.
We recommend that you check information about the property on the website of the relevant local self-government body or its municipal property department. By the way, in Kyiv, the lists are published on the Department’s website in the form of a convenient interactive map.
If you liked a particular object from the Lists, you can apply for its lease through the ProZorro.Sale system.
Stage 4. Publishing information about a potential rental object in the ETS, for which a decision has been made to include it in one of the Lists.
Information about the rental object to be made public is determined by cl. 26 of the Procedure. These are the cost of the property, its area (if it is real estate), photos, technical condition, lease term, and so on.
However, lessors often publish this information only when they publish the rental announcement itself. Here is, for example, information about the object from the Municipal Property Department of Kyiv: only the area of the object and its type are indicated, but there is no data on the cost, starting price, and lease term, there are no photos, which may affect the interest of potential tenants in this object.
Stage 5. Placing an announcement in the ETS about the transfer of property for rent.
If the property were included in the lists at the initiative of the applicant/potential tenant, the announcement will be published within 20 working days from the date of inclusion of the object in the List. If the inclusion in the List was initiated by the balance holder, the announcement can be placed in the ETS at any time.
An auction for the lease of state or municipal property is held within 20 to 35 days from the date of publication of the announcement in the ETS.
To find the announcement in the system, go to the “Auctions” tab, sort by organizer or region, and select “Accepting applications for participation.” Here is, for example, an announcement of the Municipal Property Department of Kyiv.
Stage 6. Conducting an auction for the right to rent property or leasing an object without holding an auction, concluding, and publishing a lease agreement in the ETS.
The procedure for holding rental auctions takes place in 3 stages.
At the first stage the property is put up for auction at 100% value. Potential tenants must submit their price offers by the day of the auction, i.e., information regarding the amount of money for which they are willing to rent the property, as well as pay warranty and registration fees. Bids with price offers are closed and are disclosed only when the auction starts.
If the first auction did not take place (for example, there were no interested buyers or the buyer who won the auction refused to buy), then the announcement is made about the second stage. At this auction, the property is offered already with a 50% discount.
If the second auction did not take place, then the third stage, the so-called Dutch auction is launched. The property is put up, as at the previous stage, with a 50% discount, but the electronic system automatically gradually reduces its value even more, until one of the participants clicks “buy.” This will mean that they are ready to buy the lot for this amount. After that, other potential tenants can offer a larger amount, if they wish, and then the process takes place in the reverse order, as in a normal auction. The winner will be the one who offers the highest bid.
The launch of property lease auctions, unlike privatization, is not automated. Therefore, the task of the auction organizer is to ensure the timely launch of each subsequent stage, as a result of which the influence of the human factor is possible. There were cases when, after completing the first stage, the organizer immediately moved on to the third — the Dutch auction.
The lease agreement is concluded within 20 working days from the date of publication of the protocol with the auction results in the ETS.
Auction participation costs
Let us note that tenants of state property need to be prepared to pay, in addition to a registration fee, a guarantee fee, and an advance payment, also the so-called security deposit, which is set at 2 monthly rents, but should not be lower than the minimum wage (currently — UAH 6,000). Whether tenants of municipal property will pay these funds depends on the decision of the relevant local government body.
The security deposit is established as insurance for the state if the lessee violates the terms of the contract. Thus, the lessor will be able to cover the outstanding obligations of the lessee with this payment. At the same time, the security deposit is returned to its owner within 5 working days after the end of the lease agreement, if the lessee of the property was proper in fulfilling the terms of the contract.
Extension of the lease agreement
According to Article 18 of the Law, extension of lease agreements is carried out based on the results of the auction, even if a proper lessee expressed a desire to extend the lease term.
The following contracts may be extended without an auction:
- those concluded and extended for the first time, provided that the lease term under such agreements is five years or less;
- those concluded without holding an auction with institutions and organizations that have the right to conclude a lease agreement without an auction in accordance with Article 15 of the Law;
- those concluded with enterprises, institutions, organizations that provide socially important services to the population, the list of which is determined by the Cabinet of Ministers of Ukraine, an additional list of which can be determined by local self-government bodies.
Let us note that the last point is the norm that can serve as a dangerous loophole for leaving property leased at low, non-market prices for example, UAH 1. Organizations that can receive such benefits are determined at the discretion of local self-government bodies.
However, for all other existing tenants of state and municipal property, the Law envisages holding an auction. At the same time, they have a preferential right to conclude a contract. This means that if one of the competitors offers a higher price for an object during the auction, the current tenant can agree to this higher rental price, and a new contract will be concluded.
We believe that this is a very cost-efficient mechanism for attracting funds to the city or national budgets because the price of interesting objects can increase significantly during such an auction.
How can a participant protect their rights at a rental auction?
A lawsuit for violation of rights at a rental auction is long, expensive, and not always cost-effective because the cost of a lawyer’s services may exceed the rental price. Therefore, you can appeal to a special commission for consideration of complaints and preparation of proposals, formed under the Ministry of Economy.
The participant may file a complaint with the help of a relevant form, describing the facts and circumstances of the violation of the procedure for conducting a specific electronic lease auction, as well as the provisions and norms that, in the applicant’s opinion, were violated during this auction. An electronic complaint should be sent to the email address of the Ministry of Economy email@example.com.
Based on the results of the complaint consideration, the commission can make the following decisions:
- Establish the presence or absence of violations of the procedure for organizing, conducting auctions, and taking measures to eliminate such violations.
- Inform the administrator of the electronic trading system of the circumstances and facts stated in the complaint or proposal, and the decision of the commission.
- Provide recommendations for improving the auction process.
The commission may also send a request to the auction organizer to eliminate the identified violations. Let us note that the requirements are purely advisory in nature, since the commission has not been granted the authority to cancel auctions, their results, orders of lessors to approve the results of auctions, oblige lessors to extend lease agreements with existing tenants or conclude lease agreements with business entities, determine the winners of auctions, and so on.
This material was prepared by Transparency International Ukraine with the support of the USAID project Economic Development, Management and Growth of Entrepreneurship (EDGE) and State-Owned Enterprises Rapid Response Activity (SOERR). The authors’ views expressed in this article do not necessarily reflect those of the United States Agency for International Development or the United States government.