Reform Index Focus: “Interesting” and “Uninteresting” State-owned Property to be Leased in a Different Way

At the end of 2019, President Volodymyr Zelenskyy signed Law 157-IX (+1.0 points in iMoRe 125) on the lease of state-owned and municipal property. And six months later, the Cabinet of Ministers of Ukraine issued a resolution detailing this process.

The previous law regulating the lease of state-owned and communal property dates back to 1992. Despite being continuously updated,  it was more appropriate at some point to not revise the old rules, but replace them with new ones.

What’s new in Law 157-IX?

According to the Law, all state-owned and municipal property is to be leased either via auctions or without auctions.

• As a general rule, property should be leased via electronic auctions allowing one to determine the market lease price for use of the property. Such property should be included in the Type One List (“commercially attractive property”).
• The law allows certain persons, such as state bodies and local authorities, religious organizations, the Pension Fund, and diplomatic and consular missions, veteran NGOs etc, to lease state-owned and municipal property without an auction. In this case, the property, at the initiative of the “privileged” organizations, should be included in the Type Two List (“privileged property”). As such property is leased without a tendering procedure, it cannot be subleased. Also, public veteran organizations, rehabilitation facilities for people with disabilities, and deputies are prohibited from using it for commercial purposes.

The essential point of the law is that auctions migrate entirely from offline to online to be held via an electronic trading system (Resolution No. 483 of June 3, 2020 specified that it is ProZorro.Sale). This expands access to bids for potential leaseholders. Previously, the bidding had to be done in person, and information about such bidding was not easy to find being published on the lessors’ websites or in special limited-circulation newspapers. Only “the right people” knew about those auctions.

The principle of determining the starting price for the leases in auctions has also changed.

Information on lease agreements has become public. Previously, the State Property Fund registered only lease agreements for state-owned property, publishing no information about the leases on communal property.

Therefore, thanks to extensive access to information, this law eliminated one of the mechanisms for getting corrupt rent income.

Thanks to the new rules, the property-leasing procedure will be almost twice as fast (from 123-163 to 50-95 days).

Further steps

By adopting Law 157-IX, the Verkhovna Rada commissioned the Cabinet of Ministers to pass regulations to implement this law, within 3 months. The Cabinet of Ministers failed to meet the deadline and, on June 3, only passed the resolution on the new Procedure for leasing state-owned and municipal property. 

The procedure for leasing  state-owned and municipal property also specifies the data to be included in an auction item’s information sheet, and clarifies that the auctions can begin during the working hours only (Monday – Friday 9 a.m. – 6 p.m.).

In order to participate in an auction and signal the “seriousness of their intentions”, the bidders must pay the registration and guarantee fees into the platform operator’s bank account before the outset of the bidding. The guarantee fee varies from the amount of the entire lease term (for the lease term of up to one month) to 6 months (for the lease term of over 10 years) of the starting lease price. Using this money, the auction winner pays a fee to the operator and the rest is refunded to their account after fulfilling the terms of the auction and signing a lease agreement (the failed bidders are refunded the full amount of the guarantee fee faster).

If only one participant took part in the auction, a lease agreement with them is concluded at the lease price proposed by them, provided that it is not lower than the starting price. The auction winner refusing to sign a protocol on the auction results or a lease agreement will no longer be able to participate in the bidding for this item.

In order to lease “privileged property” (from the Type Two List), potential leaseholders must submit an application and electronic copies of documents via their personal accounts (and, until such an option is available with the ETS, to the lessor directly). The lessor must decide within 10 working days (or 5 working days in the case of state-owned or municipal enterprises, institutions and organizations) in favor of or against leasing out the property. If several organizations want to lease the same property, the decision is made in favor of the organization earning more points according to the leaseholder evaluation criteria (as established by the Procedure), the one offering a higher fee or the first one to respond to the announcement.

The property of healthcare and educational institutions, the National Bank, as well as real estate housing the state and local authorities, the Armed Forces, etc. (for the full list, see the Procedure) can only be used to accommodate the aforementioned institutions or solely for their designated purpose. Exceptions are the buildings and premises in disrepair or those not used for over 3 years (those of up to 500 square meters) or 5 years (those of over 500 square meters), or if leasing out such premises does not exacerbate social and living conditions for those studying or working in the establishment owning the property. Dilapidated cultural monuments needing an urgent overhaul or restoration can be leased out on preferential terms.

The Resolution offers an interesting bonus for those intending to renew the lease agreements based on the auction results, and prior to that (during the previous lease agreement period) made permanent improvements to the leased object. The leaseholder will be able to reduce the rental cost by the cost of these improvements (it is divided into equal parts for up to 5 years). As long as the discounted price is not lower than the lease price before the auction.

So the Verkhovna Rada and the Cabinet of Ministers of Ukraine are trying to create a system of effective use of state-owned and communal property, regulate the leasing process and reduce potential sources of corruption in this area.