4. Land Transactions

a. Purchase and Sale

Purchase and sale transactions in agricultural land will not occur in the Western CIS countries unless legislation clearly allows such transactions, permission of local bureaucrats is not needed, and procedures for notarization and registration are simple and affordable. With the exception of Moldova, where registered land transactions are not uncommon, anecdotal evidence indicates that purchase and sale transactions do occur to a limited extent, but they are unrecorded and therefore not secure. (An exception is transactions in small plots in Russia.) Some of the surveyed Balkan countries also lack a supportive legal milieu and have gaps in and signs of poor craftsmanship of their land-related legal frameworks.

In the rest of the Eastern European countries, the legal framework for land transactions is adequate and the impediments to transactions relate to administrative process and market imperfections (see recommendations under administrative framework, state land reserves, farm restructuring, and mortgage). The most common legal restriction is the prohibition on foreign ownership of agricultural land which occurs not just in the Eastern European countries, but in many countries throughout the world.⁵³⁸ If the issues of privatization, farm restructuring, registration, and taxation are resolved, the lag in the land markets will progressively disappear. This has been true in Poland and Lithuania and to some extent Estonia.

i. Issue: Legislation allowing the purchase and sale of agricultural land is non-existent or unclear. (Russia, Balkans)

Policy options

• In Russia, the Duma must specifically allow the purchase and sale of agricultural land, even if restrictions (e.g., no sale to foreigners, substantial tax on early resale) are attached to it.
• In the Balkans, technical assistance should focus on basic land codes, transactions laws (purchase/sale, leasing, inheritance, and others), registration and cadastre laws, and mortgage laws and regulations.

ii. Issue: In Armenia, fixed prices set by the government are much higher than current market prices and impede the purchase and sale of land.

Policy Options

• Legislatively eliminate price floors and fixed prices. Both Georgia and Azerbaijan have done so and, in Georgia there has been an increase in land sales.

iii. Issue: In the EU accession states, the status of the restitution process is often unclear to market actors, and the assumption is that land tenure is insecure.

Policy Options

• If the necessary legal framework does exist, initiate a public information campaign clarifying that restitutions have been completed and that tenure is secure. Also clarify what is necessary for a valid title. The public, banks and lending insitutions, and private real estate agents should be informed and educated about the status of the restitution process.

b. Exchange

In the Balkans, the most critical transaction is not purchase and sale or lease, but rather exchange of land, which is needed to expedite the settlement of displaced persons. In some of the surveyed Balkan states, post-war resettlement and repatriation challenges have been inhibited by difficulties facing those who would become or remain a minority within their previous home area. In Croatia, minority Serbs have faced discriminatory laws, courts, and communities during their attempts to return and reclaim property. At least as of early 1999, fewer than half of the Serbs in Croatia had been able to return to their pre-war homes.⁵³⁹ Housing commissions in place to facilitate the return of minorities to their property have been characterized as sluggish, corrupt, and ineffective.⁵⁴⁰ Similar difficulties have been encountered in Bosnia and Herzegovina, where only 100,000 of 1.76 million displaced persons have been able to return to their pre-war homes if they are now in a minority at those home areas.⁵⁴¹

In Bosnia and Herzegovina, land swaps have been done by way of contracts and then later registered in the local cadastre.⁵⁴² Lawyers create these contracts, and they are reported to have fixed fee schedules for the service. The courts have generally recognized these land swaps. While some government programs sanctioning land swaps based on minority status may not be acceptable because government sanctioned ethnic tension was at the heart of the Balkan conflicts, more regulated, transparent, monitored, and (thereby) equitable programs might be a possible policy solution. In any event, it seems clear that many of those cast out of an area through ethnic cleansing are not likely to return to their pre-war homes.⁵⁴³

Land exchanges have been used around the world to achieve a variety of public purposes, and the precedent of facilitating them is in place. Land consolidation programs frequently envision land exchanges as a way to create larger parcels. Exchange programs have been used to facilitate the movement of larger, more consolidated populations as well. For example, land exchange programs have been used in the Philippines specifically to deal with the problem of squatting and facilitate secure settlement.⁵⁴⁴ Local governments have encouraged and made possible the acquisition of occupied land through land swapping, land exchange, and direct purchase of settlements and land occupied by squatters.⁵⁴⁵ In the United States, trades of public land for sought-after private land are made in accordance with the Federal Land Policy and Management Act (FLPMA) and regulations set forth by the Bureau of Land Management.⁵⁴⁶ The primary regulatory requirements for these swaps are that public interest is well served and that the land exchanged be of equal value determined by an unbiased market appraisal.⁵⁴⁷

However, disadvantages to increasing formal land exchanges might include the potential for capture of the process and resulting ethnic discrimination, the high transaction costs created by cross-state cooperation, the diversion of resources from other needs (such as registration, privatization, or restitution), and the danger of supporting transactions made under duress.

i. Issue: Within several of the surveyed Balkan countries, repatriation and resettlement of displaced persons are subject to land-related processes that are cumbersome, not transparent, and, in some cases, discriminatory.

