How to Tackle “Toilet Schemes”: an Analysis of Draft Law No. 14039

Can parliament eliminate abuses in land allocation?

In early 2025, the NABU and the SAPO carried out a Clean City Operation, which exposed a large-scale corruption scheme of the unlawful appropriation of land in Kyiv.

According to investigators, a criminal organization, including former and current Kyiv City Council members, officials of the Kyiv City State Administration, and municipal enterprises, used the so-called “toilet scheme.” This is a common tactic in which a small structure is built on a land plot and registered as real property (sometimes a structure that in practice does not exist), after which the “owner” gains the right to purchase the land beneath it without a land auction.

Notably, if law enforcement had not documented fictitious property registration and efforts to influence local authorities to secure land-allocation decisions, holding the participants accountable would have been far more difficult. That is because land legislation allows owners of real estate to acquire, through a noncompetitive process, the land plot on which the property is located without any limits on the size of that plot. 

In September last year, parliament registered Draft Law No. 14039, intended to regulate how owners of buildings and structures may acquire state- and municipally owned land plots on which those objects are located. Below is our analysis of whether the proposed approach can eliminate the “toilet scheme” and reduce corruption in the land sector. 

Key takeaways

• TI Ukraine supports adopting Draft Law No. 14039 at first reading;
• the draft law addresses two core problems that enable “toilet schemes”: it sets limits on the size of a land plot that can be acquired without an auction, and it requires market-based auctions if the plot exceeds the maximum;
• however, before the second reading, the draft law needs revisions, because the proposed approach still preserves certain risks. 

Our priority recommendations 

• establish, by law, a guaranteed minimum share for the state or a territorial community in investment projects implemented on state- or municipally owned land, by requiring the Cabinet of Ministers of Ukraine to set a minimum percentage of residential floor area that must be transferred to the state/community in completed housing developments;
• enshrine in law a requirement that investment projects involving housing construction on municipally owned land may be implemented only if the investor has first acquired the relevant land-use rights to the land plots in question;
• require the executive authority or local self-government body to publish the acquirer’s application, the documents submitted, and the inspection report prepared following the on-site examination of the real estate.

How the “toilet scheme” works

Land legislation requires that state- or municipally owned land plots be transferred into ownership or use on a competitive basis through land auctions. Only a limited number of cases are exempt; for example, allocation within a public-private partnership or free privatization. 

One such exemption applies when a land plot contains real estate owned by an individual or a legal entity. In that case, the owner may purchase or lease the land plot beneath the object directly, without an auction. 

This mechanism is intended to ensure proper access to and maintenance of the real estate facility and to preserve the inseparable legal link between the property and the land plot on which it is located. 

However, the absence of statutory limits on the size of the land plot transferred for maintaining the property creates significant room for abuse. Registered ownership of a small structure, such as a public restroom (which is where the scheme gets its name), effectively allows the “owner” to obtain ownership or use rights to a land plot that is dozens, and sometimes hundreds, of times larger than the structure itself. 

Gaps in the regulatory framework further create corruption risks. In particular, the lack of mandatory verification of how a person acquired ownership of the real estate has enabled the widespread practice of unlawfully constructing such objects and then fictitiously registering ownership. Another major corruption driver in the land-transfer process is the current approach to determining the sale price based on an expert monetary valuation, which can be artificially understated.

As a result, the “toilet scheme” leads to the transfer of state and municipal land plots that are far larger than necessary to service the structures located on them. In addition, public budgets lose revenues they could have received if the land had been sold through competitive auctions.

What changes are proposed?

Under the draft law, the size of vacant state- and municipally owned land plots that are sold or granted for use to owners of buildings located on them without an auction would be determined using a methodology approved by the Cabinet of Ministers.

If a plot exceeds the maximum size set by the methodology, the portion necessary to service the building, within the allowable limit, would be carved out. If the owner needs a larger plot, the owner would be able to purchase or lease it through a land auction. In the case of a sale, the auction would be held with a preemptive right for the building owner to purchase the land at the price established at auction.

If the owner loses the auction, the owner would still be entitled to obtain the portion of the plot needed to maintain the property:

– If a third party purchases the plot: a portion would be carved out to maintain the real estate object and transferred into the property owner’s ownership, and the value of that carved-out portion would be compensated to the third-party purchaser (the landowner) proportionally to the auction price paid for the land;

– If a third party leases the plot: the owner of the building located on the plot could obtain access to the land needed to maintain the property, with the scope and procedure for such access to be defined in an agreement with the lessee.

