Will it be safer?

The perpetual usufruct right was introduced to the Polish legal system almost 50 years ago. This legal institution was especially controversial after 1989, since on the one hand the fees collected from perpetual usufructs have always been an important source of income for local authorities, but on the other, it left developers and investors dreaming of absolute ownership rights to properties

In addition to this, local authorities would often terminate perpetual usufruct agreements for failure to meet deadlines for completing development projects due to delays in granting construction permits which they themselves had failed or refused to issue.

The Polish Codification Commission for Civil Law is in the course of finishing work on the introduction of a new legal institution into the Polish Civil Code, i.e. the hereditary building right. This will grant the right to endow land property with the right to build, develop or use existing buildings or other facilities above or below the surface of the land property. Unlike the perpetual usufruct right, the hereditary building right could also be extended to facilities under the land surface. Buildings and other facilities built on or under the surface of an endowed property or existing at the moment of establishing the right will be owned by the holder of the hereditary building right. Establishing new perpetual usufruct rights upon the coming into force of the hereditary building right will become impossible. Consequently, as intended by the authors of the draft, the hereditary building right will eventually replace perpetual usufruct.

A better law for developers?

Definitely, the possibility of establishing the separate ownership of premises on the hereditary building right deserves special attention. This is particularly important for the housing market and for developers, who would enjoy the right to establish the separate ownership of residential properties developed on the land vested with a hereditary building right. Without such a possibility, the introduction of the new right would make no sense at all for many potential investors.

According to the draft legislation, the hereditary building right may be established for a period from 30 to 100 years and may be subject to further extension by way of an agreement. However, unlike the perpetual usufruct holder, a hereditary building right holder will have no right to claim this extension. If the right is not extended for another period by such an agreement, the ownership of constructed buildings will pass to the land owner with due compensation paid to the holder of the hereditary building right upon its expiry.

Undoubtedly, such a solution is beneficial for the land owners who will not be, against their wishes, deprived of the possibility to use their land property upon the lapse of an agreed period. This is considerably different from a perpetual usufruct right under which ownership of land is rather illusive and is more similar to a type of ‘a perpetual annuity’ for the land owner, since once an agreement on the perpetual usufruct is concluded, the land owner in fact loses control over the property and is no longer allowed to execute ownership rights. From another perspective, if there is no claim for an extension of the hereditary building right, it could mean that depending on the provisions of the agreement, after 30 years the hereditary building right owner would lose all rights to buildings already constructed on the land. Who would be interested in buying a flat for just 30 years? Either the introduction of a claim for an extension of the hereditary building right, or at least to extend the right by a minimum period of 30 to 50 years, would be necessary.

Easier and more economic

This new regulation of the Codification Commission is inconsistent with a recent tendency to reinforce the ownership right, e.g. by the gradual liquidation of a cooperative member’s ownership right to premises. From this point of view, the introduction of a new limited proprietary right, i.e. the hereditary building right, seems to be a step backward. However, to a certain degree this new right will be beneficial for investors. The hereditary building right can be established not only for the public land property, but also on the land owned by individual persons. Such an option could be used by land owners who are interested in developing their land or realizing an industrial development project but have no funds for this and at the same time do not wish to sell their land. From an economic point of view, thanks to the new legal institution the realization of certain investment projects will simply become easier. In the case of anticipated public projects, it may also help to avoid the expropriation of privately owned land property for public purposes.

Under the proposed regulation, several land properties could be vested with a hereditary building right (the so-called ‘joint hereditary building right’), which should make the installation of communication facilities on them easier. This would be particularly important for the construction of trolley wires and transmission and communication networks, in addition to the installations already in place for these purposes.

Uneasy co-existence

Despite the many common characteristics of both legal institutions, the termination of the perpetual usufruct right is not an intended consequence of the new right coming into force. Its complete cancellation and the transformation of existing perpetual usufruct rights into ownership rights would be problematic and controversial, among other factors, for the sheer fact that local authorities would be deprived of a significant source of income, i.e. the annual charges for usufruct rights. As a result, until all the existing perpetual usufruct agreements expire in the future, the two similar legal institutions will co-exist or even, in the case of public land, compete with each other.

This prospect of such co-existence has raised some additional questions. For example, there has been some discussion over the possibility of establishing the hereditary building right on the perpetual usufruct right. In the current draft of the amendment to the Civil Code, the Codification Commission has rejected the above concept claiming that it would lead to a multi-level and confusing legal status for properties. On the other hand, the lack of any possibility to establish the hereditary building right on the perpetual usufruct will mean that on land properties located in city centres, which are very often under perpetual usufructs, establishing the hereditary building right will be impossible. The Ministry of Infrastructure proposes to fill this legal loophole through the introduction of the right to establish the separate ownership of buildings constructed on different types of the land property, including those under perpetual usufruct. In this context, another issue remains open, i.e. potential future re-privatization claims, as well as whether on that basis filing claims for establishing a hereditary building right in addition to a perpetual usufruct right will be possible.

Considering this, the question arises of how to preserve the ratio legis of the new right. Maybe instead of introducing the hereditary building right into the legal system, a well thought-out amendment to current regulations over the perpetual usufruct right would be more sensible. ν

Paweł Kuglarz, partner at Beiten Burkhardt P. Daszkowski law firm