As the private rental sector grows in Poland, more investors, both private and institutional, are interested in participating in this section of the real estate market. Before the slowdown hit the residential market, PRS buildings were mostly located in “service” areas, and therefore could function as hotels, hostelsetc. In the current business climate, developers are sometimes looking to substitute pure residential project with PRS projects located on plots designated as “residential”. Such projects become more attractive to institutional investors, but so far their implementation has been less profitable than the implementation of purely residential projects.
However, as PRS becomes a hot topic in the media, we have recently observed an alarming practice on the part of building supervision authorities, which have begun challenging the use of multi-family residential buildings for rental purposes. The authorities seem to believe that organized “renting” may be conducted in service-type buildings (such as boarding houses) but not in those designated for residential purposes.
In one case on which we advised, the building supervision authority issued a decision suspending use of a multi-family residential building located in Warsaw’s city center. The authority stated that the building contained apartments designated for rental purposes, all owned by one entity, and therefore it could not be classified as a multi-family residential building. As a consequence, the authority found that the use of the facility had changed to a collective residence building (a category reserved for hotels and the like).
The authority issued this decision even though all of the apartments located in the building (excluding several service units located on the ground floor of the building):
- are designated for residential purposes and meet housing needs, and thus each of them has its own kitchen, bathroom, installations and can be accessed via a separate entrance from the staircase, and
- constitute residential units within the meaning of the Act on Ownership of Units (Polish: Ustawa o własności lokali) and the regulation of the Minister of Infrastructure on Technical Requirements applicable to Buildings and to their Location (Polish: rozporządzenie Ministra Infrastruktury w sprawie warunków technicznych, jakim powinny odpowiadać budynki i ich usytuowanie).
In addition, all apartments located in the building were separate and a separate land and mortgage register was maintained for each.
When suspending the use of a building, authorities are obliged to set a deadline for the owner to present documentation necessary to legalize the “new” type of use, and the owner may not use the facility during that time, until the proceedings are concluded in whatever way. Violation of this rule may result in administrative fines or even criminal penalties. The suspension of use may be challenged later, once the deadline set by the authorities to resolve the situation has expired.
We perceive this practice of authorities as doubtful, especially when apartments designated for rent meet housing needs. In our opinion this is a key factor in differentiating between “service” and “residential” types of buildings designated for housing. Nevertheless, due to the severe consequences of suspension by the authorities of use of buildings, we recommend observing the market to determine whether this practice becomes commonplace (currently we have only observed it in Warsaw).
This practice may also have implications for other procedures. In the case on which we advised, the city authorities refused to issue the client a certificate stating that perpetual usufruct right to a residential property had been transformed into ownership title by law. The city authorities supported their decision claiming that there had been a “change of use” of the building, from residential to a different, service-type use, and also took steps to change the perpetual usufruct fee from 1 % (residential) to 3% (other).
We successfully challenged the decision before the Voivodship Administrative Court in Warsaw, which ordered the city authorities to issue a certificate stating that perpetual usufruct right had been transformed into ownership title. Nevertheless, this case demonstrates that the authorities can use suspension of the use of a building in an instrumental fashion to achieve other financial goals.