In addition, the draft law would require land-disposing authorities to verify the authenticity of documents confirming ownership of the building, including through an on-site inspection, when deciding whether to allocate land outside an auction. If the authority identifies indications that the documents are unreliable, it would be required to go to court to protect the rights and legitimate interests of the state or the territorial community.

Beyond eliminating the “toilet scheme,” some provisions of the draft law also seek to regulate certain aspects of implementing investment projects for housing construction on state-owned land.

In particular, the draft law introduces a requirement that investment projects involving housing construction on state land be implemented either as a public-private partnership or only after the developer has first acquired the relevant land-use rights to the land plots in question. This approach is intended to ensure that land is transferred for development only on a competitive basis. 

The draft law also sets a minimum state share in housing investment projects carried out on state-owned land: no less than the market value of the land plot on which housing will be constructed, determined under valuation legislation as of the date the agreement is signed. 

Risks

1. Corruption risks in verifying documents for property located on a land plot

The draft law requires an executive authority or local self-government body to verify the authenticity of documents confirming ownership of a building only when land is allocated outside an auction. In our view, verification is also necessary when the plot is sold through an auction that grants a preemptive purchase right. Without proper oversight, this mechanism will continue to encourage unauthorized construction and fictitious registration of ownership.

At the same time, the proposed approach preserves a corruption risk, because officials of executive authorities and local self-government bodies may not always act objectively and with integrity during inspections. This creates opportunities for abuse and unlawful decisions. It would therefore be advisable to also require publication of all documents related to such verification in order to ensure accountability and enable public oversight. 

2. Gaps in guaranteeing the state’s share in housing investment projects

The draft law sets a guaranteed minimum state share in investment projects implemented on state-owned land—not below the market value of the relevant land plot. However, this rule would not apply where the investor uses the plot under a lease or superficies right, or under the terms of a public-private partnership.

In our opinion, using land under a lease or superficies, or entering into an agreement under the Law of Ukraine on Public-Private Partnership, does not in itself guarantee that the state will receive a share in the completed development.

The PPP Law grants the tender commission the right, rather than an obligation, to include minimum requirements on the amount of residential floor area that must become the property of the public partner in the tender documentation and, as a result, in the PPP agreement. It therefore appears advisable to apply a single, consistent approach to determining the guaranteed minimum state share in housing investment projects implemented on state-owned land.

In addition, the draft law ties the minimum state share to the market value of the land plot, determined under valuation legislation as of the date the agreement is concluded. But valuation procedures are closely associated with corruption risks and can be used to artificially understate the value of the land plot.

For example, in the Ministry for Development of Communities and Territories Corruption Case, an understated valuation of the land plot made it possible to significantly reduce the amount of housing that should have been transferred to the state under investment agreements—the difference between market and contractual values exceeded UAH 1 billion. A similar situation occurred in the case involving MP Isaienko, where the real value of the land plot and the property on it was understated by more than UAH 200 million. 

Given this, it is worth considering alternative methods for determining the state’s share in housing investment projects that do not depend on valuation results. One possible approach would be for the government to set a minimum percentage of residential floor area that must be transferred to the state through the relevant authority or enterprise, in completed housing developments.

3. Shortcomings in regulating how state land is acquired for housing construction

Under the draft law, acquisition of land-use rights to state-owned land plots for the purpose of implementing housing investment projects on such land would take into account the specific features set out in the Law of Ukraine on Public-Private Partnership, except for investment projects carried out on land plots granted to the investor under a lease or superficies right.

This provision is intended to ensure that investors acquire rights to use state land for housing construction only through a competitive process, as required both for PPP projects and for leases or superficies. 

However, under the PPP Law, in a PPP project involving housing construction, the land plot may be provided to the private partner for use only under a lease or superficies right. Accordingly, carving out a separate category for acquiring land-use rights for investment projects implemented as public-private partnerships is incorrect, because in such projects the investor likewise obtains the right to use the land plot exclusively under a lease or superficies right.

4. Failure to account for territorial communities’ interests in housing investment projects

According to the explanatory note, the bill’s objectives include: “introducing a requirement that housing investment projects on state or municipal land be implemented as a PPP or only after prior acquisition of rights to the relevant land plots,” and “establishing a legally guaranteed minimum share for the state or a territorial community in investment projects implemented on state- or municipally owned land.”

