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Conversion of perpetual usufruct into ownership title for business entities

On 25 July 2023 President Andrzej Duda signed a bill amending the Property Management Act and certain other acts.

The act aims to further eliminate perpetual usufruct from the Polish legal system. This process was initiated in 2018 with the adoption by the Sejm of the Act on the Transformation of the Right of Perpetual Usufruct of Land Developed for Residential Purposes into Ownership of such Land. This current amendment is intended to regulate the enfranchisement also of other developed land held in perpetual usufruct. There are however certain exceptions provided for in the amendment.

Unlike the transformation of perpetual usufruct of residential land, the current amendment does not assume transformation by operation of law, and the procedure will only be initiated at the request of the holder of perpetual usufruct. According to the bill, if the holder of perpetual usufruct qualifies under certain conditions specified in the Act, the land owner will not be able to refuse transformation.

The transformation will occur through the purchase of the property in use. The holder of perpetual usufruct will be able to demand conclusion of a sale agreement only for developed property and only for one year from the moment the amendment takes effect.

The Act will only apply to developed land to which perpetual usufruct was granted at least 10 years before the amendment enters into force (after 31 March 1997). This is a significant change from the original bill, which called for a much longer term of twenty-five years. In order to exercise this right, the holder of perpetual usufruct may not be in breach of obligations under the perpetual usufruct agreement, and the agreement cannot be in the process of being terminated.

Land important for the national economy (i.e. entrusted to the National Agricultural Support Centre, the Military Property Agency, the State Forest Management Authority, the National Parks Authority, the Polish Waterways Management Authority, and harbors and marinas) is excluded, and in this case transformation into ownership title is not possible.

In order to determine the purchase value of land not used for business activity, a solution analogous to the mechanism used for the transformation of perpetual usufruct of residential land has been adopted – the price of the property will be twenty times the current annual perpetual usufruct fee.

The price of property used for business activity will be determined based on annual fee for perpetual usufruct and will be a percentage of the market value of the land according to the applicable annual fee percentage rate, and thus:

  • 6% of the market value of the land where the applicable annual fee percentage rate is 0.3%.
  • 20% where the rate is 1%.
  • 40% where the rate is 2%.
  • 60% where the rate is 3%.

Meanwhile, this it may not exceed the land market value, or be less than twenty times the annual fee.

The purchase price for the land in use can be paid in instalments, and the amendment also provides for additional price discounts. In the case of land used for business activity, sold to its perpetual usufructuary, the unpaid part of the price spread over installments will be subject to interest at the reference rate determined in accordance with the guidelines of the European Commission. Substantial statutory discounts have been granted, for example, to individuals in special personal or social circumstances. The difference between the market value of the land and the agreed price will be accounted for according to the de minimis aid limit, due to European Commission guidelines which state that the disposal of public property at a price lower than the market price triggers the application of state aid rules“.

Consequently, the aid will be granted up to the limit, and the remaining difference between the market value and the agreed price will be covered by the buyer in a form that can be divided into instalments of the surcharge.

Assessment of the proposal

The amendment does not state any economic rationale for purchasing real estate held in perpetual usufruct. Few business entities will decide to pay a cost in a single payment that would otherwise be spread over a period of at least twenty years. The prospective gain in the form of not being required to continue paying the annual fee is not an adequate incentive. Most business entities do not plan real estate projects with an envisaged period of return of more than 20-30 years. Bearing in mind that the current market price of real estate held in perpetual usufruct does not differ significantly from the price of real estate to which full ownership title is held, land purchase of this type, even if payment is in instalments (which is possible under the proposal), would be profitable only for projects for a longer term.

With regard to leased real estate, taking into account the market catalog of the elements of the property administration fee, it is at best doubtful whether the cost of buying the property can be passed on to the tenant. On the other hand, it is normal practice for tenants to be charged the annual fee for perpetual usufruct. A potential dispute with tenants or the need to depart from the triple net lease rule also do not provide any incentive to make use of the new legislation.

The amendment does not address the issue of outlays incurred by perpetual usufructuaries on real estate. As outlays increase the value of the land, the perpetual usufructuary will be required to incur these costs twice – first by making the improvements, and secondly when they pay the transformation price based on the increased property value. The market would expect this to be resolved by setting off the value of the outlays incurred by the perpetual usufructuary against the real estate value, and this has been the practice to date. The value of buildings erected by a perpetual usufructuary usually exceeds the value of the land itself.

Under the amendment, the sale price of the land will be calculated based on the current rate of the annual fee. Local government authorities and the State Treasury are expected to revise the existing rates of the perpetual usufruct annual fee before the Act enters into force, to maximize the income from transformation.

To conclude, the commitment to continue eliminating perpetual usufruct from the Polish legal system is commendable, but it is doubtful whether the system proposed in the amendment will be popular among business entities. 

It is worth noting that the simultaneously amendment to the Act on tax on civil law transactions has also been adopted. The PCC, when purchasing at least 6 apartments in one investment, has been raised to 6%. This will potentially have a negative impact on the profitability of investments in the PRS sector. At the same time 2% PCC tax for people buying their first apartment on the secondary market has been abolished.

Most of the changes will come into force within 30 days of their announcement.