Shall internet trade in real estate beat the “caveat emptor” rule of sale by private treaty?

Controversial practice of real estate sale (by private treaty) is wide-spread in Ukraine, under which internet commerce and paper cash payment are applicable

Buyer beware, as some take others’ thoughtlessness where they find it

 In 1990’s Ukrainian mob­’ business was about cheap purchase of a real estate (property) after ‘occasional’ fire.

Now-days it is about sale of real estate by an emigrant. Pretended emigrant in many occasions, I would think, if to compare statistics on emigration with related sales of real estate, and bearing in mind current Ukrainian economics.

Easy, easy money, tricks for free

Thanks to stable boom in construction and IT business in Ukraine, there are plenty of internet “easy money”, over-capacity of real estate on offer. Coincidentally Ukrainian legislation is rapidly changing, producing  flood of governmental electronic public registers. So real-estate market is awash with “New Old Stock” real-estate and here goes on lively trading activity with all characteristics of internet commerce: advance – payment without proper check of property title, fast returns of middle-man (brokers, real-estate agencies), internet deal-making, on-line price-comparison, abundance of free internet information and plenty of free internet legal advice on property deals. In place even sms-messaging  service informing property owner about re-registration of his/her property title in public governmental electronic  property register.  It is supposed to be good protective measure against possible fraud with property.

Is it in case of prompt controversial property purchase?

NOS-real-estate internet trade

Common features of this “New Old Stock” real-estate “emigrant – property-sale” are:

  1. No full survey, proof of title based solely on a “certificate of property ownership“;
  2. Property is under-valued;
  3. Payment method – paper cash, usually USD;
  4. Buyer provides collateral;

5.Seller (emigrant) leaves Ukraine soon after the deal, no assets are left in Ukraine, nothing is known about a seller’s new address.

Certificate of property ownership:

if it looks like proof of title, sounds like it, but it is not a proof of title,

then it is evidently MISTAKEN SUBSTANCE

The main feature of this “prompt purchase of emigrant property” a “certificate of property ownership” serving as a documental proof of property ownership, so there is no  full survey, nor proof of title. But it is mistaken substance, because it is an inadequate document for proper due-diligence of a property for sale by purchase contract (private treaty) in Ukraine. Variety of different types of specific property – related documents named “certificate of property ownership“: property privatization certificate, a certificate on part of the property of a spouse, an auction certificate on property sold, etc. All these certificates attributed as primary ownership-defining documents to different specific ways of property title transfer in Ukraine. However, certificate of property ownership is not applicable to property purchase contract (private treaty). In this particular case the primary document – proof of ownership – is a property purchase contract (private treaty), and a secondary document – is a property ownership certificate, is an evidence of a title transfer enrty in a public register.

Fool and his money shall part soon

A buyer is under substantial risk under this “prompt purchase of emigrant property”. Hence, a buyer  violates Ukrainian Law, that restricts both types of transactions: cash-in-hand and in foreign currency. Furthermore, Ukrainian Law specifically commands a bank transfer as a payment method for real-estate purchase for taxation reasons. As a result of this controversial purchase, a buyer may part not only money, but available assets on top of it. Under unfortunate coincidence that a buyer may not prove actual payment (because it was not made via bank transfer), this debt could be sold to collectors. Police shall not be of much help too, if there is property dispute. Only court may grant certain remedies, but shall it be unenforceable, if no seller with assets shall be found in Ukraine later on?

Free-rider or Ignorant Buyer?

So why any buyer might be in this deal at all? It might be tempting to buy undervalued property under pretext of prompt purchase due to emigration of a seller of the property. In addition to “emigrant scenario” buyer might be tricked in this purchase scheme on considerations of apparent paradox of Ukrainian jurisdiction, where ignorance pays – off: no proper due-diligence gives a buyer status of Bone-Fide Purchaser of disputed property.

Rationale under apparent paradox of Ukrainian jurisdiction

ignorance pays – off for Bone Fide Purchaser of property

In line with Ukrainian Law a purchase contract (sale by private treaty) shall be notarized, where primary role of a notary shall be to serve as a tax agent, and secondary – to provide property due-diligence before purchase and consequent registration of title in public electronic state register.

A notary shall check property title and property obligations in several governmental electronic public registers before a property purchase contract shall be notarized, then notary shall register property title transfer in governmental public register. From this exactly moment property title shall be transferred from a seller to a buyer, hence a property ownership certificate serves as a confirmation of register entry.

Under Ukrainian Law a seller is not obliged to provide a buyer with any proof of property rights; hence a certificate of property ownership is sufficient for notary to brief due-diligence before purchase. Furthermore, within Ukrainian jurisdiction property rights of bone-fide buyer are protected by Law and shall prevail in case of property dispute.

Buyers are lost in Law

However, property ownership certificate might not show available property disputes of the competing claims of other party, which might be concealed by subsequent buyer who qualifies as a Bone fide purchaser.

In fact, government electronic property register provides for general public limited history of property transfer – only on a previous owner of a property in question. Notaries are authorized to request complete history of transfers of property in question, but they are allowed to limit their due-diligence by checking only a certificate of property ownership (from recently – its electronic version). As a degree of due-diligence is up to a notary in line with legislation, it could be just brief look at entry of the previous owner in electronic public register, without checking documental proof of ownership and history of all previous transactions. No-one (except a notary) may see complete property history and scans of ownership-proof documents available in this registry. Law does not provide public for obtaining any paid-for additional information on property history or ownership-proof documents from this register either. With this approach it is easy to sell disputed property.


Roman rule applies in Ukraine

So what is hardly available in Ukraine for free, is valuable professional advice and sufficient information on property title. Needless to mention, a middle-man may not inform prospective buyer on Roman principle “caveat emptor’ being applicable in Ukraine.

In contrary, there was a controversial attempt to provide a “certificate of property ownership” with the status of primary ownership document in Ukraine. Relevant draft Law #4043 dd. 09.02.2016 failed to be adopted by Ukrainian  Parliament (the “Verkhovna Rada”). Thus if, and when this certificate shall be legalized as primary property ownership document, it could be even easier to make fools of property buyers. Even then, while a seller is not obliged to provide a buyer with any proof of property rights, a buyer is free to buy a property after proper due-diligence. As “Let the buyer beware” lets a buyer avoid a fate of being too clever by half at his own expense and to his own annoyance.


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