Policy Options

• Create programs to facilitate, carefully promote, regulate, and monitor land exchanges. While past exchanges made under duress should not be recognized as being valid, many beneficial land swaps have been occurring informally.⁵⁴⁸
• In any event, create systems that bring equitable exchanges that have occurred in the past into formal land administration frameworks.
• Consider the inclusion of unutilized public lands within the pool of land available for exchange.

c. Lease

Land leasing policy is somewhat complex in the Transcaucasus and the EU accession countries. On the one hand, much of the land that is leased is state owned, and there is a desire to privatize this land and get it into the market. If the land is not privatized, there is a desire for long-term leases, which would allow for at least the possibility of mortgage and would provide tenure security and the desire to improve the land. State land is easy to locate, and easy to access, and therefore is used a great deal to expand or consolidate small-holdings.

On the other hand, this state land is often used to rectify a failure to make correct restitution and, privatizing it or providing long-term leases to others would eliminate or greatly reduce this function.

Land that is privately owned is often leased back to the cooperative from which it came at little to no cost. This land is already privatized but essentially has little to no value to those who received it. Policies must be considered that would encourage more productive use of this land.

These issues are discussed at length in other sections. See administrative framework (taxation and consolidation), state land reserves, and farm restructuring.

In the Western CIS countries, the primary issue regarding land leasing is lack of information. Farmers often do not know what their choices are, or do not know how to exercise their choices regarding their land and their land shares.

i. Issue: For a lease market to thrive, farmers must understand their right to lease out their land shares and receive payment for those shares. (Russia, Ukraine)

Policy Options:

• Accelerate the development of the land share lease market through a public information campaign designed to inform land share owners of their rights and the benefits of entering into different types of land share transactions. Such a campaign could also provide information about sale prices and rents being paid in the countryside, so that land share owners can be informed participants in the land share lease markets. Land share owners would receive further assistance and education through targeted programs of legal assistance.

5. Mortgage

Mortgage of agricultural land cannot occur without secure land rights and a land market. In addition to the need for legislation that allows mortgage of agricultural land, there needs to be legislation allowing for the free transfer of land. Land-based lending will not occur until there is an active agricultural land market, and for Russia, Ukraine, and Belarus major changes in legislation and political will would have to occur first.

Once mortgage of agricultural land is a legal right, as it is in the rest of the Eastern European (EE) countries, it still needs to be a part of a larger scheme of providing credit to farmers. Few landowners are using land as security for loans in the EE countries. In fact, mortgage lending to any great extent will not occur until: (1) an active land market exists and agricultural land has market value; and (2) foreclosure procedures are reasonably quick and effective. Laws to create mortgagability will not have the positive effects anticipated unless other conditions enabling farmers to take advantage of mortgagability are first satisfied. In addition to secure land tenure and the existence of a rural land market, these conditions include willing lenders; terms farmers find attractive; support services that can help ensure success in agricultural innovation; a political and legal situation that permits foreclosure if necessary; and prices for produce that permit recovery of costs of an investment.⁵⁴⁹

a. Issue: Legislation allowing mortgage of agricultural land does not exist or the legislation forbids the mortgage of agricultural land. (Russia, Ukraine, Belarus)

Policy options:

• Pass legislation allowing agricultural land to be used as collateral for a loan. Reasonably limit restrictions on foreclosure of agricultural land.
• Once legislation allows land based lending, consider pilot projects to understand and eliminate problems with the mortgage system.

b. Issue: Land-based lending is limited because agricultural land is not valuable due to a slow land market.

