Legislative work aimed at phasing out the right of perpetual usufruct is underway | In Principle

The government’s draft reform of perpetual usufruct in Poland focuses on changing the rules and method for determining the price for sale of a property to its perpetual usufructuary. Additionally, perpetual usufructuaries are granted a claim to acquire the property they hold. This is part of the process of phasing out perpetual usufruct entirely.

For many years, the parliament has gradually been trying to extinguish the right of perpetual usufruct in the Polish legal system. This trend is due to the historical conditions under which this specific land right was created, and the current socioeconomic circumstances, in which the lack of secure title to property inhibits development and lowers the sense of legal stability on the part of holders of land.

Previously, this trend led to the Act on Transformation of the Right of Perpetual Usufruct into the Right of Ownership of Real Estate of 29 July 2005, which finally grants a claim for transformation (on preferential financial terms) only to natural persons and housing cooperatives using land developed or intended for residential development or garages and agricultural real estate. In 2011, the parliament extended its application to all land and all perpetual usufructuaries, including business entities, a move that met with opposition from property owners and raised significant doubts from the European Commission regarding the preferential financial terms of conversion, which the Commission regarded as a broad form of state aid. As a result, in 2015 the Constitutional Tribunal declared this extension unconstitutional. Another manifestation of this trend was the automatic conversion on 1 January 2019 of land developed for residential purposes under the Act on Conversion of the Right of Perpetual Usufruct of Land Developed for Residential Purposes into Ownership of Such Land of 20 July 2018.

This overview of the history of the attempts to date to phase out perpetual usufruct is helpful for understanding the solutions contained in the current government draft reform, which is intended to meet the objections of the European Commission and the guidelines from the Constitutional Tribunal. The draft also takes into account calls from the business community to introduce a claim to enter into a sale contract giving businesses the certainty of acquiring property under certain financial conditions and after fulfilling the statutory prerequisites.

The original bill, dated 22 November 2022, was circulated for inter-ministerial consultations, which led to comments from various ministries and invited organisations and a revision of the draft, primarily extending the minimum periods of perpetual usufruct entitling the holder to apply for acquisition of ownership, as well as excluding the possibility of seeking acquisition of ownership of undeveloped land.

New rules for sale of real estate to perpetual usufructuaries

The draft provides completely new rules for qualifying land for sale to perpetual usufructuaries and determining the price.

Only land that has been held in perpetual usufruct for at least 25 years will be subject to sale. The specific prerequisites for allocating perpetual usufruct land for sale will be determined by an order of the province governor (in the case of land owned by the State Treasury) or by resolutions of local governmental bodies (in the case of land owned by local governments), but will not occur in the case of land managed by the Military Property Agency.

When setting the terms of sale, property owners are to be guided by considerations of:

• The needs of the local community and the public interest
• Spatial order
• Economic rationality
• The state of implementation of the purpose and other provisions of the agreement delivering the real estate in perpetual usufruct
• The period remaining until expiration of the perpetual usufruct
• The development potential of the property for public purposes, public utility purposes, and residential development.

This already broad set of guidelines is only exemplary, not a fixed catalogue of criteria that can guide property owners in formulating the prerequisites for the sale of land delivered in perpetual usufruct.

The proposed reform also departs from the rule of crediting the value of perpetual usufruct against the price for sale of the land to its perpetual usufructuary. Instead, the proposal includes a mechanism for determining the sale price based on 20 times the product of the existing percentage rate of the annual perpetual usufruct fee and the value of the property estimated at the time of sale. In the case of real estate not used for conducting business activity, the sale price would be 25 times that product, while in the case of real estate used for conducting business activity, the owner and the perpetual usufructuary could negotiate the sale price, the lower limit of which would be 20 times that product and the upper limit would be the value of the property determined at the time of sale.

In determining the price for sale of real estate used for conducting business activity to its perpetual usufructuary, the rules on state aid would apply, where the amount of the state aid would be the difference between the value of the real estate as of the date of sale and the price finally determined. The value of this difference in excess of the de minimis aid limit would constitute the basis for determining the additional fee, which the purchaser would also be able to pay in instalments subject to interest at the European Commission’s benchmark rate.

