real estate

Life inside the box

08.11.2010 | Text: Olena Herasymova, Ivan Vorontsov Weekly.ua

The severity of the new law on the mandatory registration of contracts for the rental of apartments is compensated by the legal possibility of their non-fulfillment

PH: shutterstock

The news that from now on contracts for the rental (leasing) of apartments must be certified by a notary public and registered with the Technical Inventory Bureau (TIB), for which a 15% tax must be paid, has raised the concern of more than half the population of large cities in Ukraine. The fact is that some people rent out their apartments, while others rent them.

The editorial board of Weekly.ua looked into this issue and is convinced that apartments can be rented out as earlier on the basis of verbal agreement or by contract drawn up to avoid paying this tax on legal grounds

According to official statistics, today only 5% of the 700,000 apartments in Kyiv are being rented out. The situation is more or less similar all throughout Ukraine. The idea behind the new law is to pull the rental market out of the shadows and force lessors to pay this property tax.

The law requires the registration of a rental agreement with the TIB. But prior to that the document must be certified by a notary public and the latter must report to the tax authorities once a month about all the contracts that involve generation of profits. If the owner of an apartment that is being rented out does not pay the 15% tax on the sum of the rental he or she will have problems with the tax people.

Exorbitant prices!

The matter is one of very serious money. It is easy to calculate that if only 5% of the 19 million apartment owners in Ukraine (according to data of the State Statistics Committee) pay this tax, the state will earn US $342 mn a year in revenues considering that the average monthly rent in the country is US $200. If to enforce control over the collection of taxes from half the market, revenues to the national budget will run into billions.

It is clear that the lessors and lessees of apartments will not even bat an eyelash on the problem of filling the coffers of the national treasury. They simply feel that the matter is amiss. What if an envious neighbor reports them to the tax police? Meanwhile, realtors are adding fuel to the fire, explaining with sadistic pleasure why rental payments (and accordingly their commissions) should soar by 15-20%.

The first thought that springs to mind is to simply lower the size of the rent set in the agreement to a symbolic figure, for example, UAH 20 and paying the 15% tax on this amount, but continuing to charge the tenants the same rent as before, should simply be discarded based on common sense. Firstly, any normal person in Ukraine should think twice before messing with the tax bodies. Secondly, a deal is a deal. What if the tenant begins paying the rent as per the written contract and forgets about the verbal agreement?

Benefit of paper

Landlords are afraid that tenants will either trash the apartment or stop paying the rent while evicting them is not possible. In turn, tenants are worried about a possible arbitrary increase in rent, not being reimbursed their initial deposit or a sudden request of the landlord to vacate the apartment.

So, a rental agreement is signed in the overwhelming majority of cases. Clearly, no landlord will take the tenant to a court of law for their cat tearing up the wallpaper, but they guarantee that the tenant can be financially liable for serious damages to the property.

As a rule, a tenant also satisfies the landlords request to vacate an apartment before the expiry date of the lease agreement, though such an agreement guarantees that the tenant will not be left out on the street. Indeed, not a single court will pass down a ruling to evict a tenant in the winter months or if they have children, but do not have another place to live.

What should a rental agreement look like?

Whatever the case, a rental agreement is necessary. If so, is the situation hopeless? After all, the law requires the registration of such an agreement with the TIB that envisages prior certification with a notary public and the latter is obligated to report to the tax inspector etc.

So, does this mean that tenants must brace for an increase in rent, while apartment owners should be ready to communicate with the taxman once a year?

Not at all. The solution is quite straightforward as everything ingenious. An additional clause is added to the rental agreement that a landlord and the lessee assume responsibility to have the agreement certified by a notary public. Oddly enough, the terms of fulfillment of this clause are not stipulated. Pursuant to legislation currently in effect, such a wording is legally irreproachable and is in the interests of both parties to the agreement. Because if a conflict situation arises and there will be a need for legal recourse in a court of law, the offended party will invite the offender to a notary public to certify the deal. Such a visit to the notary public costs nearly UAH 1,000, which is often enough to encourage the conflicting sides to reach an amicable out-of-court agreement.

How its done in Europe?

Not a single European country has a similar law. In any country, the main function of a written lease agreement is to guarantee the rights of tenants and landlords. While the law does not ban the rental of a domicile on verbal agreement, in most cases some kind of document is still drawn up and signed. As for income from rental, it is taxed just as any other form of income. Citizens are obligated to calculate on their own how much they owe the state and pay up. Meanwhile, different schemes of optimization with the consultation with tax specialists are quite a common practice.

Do all landlords in Europe pay taxes on the incomes generated by rented out apartments? Naturally, not all do. The percentage of tax dodgers depends on the country and the national mentality. In The Netherlands or Germany, this figure is quite low. As you go further south or east, this number increases. This, by the way, applies to all taxes. Vigilant neighbors and random inspections are big help to tax authorities. Although Europe suffers from excessive bureaucratization, registration of every lease agreement and transforming notary public offices into the tax police has not been thought of.

COMMENTARY

Daria Havrylytsia

Partner, Prioritet Law Center

Now and henceforth, residential space can be rented on the basis of a verbal agreement. The landlord can always say he let relatives of close friends live in his apartment exclusively on the goodness of his heart. Moreover, there is nothing stopping tenants from claiming that the money the landlord receives from them every month is none other than a charitable donation to help his family. And though the opposite will be clear to anyone, in order to prove that the money is charged as rent testimonial evidence should be gathered namely, neighbors must confirm that the people living there are indeed the lessees, a personal inquiry must be made and familial relations should be clarified. But this is considered invasion of privacy, which is a violation of the Constitution. Theoretically, this can be proven. In practice, this is highly problematic and requires great efforts.

COMMENTARY

Vitaliy

Koroshevskiy

Managing Partner, Law in Ukraine law firm

A properly drawn up lease agreement should be certified by a notary public. This is required by Point 1 of Article 220 of the Civil Code: an agreement not certified by a notary public is invalid. However, pursuant to Point 2 of the same article, if two sides signed an agreement and began fulfilling it, a court may recognize it without notarization. Moreover, in this case there is no need for a subsequent notarization.

The recent changes in the law On State Registration of Proprietary Rights to Ownership of Real Estate and the Limitations Thereof do toughen such requirements. Pursuant to the amendments, in order for an agreement to have legal force, it must be certified by a notary public and registered with the TIB. But in order for this innovation to work, the parliament must make a number of amendments to the Administrative Civil Code and the Criminal Code by eliminating any contradictions in legislation and setting penalty sanctions for failure to execute the law.

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