Ownership? Not so fast…

In its amendment to the Act on converting perpetual usufructs into ownership rights, the Constitutional Tribunal has given greater freedom to local authorities in granting this right. Will this amendment affect the development of new projects or will it only affect the relationship between investors and local government?

The right of perpetual usufruct has been part of Polish law since the 1960s. The law states that the state or local government (city councils, boroughs and provinces) can grant a lease of land to an individual or a company (the perpetual usufructuary). The usufructuary has the right to dispose, sell or bequeath the property in his/her last will. The right of perpetual usufruct is temporary, and usually lasts from 40 to 99 years. The use of the property is also specified and annual fees for users are imposed. “The difference between the right of perpetual usufruct and ownership are mainly those three things – and these can restrict a developer’s plans. As a result, it might be the case that perpetual usufruct holders want to convert their right into an ownership title. And this is where the changes to the regulations effected on March 17th 2015, with the publication of the decision of the Constitutional Tribunal on the 2011 amendment to the Act on converting perpetual usufructs to ownership titles, comes in” explains Piotr Woźniak, a solicitor with EY Law.

Limiting the privilege

Some holders of perpetual usufructs would like to have the ownership titles to their properties to avoid the time limits for owning the land and the financial liabilities, as the fee for a perpetual usufruct may increase and so may become less profitable. There are now two procedures for converting a perpetual usufruct into an ownership title. One is the Act on converting perpetual usufruct rights into ownership titles, which disallows the relevant public bodies from denying such applications from usufruct holders if they fulfil all the legal conditions. The other course is via a contractual procedure. A perpetual usufruct holder of land in an administrative district can request its purchase. If the local authorities agree, the procedure is carried out under the Real Property Management Act. “In 2011 the group of people entitled to conversion on the basis of such a request was extended. Apart from housing co-operatives, private individuals who have a share in the ownership of the property, the expropriated and members of the Warsaw Property Rights Association, the privilege was also granted to legal entities, general partnerships, professional partnerships, limited liability companies, joint-stock companies and entrepreneurs who conduct their business activity on the land under the perpetual usufruct. This group can request a conversion of the perpetual usufruct into an ownership title – and the authorities have no right to reject the request, provided all the formal conditions have been fulfilled,” explains Piotr Woźniak. Local councils have objected to the extension of the procedure to these additional groups. Poznań, Szczecin and Ustronie Morskie have all appealed to the Constitutional Tribunal. “The Constitutional Tribunal has adjudicated on their claims and stated that the amendment of 2011, which entitled new entities, mainly entities and individuals who are entrepreneurs, to such conversions, is inconsistent with the Constitution. The decision was mainly based on the principles of a democratic law-abiding society and the protection of public property in administrative districts. It was published in the Journal of Laws of March 17th 2015 and issued on March 10th 2015. This means that as soon as the decision was published, the regulations were rendered invalid. All legal proceedings in progress referring to the amendment should now be discontinued as groundless. The decision does not apply to the entities who obtained a final administrative decision on the conversion of a perpetual usufruct before the day of the publication of the Constitutional Tribunal verdict, i.e. before March 17th 2015,” emphasises Piotr Woźniak. Local councils have breathed a sigh of relief over the decision of the Constitutional Tribunal. “The ruling that these unconstitutional regulations are invalid has brought back the possibility of the rational management of communal resources, with a particular focus on area development plans and planned projects,” comments
Tomasz Klek, Szczecin city council’s representative.

The investor can doless

At present, the groups that are no longer able to make requests as a result of the decision of the Constitutional Tribunal can follow the contractual procedure only, which means they can acquire the ownership title solely from the owner. Investors holding the right of perpetual usufruct at the moment cannot transform it into an ownership title on request, as was possible before March 17th 2015. That means that the majority of investors will remain perpetual usufruct holders. Those who may have profited from the transformation of the perpetual usufruct into an ownership title have to make a greater effort now and it is necessary for them to communicate with the property owner. “From the point of view of the relationship between the investor and the property owner, limiting the number of entities entitled to request the conversion into an ownership title considerably strengthens the position of the owner. Now conversions depend solely on his/her good will. As far as future projects are concerned, I don’t think that the changes in this respect will be considerable. One should bear in mind that the right to conversion of the title has applied (and still applies) to the right of perpetual usufruct which existed from October 13th 2005. This means that with reference to the right of perpetual usufruct established after this date the conversion has depended and depends on the owner’s good will,” points out Jan Bagatela, a solicitor with Schönherr. According to Ewa Bobkowska, the president of the board of directors of developer and constructor P.A. Nova, the decision is not a good one for investors. There is the dangerous prospect of a culture of political dependence and investors being less willing to invest in land. “Granting local government the right to reject the conversion of the perpetual usufruct into an ownership title will bring with it unfortunate effects, all the more so because as a rule local councils are formed according to a political agenda. Furthermore, the choice of land made by the majority of foreign investors depends on the acquisition of the ownership title, and they are rather reluctant to accept the right of perpetual usufruct,” argues Ewa Bobkowska. Financial issues also play their part. “As a rule, the fee for the perpetual usufruct amounts from 0.3 to 3 pct annually, depending on the category of land. Over a period of 20–30 years 100 pct of this is paid, which might be unprofitable and affect the leasing terms, specifically the amount of common fees,” adds Piotr Woźniak. And that’s what worries investors the most. “The fees for the perpetual usufructs increase dramatically as soon as the investment is handed over, which may in turn lead to a substantial rise in maintenance costs and affect an increase in fees for tenants,” claims the president of the board of directors of P.A. Nova.