Perpetual usufructuary’s claim to acquire real estate

The draft takes into account the demand of the business community that perpetual usufructuaries can require the owner to sell the property to them. Under the draft, perpetual usufructuaries could make such a request within one year after the reform enters into force.

The subject of such request could only be built-up land that has been held in perpetual usufruct for at least 25 years. Additionally, no claim for the purchase of land by its perpetual usufructuary would lie:

• If the usufructuary has not performed its obligations under the perpetual usufruct agreement
• If there are pending proceedings to terminate the agreement, or
• With respect to land located in the territory of seaports or harbours, and land used for the operation of an allotment garden.

The draft dated 24 January 2023 abandons the exceptional possibility (provided for in the version of 22 November 2022) of seeking acquisition of undeveloped land held in perpetual usufruct.

In the case of a claim to acquire property held in perpetual usufruct, the method to determine the price would depend on who owns the property. Again, the price-setting mechanism would be based on 20 (or 25) times the product of the current percentage rate of the annual perpetual usufruct fee and the value of the property estimated at the time of sale. In the case of property owned by the State Treasury, the sale price would be 20 times that product in a single payment, or 25 times that product if the price were paid in instalments. But with regard to real estate belonging to local government units, the owner and the perpetual usufructuary could negotiate the sale price, the lower limit of which would be 20 times the aforementioned product and the upper limit would be the value of the real estate determined at the time of sale. In this case, the terms of payment would be defined in resolutions of the local government decision-making bodies.

The draft also foresees a 90% discount on the sale price when the purchaser of property owned by the State Treasury is a perpetual usufructuary belonging to a large family, or a disabled person, or the legal guardian or legal representative of a disabled person. In the case of local government properties, such a discount could also be granted based on other discretionary conditions set forth in resolutions of the governing bodies of the local government units.

If the claim related to real estate used for business purposes, then the state aid rules analogous to the proposed rules for the sale of real estate to its perpetual usufructuary would apply.

Amendments to other provisions regarding perpetual usufruct

The draft introduces relevant references to the new mechanism for determining the sale price of real estate to its perpetual usufructuary in the provisions on agricultural real estate owned by the State Treasury and housing cooperatives. This is intended to unify the rules for determining the sale price of real estate to its perpetual usufructuaries regardless of the type of property or purchaser.

As an exception, in the 2005 Transformation Act, the parliament retained the rule of crediting the value of perpetual usufruct of the property against the sale price. This is dictated by the principle of vested rights, and is also justified by the nature of the property (land developed or intended for residential development or garages and agricultural property) and the types of beneficiaries of the transformation (natural persons and housing cooperatives). At the same time, the parliament decided to introduce a cut-off date for filing claims under the 2005 Transformation Act at the end of 2025, explaining this by the need to ensure the stability of legal relations enabling public entities to plan and manage the stock of real estate owned by them.

Summary

The recent government proposal for systemic changes to the right of perpetual usufruct furthers the expectations that perpetual usufruct will gradually be phased out of the Polish legal system. Additionally, this bill seems to take into account the general guidelines of the Constitutional Tribunal and the European Commission on the principles for abandoning this right, and marketisation of the payment rules (in particular for real estate used for conducting business activity) in this process. However, the details of the proposed mechanisms, such as the adoption of a short one-year time limit for filing a claim to acquire property, may raise doubts. Certainly, these solutions will still be subject to further discussion and modifications, as the draft is still being worked on within the government.

However, even adoption of this bill would not completely eliminate perpetual usufruct from the Polish legal system. First of all, in the proposed mechanism for the sale of real estate to its perpetual usufructuary, the owner retains a great deal of discretion in framing the conditions for qualifying the property for sale. As for the acquisition claim provided for in the draft, it applies only to a certain portion of the property held in perpetual usufruct. The marketisation of the rules for asserting this claim may effectively deter perpetual usufructuaries from pursuing it, especially within such a short one-year time limit. However, the intention of the drafters to implement the next stage of phasing out perpetual usufruct and stimulating development of land now held in perpetual usufruct should be regarded as a step in the right direction.

Dr Radosław Wiśniewski, attorney-at-law, Real Estate practice, Wardyński & Partners