Policy Options:

• Establish and encourage credit cooperatives. While credit cooperatives are only a starting place and are not capable of fully funding the agricultural sector, they have been successful for at least short-term loans in some Eastern European countries. Moreover, credit cooperatives can help farmers establish a track record for repaying loans.
• Provide support or incentives to lenders who provide agricultural credit.
• The State could assist mortgage lending by selecting banks through a competitive process that would serve rural producers and budget support and tax relief to these banks.
• Consider state guarantee programs. State guarantees for mortgages on agricultural land could encourage mortgage lending. State guarantee programs exist in the Czech Republic, Latvia, Poland, Hungary and Slovakia, for example. However, in the Balkans, most mortgage credit support programs funded by international donors or by borrowing countries are directed toward urban residential mortgages and not agricultural land. ⁵⁵⁰ The risk with state guarantee programs is that the payback rate is often very low because either the banks or the farmers do not bear enough risk. If such a state guarantee program is implemented, the guarantee should not reach 100%, and both the banks and farmers should share an adequate risk for credits.
• Evaluate existing mortgage legislation and interview bankers and farmers to determine legal and practical impediments to mortgage of agricultural land.

c. Issue: Incomplete or conflicting mortgage legislation and poor performance of land institutions affect the desire of lending institutions to use land as collateral.

Policy Options:

• To deal with the problem of slow registration of mortgages, encourage independent insurance companies to guaranty the banks’ security interest between notarization and registration, for a small fee (1% of the loan amount has been typical in Poland).
• Make consistent the priority of mortgages in all legislation including the Commercial Code, the Bankruptcy Code, the Banking Law, and the Mortgage legislation.
• Allow banks to hold land for a period of time (at least 2 years⁵⁵¹, and perhaps longer, if there is not yet an active landmarket) if the land does not sell for the unpaid value of the loan at auction.

6. Registration

One of the key measures needed for a fully functioning land market is a system for registering legal rights, so that right holders can be easily identified and have their rights protected. Poor registration systems can constrain:

• Mortgage lending and the general extension of credit: Ability to obtain credit is reduced when land is undocumented.⁵⁵² Secure title enables creditors to loan money with less risk, and titled land provides reliable collateral.⁵⁵³ For land to be reliably used as collateral, the rights to the land must be clearly defined, consistently and openly documented, and easily and securely transferable.⁵⁵⁴ The high risk levels and transaction costs created by unregistered land clearly impede the extension of credit.
• Land Transactions: The ability to sell or lease land is reduced when title is not securely held by the landholder. Limiting transactions can also limit the availability of credit, and may foster informal transactions that only increase the difficulty of ascertaining the actual owner.⁵⁵⁵ Land exchange transaction costs are also lower in those countries that have clear land rights.⁵⁵⁶
• Long Term Improvements: Tenure security influences landholders’ willingness to make investments and improvements to the land.⁵⁵⁷ Farmers are more willing to improve the land through irrigation, mulching, fertilization, and other means when they have some level of tenure security (whether formal or informal).⁵⁵⁸ Studies in Brazil, Ghana, and China have shown that, with greater tenure security, landholders are more willing to make improvements and long-term investments in the land.⁵⁵⁹

However, land registration and other land market supporting measures are costly. From early 1994 through 2001, USAID spent over $15 million on the Albanian Land Market Action Plan, in a small country of 3.5 million people. The World Bank and EU Phare have also made contributions to the effort.

The Western CIS countries, except for Moldova, have seriously under-functioning registration systems and need basic legislative assistance to begin with. Effective land registration is (with the notable exception of Albania) largely not occurring in the surveyed Balkan countries, although the vast majority of agricultural land is privately owned and privately farmed. The Transcaucasus and the EU accession countries are in the process of transforming and bettering their registration systems, but still have problems due to the large number of new owners and the need to reestablish boundaries.

a. Issue: Inadequate legislation or lack of legislation regarding which rights should be registered impedes the land market.

Policy Options:

• Develop, enact, and implement legislation regarding registration of land titles. (Ukraine, Belarus).
• In Macedonia, Bosnia and Herzegovina, Kosovo, Croatia, and the Federal Republic of Yugoslavia, where outdated, inappropriate, or never-completely-implemented registration laws exist, develop, enact, and implement new registration legislation.
• Clarify in Russian legislation that land share transactions must be registered, and ensure a streamlined process for doing so. Amend the Civil Code and Law on Registration to account for the peculiarities of joint shared property of large agricultural collectives.
• Design registration programs to recognize the high costs associated with 100 percent capture and effectiveness. Substantial gains in land market viability can be made with less-than-universal registration.
• Do a careful review of the steps in the present registration process, streamlining, eliminating unnecessary documents, and setting reasonable time-bound requirements for official actions through revised regulations whenever possible.

b. Issue: Distribution of land share certificates is incomplete, and registration cannot occur without at least a land share certificate.