However, the draft law establishes these requirements and guarantees only for investment projects on state-owned land. This indicates that the draft only partially aligns with its stated objectives and does not fully account for the interests of territorial communities.

5. Inconsistent limits on using certain land plots in investment activities

The draft law provides that state- and municipally owned land plots acquired by owners of real estate facilities located on them into ownership or use without land auctions may be used for investment activity only if their size does not exceed the maximum established by the Cabinet of Ministers’ methodology for maintaining the relevant real estate object. An exception applies to plots acquired through land auctions.

This rule appears logical given the need to limit development on state and municipal land obtained outside competitive procedures and, in particular, not at market value. However, under the general principles governing ownership rights in Ukraine’s civil legislation, an owner may possess, use, and dispose of their property at their own discretion. In that context, state interference with the owner’s right to use a land plot they own for investment activity appears questionable.

Conclusion

Draft Law No. 14039 proposes a combined approach to transferring vacant state- and municipally owned land plots to owners of buildings and structures located on them. As is the case now, individuals and legal entities would be able to acquire a land plot without an auction if its area does not exceed the maximum size necessary to service the real estate object; that maximum would be determined under a Cabinet of Ministers–approved methodology. 

If the plot exceeds the applicable cap, it would either be subdivided to carve out the portion needed to maintain the real estate facility, or it would be put up for auction at the initiative of the real estate owner, who would have the opportunity to purchase the plot at the price established at auction or to lease it through a competitive procedure.

If the owner loses the auction or cannot match the auction price, then:
-if a third party purchases the land plot, a portion necessary to maintain the real estate would be carved out and transferred into ownership of the real estate owner; the value of that carved-out portion would be reimbursed to the new landowner proportionally to the price paid at auction;
– if the land plot is leased to a third party, the owner of the building located on the plot would be entitled to access the land as needed to service the property, with the scope and procedure for such access to be set out in an agreement with the lessee.

TI Ukraine supports adopting Draft Law No. 14039, because it addresses two key problems that enable the “toilet scheme”: it limits the size of land plots that can be obtained without an auction, and it requires competitive procedures where the requested plot exceeds the maximum size. 

However, the draft needs revision before the second reading, because the proposed approach still preserves certain risks. First, imposing a formal duty on executive authorities and local self-government bodies to verify the authenticity of documents confirming ownership of real estate objects, including through on-site inspections, does not, in itself, guarantee the impartiality or quality of such verification.

Second, tying the minimum state share in housing investment projects to the market value of the land plot is questionable. Valuation procedures are closely associated with corruption risks and can be used to artificially understate land values. 

As for a guaranteed share for territorial communities in such investment projects, the draft law does not provide for one at all.

To address these and other shortcomings, we recommend that, before the second reading, parliament:

• require executive authorities or local self-government bodies to publish the acquirer’s application, the supporting documents submitted, and the inspection report prepared following the examination of the real estate;

• delete, from Article 13(2)(2) of the Law on the Management of State-Owned Property, the words: “except where the person who ensures the organization and/or financing (investment) of construction projects uses such land plot under a lease or superficies right, or where an agreement is concluded in accordance with the Law of Ukraine on Public-Private Partnership”;
• establish, by law, a guaranteed minimum share for the state or a territorial community in investment projects implemented on state- or municipally owned land, by requiring the Cabinet of Ministers of Ukraine to set a minimum percentage of residential floor area that must be transferred to the state/community in completed housing developments;
• enshrine in law a guaranteed minimum share for territorial communities when entering into agreements that provide for the construction of residential real estate on municipally owned land and the allocation of future real estate objects between the construction customer and the party that ensures the organization and/or financing (investment) of construction;
• restate Article 9-1(8)(2) of the Law on the Management of State-Owned Property as follows: “State-owned land plots may be granted for use, on a leasehold or superficies basis, for the implementation of investment projects involving the construction of residential real estate and the allocation of future real estate between the construction customer and the person responsible for organizing and/or financing (investing) such construction.”
• enshrine in law a requirement that investment projects involving housing construction on municipally owned land may be implemented only if the investor has first acquired the relevant land-use rights to the land plots in question.

This material is funded by the European Union. Its content is the sole responsibility of Transparency International Ukraine and does not necessarily reflect the views of the European Union.