The consequences are not sobad

Another problem is that other claimants may wish to regain land to which the ownership title was granted by challenging the act as invalid. “In that case extraordinary procedures apply, i.e. you resume the proceedings that allow the previously ‘final’ decision for the rights to be converted to be challenged. Obviously, perpetual usufruct holders will not be keen on amendments such as this. It is possible to resume the proceedings solely upon the request of the party in court, and the local authority, according to the most common method of jurisdiction by the Supreme Administration Court, is not a party to such cases. Independently of this, it is necessary to point out that a court decision has been made considering the perpetual usufruct holder and the local authorities to both be parties in court proceedings. Hence, it is theoretically possible to remove the legal consequences, i.e. to consider again as the usufruct holder the entity that had become the owner under the amendment of 2011. Nevertheless, such decisions are highly unlikely to be made,” explains Piotr Woźniak. What are the other consequences of the decision? “I don’t think that the requests for converting perpetual usufruct rights into ownership titles rejected by entities which, due to the decision of the Tribunal, have no such rights at the moment, will significantly affect the market. Apparently, usufruct holders whose requests are rejected will be forced to revise their economic assumptions. There will certainly be cases where the rejection of the request will make it impossible to develop the planned investment, so the investor will have to pay a fine for the delayed development or will even lose the right of the perpetual usufruct. However, such situations are exceptional and in principle apply to cases in which the request for the conversion was made in the middle of a dispute with the property owner,” concludes Jan Bagatela.

Cities say ‘no’

The city councils of Szczecin, Poznań and Ustronie Morskie were mainly appealing against the extension of the range of entities eligible for converting the rights as a result of the 2011 amendment to the Act of 2005, which decided on the removal of any restrictions on the kind of property that could be the subject of the request. According to these cities, as a result of the regulations local government bodies would lose any influence on the development of the property to which the right of the perpetual usufruct was granted. The applicants also questioned the obligatory character of such conversions of the perpetual usufruct rights into ownership titles. This would deprive local authority bodies of the
ownership rights, while at the same time not leaving them with any freedom for deciding on the sale of the properties and limiting their influence on who could acquire the property. Moreover, the applications and letters with additional details pointed out that the conversion of the perpetual usufruct rights into ownership titles deprives local government bodies of the permanent income they would otherwise receive from the perpetual usufruct fees in subsequent years. Calculations showing the scale of the reduction in such income were submitted in supplementary letters of application to the Tribunal. Poznań city council was able to show that the considerable decrease in the budget of the city in 2012 due to the amendment was insufficient for the implementing of scheduled tasks.

Source: Statement of reasons of March 10th 2015 on the conversion of perpetual usufruct rights into ownership titles, in a decision issued by the Constitutional Tribunal.

The decision has been made

Article 1(1) and Article 1(3) of the Act of July 29th 2005 on converting the right of perpetual usufruct to an ownership title – insofar as they sanctioned that the right of perpetual usufruct to be converted to the right of ownership by private individuals or legal entities that had not been entitled to such conversion before the Act of July 28th 2001 came into force amending the Act on the Management of Immovable Property and certain other acts (Journal of Laws Number 187, item 1110) – were adjudged inconsistent with Article 2 of the Constitution; furthermore

a) insofar as they concerned immovable properties constituting the property of the units of local authorities, were adjudged inconsistent with Article 165(1) of the Constitution; and

b) insofar as they concerned immovable properties constituting the property of the State, were adjudged not inconsistent with Article 165(1) as well as Article 167(1) and (2) of the Constitution.