Policy Options:

• Distribute land share certificates to all Russian land share holders. To do so, the issue of whether or not land should be demarcated must be decided. Without demarcation, land share certificate distribution should involve very moderate cost. However, land shares have very little value since withdrawal of land shares can be difficult and land has a low value at this time.

c. Issue: Unclear rules about which agency has responsibility for registration of land and buildings leads to overlap, confusion, and extra costs. For example, Armenia does not have a centralized institutional framework for registration, and three separate agencies issue temporary certificates of ownership. Moreover, important information is not shared among actors.

Policy Options:

• Establish one agency that is responsible for registration and provide that agency with resources and support. Eliminate all conflicting legislation regarding powers and duties of registration. (Belarus, Russia) However, the process of centralizing administration is very political with many entrenched interests involved. The single-agency issue can bog down legislation interminably.
• Every legal interest in land that is to be registered should be registered in one accessible place, whatever that place is. (In Lithuania for example, the Mortgage Registry should not be a separate registry.)
• Mandate information sharing among registration actors, most especially the land committees dealing with restitution and the registration agency or judges.

d. Issue: Surveying and title preparation are slow due to lack of resources and lack of experience.

Policy Options:

• Donor assistance in establishing new private survey firms. In Moldova, private survey firms reduced the costs of privatization and transactions, and at the same time were able to quickly and efficiently provide services. However, private surveyors that are paid only for work performed, may rush jobs or prioritize large landowners over smaller owners.
• Donor assisted training for surveyors and land cadastre workers.

e. Issue: The current owner-based system in Armenia provides one land title for multiple land holdings.

Policy Options:

• Assess the cost, confusion, and time of moving from an owner-based titling system to a parcel-based system to eventually speed up the system and make it easier for landowners to conduct land transactions. While the end result may be a faster system, the transition could be very costly and could in the short-term further slow-down the already overwhelmed system.

f. Issue: Lack of land tax or a high transaction tax can discourage registration of land.

In Armenia, a high tax must be paid in cash based on the fixed value of land when a transaction is registered.

Policy Options:

• Require all owners to pay a modest land tax whether or not they have registered their land (i.e., not just on registered land). Special circumstances of poverty or age can be exempted from these assessments.
• Eliminate the transaction tax, or at least replace it with a much lower tax keyed to be a very small percentage of realistic estimates of actual market values of land. In the early stages of market development any substantial transaction tax will discourage transactions, discourage registration of transactions, and discourage information about the real cost of land. Such a provision could be temporary until the land market is in full swing.

7. Land Consolidation

Traditional consolidation projects have been criticized as too slow and too expensive. However, with new tools such as the technology of spatial data infrastructure (GIS, LIS etc.) land use planning can be discussed more easily and comprehensively. On the other hand, as of yet, there are few examples of successful consolidation projects.

An alternative to the traditional consolidation procedures would be market-assisted consolidation, in which for example a legal rule would be established stating that very small plots cannot be divided and then transferred through sale or inheritance or divorce. However, legal rules such as these often infringe on custom and individual choice, especially in terms of inheritance rules and can be unpopular because they are seen as inequitable within the family. Moreover, division through sale represents a market-based choice which, it may be rather persuasively argued, should not be overridden by administrative means.

Land fragmentation is an issue that has been raised in all of the EE countries with the exception of Belarus, Russia, and Ukraine. The EU accession states are receiving much help from the European Union in relation to consolidation efforts. Many of these programs are a combination of market assisted reform and government intervention at the community level. Because many of the EU countries have a state land fund, there is already a system in place for purchasing and redistributing land.

a. Issue: Privatization has affected the size and shape of many parcels of land in the EE countries. Privatized parcels are often non-adjacent and sometimes not in the community where the new owner now lives.

Policy Options:

• In restitution countries the State could offer to purchase land from urban residents who are non-users of land, or purchase could be more narrowly focused on pensioners at market prices. Redistribution of this land should be carefully planned, quickly executed, and transparently carried out.
• Consider using a portion of State land fund land that already exists for purposes of consolidation and makes such a policy goal part of the privatization process for this land.
• Prohibit subdividing land that is within a certain size range. However, there may be strong counter-arguments to applying such a restriction both in the case of non-market transfers through inheritance and gift, (custom, expectation, equity) and in the case of land sales (market decisions should prevail).
• Work to foresee and plan for the impacts of transfer-limiting measures and other results that influence land markets. One approach to assessing such impacts is to craft a simple land market impact assessment that briefly lists the anticipated impact, outlines the possible scope and effect, and proposes restrictions to the proposed measures and mitigating counter-measures.
• Encourage land exchanges by eliminating the cost of the two transactions.
• Establish a land exchange program, providing country-wide information on land available for exchange or sale.
• Eliminate the transfer tax for transactions that lead to consolidation.
• Establish pilot projects in communities where voluntary land consolidation is highly desired and feasible.

