From the moment foreign investors enter Ukraine they face a non-Western standard business environment, confusing and unstable legislation, and bureaucracy. One would need to spend a lot of time and effort to get a clear understanding of the local rules of conduct. That is why many investors prefer to have a local partner rather than be on their own.

There are two main options for having a local partner in retail: (a) franchising and (b) joint venture. Franchising requires less investment but also could be less profitable. On the other hand, a joint venture usually is more profitable but it requires more investment. Also, in the case of a conflict, a joint venture is more attackable.

In any of the above options, a foreign retailer should consider the following:

  1. Joint venture shareholding

Ukrainian courts are rather inexperienced and are highly sensitive to administrative pressure. That is why we recommend moving all shareholding agreements out of Ukraine (for example, to the Cyprus or BVI level). This is also advisable from the perspective of investment repatriation.

  1. Governing law

Unlike English law, Ukrainian corporate law remains rather inflexible and does not provide shareholders with all standard corporate tools for regulation of shareholder relations. That is why we recommend governing all commercial agreements by a foreign law (for example, English law) and resolving all commercial disputes in an international arbitration.

  1. Antitrust issues

Even if a joint venture is established abroad, it is still subject to Ukrainian antitrust regulations. In most cases, establishment of a joint venture would require approval of the Antimonopoly Committee of Ukraine.

  1. Legal/financial consultants

A foreign retailer should have its own Ukrainian legal and financial/tax advisers. They should supervise at least (a) tax charge and payment, (b) goods supply and customs clearance, (c) permits and approvals, and (d) litigation.

  1. Retail leases

With respect to lease agreements, a foreign retail investor should consider the following:

  • If the lease term exceeds three years, the lease agreement is subject to notarisation in Ukraine. This will cost from UAH17 up to UAH850 (from USD1.8 to USD106.11).
  • The landlord may terminate the lease agreement only in cases, provided by (a) law (i.e., rent payment delay; damage to the leased property etc.) or (b) the agreement. That is why we advise our client to provide in the lease agreement a termination clause specifying alternative cases for the lease termination.
  • The tenant has a pre-emptive right to execute the new lease (should the landlord wish to lease the premises for another term), as well as a pre-emptive right to buyout the leased premises (should the landlord wish to sell the premises).
  • The tenant may carry out fit-out works only upon obtaining the landlord"s consent. Upon the lease expiration, the tenant is entitled to reimbursement of the fit-out costs, provided that such fit-out works (a) may not be removed by the tenant, and (b) were approved by the landlord.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.