On the right track

Poland has major challenges and opportunities ahead of it in the next few years. The upcoming Euro 2012 football championship and the more efficient use of EU funds should not leave investors and construction companies empty-handed. However, is there anything they should pay special attention to?

The law firm Beiten Burkhardt P. Daszkowski has provided legal services to major international companies operating on the property market in Poland for many years. Since the credit crunch began, have clients started to approach your law firm with different cases than hitherto?

Peter Daszkowski, managing partner: The good news is the fact that transactions are still taking place on the commercial real estate market. Mergers, takeovers and acquisitions of real estate are not that common anymore, but we have many more cases involving the restructuring of companies. We are also involved in various infrastructure and development projects. In our view the number of real estate transactions still remains satisfactory.

Paweł Kuglarz, partner: We are seeing, however, a clear shift from private to public projects. At the moment public investors are the ones with money. We should bear in mind that Poland will be the largest construction site in Europe in the next few years, as PM Donald Tusk put it during his meeting with Austrian President Heinz Fischer. In some cases we represent the ordering party, in others constructors. We have noted that if the project has not been correctly estimated, construction firms try to find a way out of it. Their calculation of projects is usually based on an up-front cost estimate, which means that the prices applied at the moment of project estimation affect the final financial outcome of the project. In calculating project costs, a lot of constructors made the assumption that prices would go up. Now they see that this is not the case. With prices and rates dropping, firms are looking for savings. They are now trying to get projects suspended, as are the ordering parties. Sometimes halting a project makes sense, and it is often done by exploiting the fact that a contractor has made a mistake. In a new tender the same project can be carried out 30-40 pct cheaper. Also, the number of lawsuits has grown significantly of late. Before, constructors were more interested in new projects. But these days, they are fighting for public contracts until the very end.

What do your foreign clients think about the Polish legal environment? And how does Poland stand in Europe on showing favours to investors?

Paweł Kuglarz: In many fields, for example in commercial law, harmonization with EU regulations has already taken place. However, administrative, public and construction law still differ from the regulations that foreign investors are familiar with. Consequently, they complain about long court procedures and the transaction of payments. A number of controversial matters still need to be regulated, including the penalty for the lack of a building permit. If the proposed amendment to the Construction Law came into force today it would create chaos because penalties imposed for illegal constructions would not correspond with the importance of the deed. For example, a developer would have to pay the same fine for the illegal development of a shopping centre as a private person who has built a small house without a permit. The next issue concerns temporary facilities, which should be dismantled after a project has been completed. The amendment fails to set time limits for these obligatory activities to be carried out. And finally, the amendment legislates for a site development agreement under which the developer would be responsible for preparing a site development plan. The introduction of such laws could negatively affect the development of entire areas due to someone’s arbitrary vision. This might be dangerous.

The lack of sufficient protection for subcontractors is another issue...

Paweł Kuglarz: True. The problem concerns payment guarantees for construction works. In 2006 the Constitutional Tribunal challenged the Act on Guaranteed Payment for Construction Work and as a result most of its provisions became invalid. Few are still in force but in fact the Act is not really applied. The problem is that even if investors duly pay general contractors for construction work, the latter often fail to do the same for their subcontractors. It happens to be the case that sub-contractors have no power to enforce payment since large constructors often establish project companies for the realization of specific contracts and later transfer all of their assets to another firm when the project is completed. Considering the interest of the subcontractors we have developed a draft of the Act on Construction Mortgage. This draft provides subcontractors with effective protection. Under the draft, subcontractors would have the right to demand that a construction mortgage is established on the developed property that would allow for the effective enforcement of payments.

Peter Daszkowski:  Still, there are many areas in administrative law that needs to be regulated. The Act on Reprivatization, as adopted for example in Germany, is still missing. Currently investors must consider the risk of former owners turning up on the construction site and putting the project on hold. Since former owners may claim for the return of their properties, investors run into the serious investment risk of losing the project. If the Act on Reprivatization was in force, the risk of successful restitution claims would be borne by the state and the investor would not bear such a risk. The missing regulation in that regard does not deter companies from investing in Poland, but it certainly makes transactions more difficult to execute. However, I do not think that investors should criticize or assess the law. Investors should rather know it and apply it. It is interesting to note that although under different legal systems the wording of legal provisions may be the same, they are applied differently. In Poland, unlike in other countries, legal provisions are applied rather formalistically according to their literal meaning.

Public contracts are sure to grow in importance. Is there anything ordering parties should pay special attention to?

Paweł Kuglarz: Contracts drawn up by the International Federation of Consulting Engineers, the so-called FIDIC (‘Fédération Internationale Des Ingénieurs Conseils’), are increasingly popular for public contracts because a lot of the public projects are financed from EU funds. The European Commission recommends the adoption of FIDIC standards and will monitor whether FIDIC contracts have been applied. If they have not been applied or have been significantly amended, the Commission will be empowered to challenge the use of EU funds.

Peter Daszkowski: Lately we often hear of large projects carried out under private-public partnerships (PPP). However, the application of the provisions of the Act on PPP is a problem. The Act is in force but cannot yet be fully applied because the regulations to this Act are still insufficient. In fact, a PPP project can be carried out without regard to the Act, under a civil contract between the two parties. To sum up, the Polish public procurement law is considered to be very complicated. One way or another, under Polish public procurement procedures, projects take too long. In other EU countries, the decisions of public authorities in key issues are made quickly. Any appeals against the decisions filed by competitors do not delay the realization of projects. The work may be held up by only up to three weeks at the most. 

Beiten Burkhardt

is an international law firm with substantial experience in the field of legal consulting, operating in Germany, the CEE, China and Belgium. Beiten Burkhardt has been present in Poland since 1993. Currently, its Warsaw office employs over 30 lawyers, legal advisers and tax consultants, specializing in company law, mergers and acquisitions, labour law, IP/IT/Media, public law and public order law, as well as property market related law. Services for the real estate market constitute 30 pct of its business. The firm has been involved in a number of retail chain sale transactions, as well as the privatization of STOEN for RWE in 2002, and in 2007 introduced Immoeast onto the Warsaw Stock Exchange.

Peter Daszkowski is an attorney at law, admitted in both Poland and Germany. Peter has been the managing partner of the Beiten Burkhardt Warsaw office 
since 2001. He specializes in company, commercial and real estate law.

Paweł Kuglarz is an attornery at law, a partner of Beiten Burkhardt, a member of the Bank Law Centre Programme Council and the vice-president of the Association of Liquidators, Valuers and Poland-Europe Economic Advisors. He specializes in real estate, construction, credit securities and public order law. Paweł is the author of many publications on real estate law.