Some problems with these consolidation techniques include:

• Reductions in transfer tax revenues
• Exclusion of smaller players from the land market
• A limitation on transactions facilitated by real estate market service providers (agents, brokers, appraisers, notaries, lawyers, and others)
• Fewer candidates for lower value mortgage lending
• Pushing transactions into an informal market and eliminating registration within formal systems
• Excluding heirs from the agricultural sector and pushing population toward off-farm employment
• A general chilling of the broader market

In general, it may be concluded that non-voluntary measures aimed at consolidation or against subdivision of land holding should be viewed with great caution.

8. Land Use Planning

There are two primary issues related to conversion of agricultural land to non-agricultural uses. First, there is concern that, without guidelines for conversion, development will be scattered throughout the urban-rural fringe. Most often, agricultural land is subject to conversion to non-agricultural uses when it comes within a community’s potential zone of expansion. Conversion occurs characteristically on land nearest the city, but because competition for land at the immediate urban fringe increases its purchase price, development costs there are substantial.

Thus, speculators and developers are attracted to more distant farmland that carries a smaller price tag and provides greater profit.⁵⁶⁰ Second, countries with little arable land per capita may be concerned about protecting farmland to assure future food supplies.

a. Issue: Conversion of Agricultural land to non-agricultural use is strictly prohibited.

Policy Options:

• Develop land use planning, zoning, and use-permitting regulations that reasonably promote the policy of preserving agricultural land and uses without prohibiting non-agricultural use outright. These may include non-exclusive agricultural zoning approaches, creation of transferable development rights, and other measures. A neutral agency (not a government agency that itself engages in sales or other distributions of land) should administer land use regulations.
• To the extent that legal prohibitions on converting some agricultural lands to non-agricultural use do exist, do not apply the prohibition or apply more flexible regimes to areas designated as urban, urbanizing, or peri--urban.
• Craft tax regulations that serve to encourage (or at least do not penalize) farmers for agricultural uses. Avoid land taxes that value peri--urban agricultural land as though it were an industrial park or an apartment complex.
• Establish districting opportunities whereby members can avail themselves of member benefits in exchange for commitments to keep land under cultivation or otherwise in agricultural use.
• Promote the development of appropriate industry, infrastructure, and social service delivery in agricultural/rural areas as a means of retaining agricultural populations and preserving agricultural uses.

9. Role of the Public and Private Sector

There are a variety of measures that could be undertaken to help create and strengthen the private sector institutions that participate in and support healthy land markets. A disadvantage to these types of support measures is the difficulty in quantitatively ascertaining progress.

• Generally create a regulatory environment (by way of tax, licensing, liability, certification, and other laws) that nurtures these private sector institutions.
• Help to create the educational and professional capacities for property appraisal, survey, land use planning, legal services, and the like.
• Assist real estate agents and brokers in the creation of their industry so as to help establish and maintain the private flow of real property demand and supply information.
• Assist credit provider associations with the transition to servicing agricultural borrowers.
• Conduct and sponsor public education about land markets and the private-sector institutions that support them.

In the Western CIS countries, the first step must include the political will for the State to delegate certain functions to the private sector and away from the State.

a. Issue: In the Western CIS countries, land administration functions related to agricultural land are still held primarily by the federal government and not by local or private institutions.

These functions include(with some exceptions for Moldova), surveying, titling, registration of rights, land use planning, valuation, market information, and sometimes crop planning. This over-centralization is a legacy of the former Soviet Union.

Policy options:

• Decentralize land functions and devolve functions to the local level whenever possible. Monitor whether the decentralized process that empowers local institutions also allows unscrupulous local leaders to abuse their authority to reward friends and punish enemies.
• Consider delegating all land registration functions to the oblast government, providing only that they comply with the Civil Code and the Law on Registration. Land Registries in many large countries (the US, Canada, and Australia) are regulated at the provincial/state level.
• Eliminate government interference in crop planning, land use, except for environmental concerns, and production controls. (Belarus)

b. Issue: In some of the EU accession countries private surveyors, real estate agents, and valuators need to be encouraged, and land market information must be widely disseminated.

Policy Options:

• Encourage the development of private surveyors, valuators, and market information.
• As a first step, regional ministry offices and/or extension offices could keep track of prices for leasing and selling agricultural land. The prices should be available free of charge to whomever is interested. However, such a service could interfere with private real estate agents when they begin to be active in the agricultural land market.