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Proposed new restrictions on trading in agricultural property

New regulations governing trading in agricultural real estate proposed by the Ministry of Agriculture and Rural Development may have a huge impact not only on the possibility of selling property, but also on share transactions.

A bill entitled the Act on Halting Sale of Real Estate of the State Treasury Agricultural Property Reserve and Amending Certain Other Acts has been drafted by the Ministry of Agriculture and Rural Development and posted on the website of the Government Legislative Centre. The bill comes in response to the expiration on 1 May 2016 of the 12-year period of limitations on trading in agricultural real estate in Poland by foreigners who are citizens or enterprises of member states of the European Economic Area. Restrictions on acquisition of agricultural real estate by such foreigners were allowed to remain in force for 12 years following Poland’s accession to the European Union.

Some in Poland take the view that complete deregulation of trading in agricultural property, including allowing land to be freely acquired by foreign enterprises, could result in an increase in prices of agricultural land and concentration of ownership in the hands of large and possibly foreign agricultural enterprises. This could in turn have a negative impact on Polish farms, particularly small, family farms, preventing them from growing.

With the goal of eliminating this risk, the ministry is proposing the introduction of new limitations on the market which would allow the ministry to intervene in transactions involving agricultural property.

If the proposal is adopted, an acquirer of agricultural real estate would as a rule have to be an individual farmer, i.e. a natural person holding (as owner, perpetual usufructuary, independent possessor or tenant) agricultural property with a total cultivation area of no greater than 300 hectares, with agricultural qualifications, residing for at least 5 years in a commune in which one of the properties is located, and operating a farm over that period. This excludes from the set of acquirers of agricultural property for example any and all legal persons, individuals seeking to acquire agricultural property for investment purposes or recreational purposes, as well as persons operating agricultural activity whose area exceeds 300 hectares or would exceed 300 hectares as a result of the acquisition.

There is an exemption from this limitation for acquisition of agricultural property by the seller’s family, local governmental units or the State Treasury, as well as acquisition through inheritance or bequest or in execution proceedings on the basis of a ruling by the court or other competent authority, provided however that this does not limit the rights of the Agricultural Property Agency to take over agricultural property under the regulations described below.

Acquisition of agricultural property by any other entities would require that they first obtain the consent of the president of the Agricultural Property Agency. Consent would require proof that:

  • The current owner was unable to sell the property to an individual farmer or other entity not requiring such permission
  • The designated acquirer provides assurance of properly conducting agricultural operations, and
  • The transaction will not result in excessive concentration of landholdings.

The proposal does not explain how these grounds should be understood, thus giving the agency great discretion in deciding on applications.

A potential acquirer who is an individual seeking to establish a farm may apply for consent instead of the seller. The acquirer must hold agricultural qualifications and provide assurance of properly operating agricultural activity, as well as commit to reside for 5 years from acquisition of the property in a commune where one of the properties making up the agricultural establishment is located.

If the president of the agency issues a decision refusing to consent to the acquisition of agricultural property, the seller may demand that the agency acquire the property (by filing a demand within one month after the decision becomes final). But then the property would be acquired at a price determined by the agency based on real estate administration regulations. This valuation of the property could often differ from what the seller expected to receive.

An entity that acquires agricultural property on the basis of consent from the president of the agency would be required to operate a farm for 10 years following the date of acquisition of the property. Additionally, if the acquirer is an individual, he or she would be required to operate the farm personally. This would exclude for example the possibility of leasing out not only this one specific agricultural property, but also other properties making up the agricultural establishment. Violation of these obligations would risk sanctions in the form of the right of the agency to buy out the property.

In addition to the limitations on trading in agricultural property presented above, the proposal would modify the current entitlements of the Agricultural Property Agency to pre-emption or buy-out of property, or introduce new entitlements. Specifically, in connection with the continued right of pre-emption of agricultural property by tenants of the land (under certain conditions), the statutory right of pre-emption of agricultural property by the agency when the property is not the subject of tenancy or the tenant does not exercise its rights would be maintained. In a major change, the limitation on the area of the property would be eliminated. Under current law, the agency’s right of pre-emption applies only to properties of 5 hectares or larger.

In a major change from current law, there would be a statutory reservation in favour of the Agricultural Property Agency of a right of pre-emption of shares in companies owning agricultural property. The only exemption would apply to shares sold on the stock exchange. Before deciding whether to exercise the right of pre-emption, the agency would have a right to review the books and records of the company whose shares are to be sold. The agency would also be entitled to demand information from the company about encumbrances and obligations in undisclosed books and records.

Apart from the right of pre-emption of agricultural property and shares in companies owning agricultural property, the proposed law provides in certain instances for the possibility of buying out agricultural property from companies that own it. This right could be exercised in the event of a change in partners in a partnership, or entry of a new partner, and in the case of acquisition of agricultural property as a result of an agreement other than a contract of sale, a unilateral legal act, a ruling by a court, administrative body or execution authority, or other legal acts such as prescription, inheritance, bequest, or division, merger or conversion of companies. The agency could exercise this right by submitting a declaration on acquisition of the real estate in favour of the State Treasury for payment of the monetary equivalent provided in the basis for acquisition of the real estate. If the act under which the agency’s right to buy out the property arose did not specify this amount, a valuation would be made under real estate administration regulations. And in cases where the agency found that the value of the property specified in the legal act that was the basis for buy-out of the property was inflated or grossly different from the market value, the agency could apply to the court to establish the value.

According to the plans of the Minister of Agriculture and Rural Development, buy-out rights would also apply to shares of companies owning agricultural property when transfer of the shares occurred under legal acts other than sale. In such cases as well, the agency would have a right to review the companies’ books and records.

According to the proposal, transactions and other legal acts conducted in violation of the regulations limiting free trade in agricultural property would be invalid. This would apply also to instances of failure to inform the agency of conclusion of the transactions or of the agency’s entitlements in this respect.

The rules proposed by the ministry would certainly have an impact on the agricultural property market in Poland. Apart from the ministry and perhaps contrary to the drafters’ intentions, the new rules could also impact transactions by entities seeming to have little direct connection to agriculture but for various reasons owning agricultural property. If the regulations enter into force in the form proposed by the ministry, contracts for sale of shares in industrial companies might carry an additional risk of pre-emption by the State Treasury because even the tiniest amount of land they own is agricultural land. This would greatly raise the importance of accurate legal analysis of the real estate assets of companies being bought and sold.

Under the guidelines presented by the Minister of Agriculture and Rural Development, the new regulations would enter into force on 1 May 2016.

Radosław Wasiak, Energy Law Practice, Wardyński & Partners