Katarzyna Sawa-Rybaczek is a rarity among lawyers in that she uniquely connects banking and finance with transactional real estate work.

With more than two decades of experience in property transactions and property finance transactions, she combines hands-on knowledge gained in extremely varied real estate transactions (examples upon request) with practical business-oriented advice to investors and financing banks alike.

Katarzyna's considerable experience allows her to understand all aspects of even the most complex property finance projects and provide comprehensive advice.

Understanding Perpetual Usufruct

The oxymoronic "perpetual usufruct" is a quasi-ownership right which has its roots in Poland's communist times. It enabled the State to secure the purpose for which land will be used. What is more, land held in perpetual usufruct is owned either by the State Treasury or a local council.

Although, usufruct is necessarily temporary by definition, "perpetual usufruct" lasts a lengthy 99 years and it is renewable. During this period, the so-called "perpetual usufructuary" has the right to use the property, including the possibility of renting or selling, but – as is the case with usufruct – has no ownership right, and seeing as perpetual usufruct is common on the Polish market, this a worry for the real estate market.

A perpetual usufructuary owns the buildings that are erected on the land but the ownership right over the buildings cannot be transferred to a third party without transferring the perpetual usufruct right over the land.

The statutory fee for land in perpetual usufruct is generally 3% of the land value payable annually in a lump sum. The fees are updated and can be increased every three years if the market value of the land increases.

Real Estate Revolution

On 26 May 2023, Poland's parliament passed an Act that entered into force only recently 31 August 2023. It will eventually lead to the abolition of the perpetual usufruct right from the Polish legal system. Previously, a 2018 Act transformed the right of perpetual usufruct of land for housing purposes into ownership by operation of law. This time, new regulations apply to land for purposes other than residential and cover a wider range of properties, including shopping centres, office buildings, service or commercial and service facilities.

Interestingly, according to Poland's Ministry of Development and Technology, there are 505,796 hectares of land in perpetual usufruct and of that, the State Treasury owns approximately 485,000 hectares with local councils owning approximately 61,000 hectares. Moreover, land in perpetual usufruct on which commercial buildings are built or intended for such development accounts for over 50%, and in some cases even 100% of investment land.

Requesting Transformation

According to the new Act, the transformation from the perpetual usufruct into ownership will not take place by operation of law, but only by a request submitted by the investor (the perpetual usufructuary of the land). The right of perpetual usufruct will disappear by the property being sold to its perpetual usufructuary. If the request is submitted within the statutory period, the authority will not have the right to object to the request and will be obliged to conclude a sales contract.

The Act provides that the perpetual usufructuary is entitled, but not obliged, to submit such a request. It is important to note that the 'request for transformation' has been limited in time and maybe submitted only within twelve months from the date of entry into force of the new Act, i.e. until 31 August 2024.

Establishing Price

In terms of how this will all impact the market, the purchase price of real estate is calculated separately for real estate owned by the State Treasury and separately for real estate owned by local government.

With regard to real estate owned by the State Treasury, the price is determined as twenty times (in the case of a one-instalment payment) or twenty five times (for payment in multiple instalments) of the current percentage rate of the annual fee for perpetual usufruct and the value of the land property determined as at the date of conclusion of the sales contract. At the same time, the price can be split into instalments for a maximum of ten years. As a result, depending on the applicable percentage rate of the annual fee (0.3%, 1%, 2%, 3% or higher), the sale price will ultimately be the equivalent of 6%, 20%, 40%, 60% or more of the market value of the land.

With regard to real estate owned by local government, the terms of sale will be determined independently by local bodies. However, if the respective rules are not adopted within four months from the entry into force of the Act, the rules adopted in the Act for real estate owned by the State Treasury will be applied to determine the price of real estate owned by local government.

Exceptions and Exclusions

The Act provides for certain exceptions and excludes from the scope of land that may be subject to a request to conclude a sale agreement, amongst others, undeveloped land; land for which the perpetual usufructuary has not fulfilled the obligation specified in the agreement on granting perpetual usufruct of land property; and land given in perpetual usufruct after 31 December 1997.

Also, certain categories of land have been excluded from the operation of the Act, amongst others, land belonging to the State Treasury entrusted to the National Support Centre for Agriculture, the Military Property Agency, the State Forests, National Parks, Polish Waters, land in ports and marinas.

Remaining Doubts

It must be noted that on the Polish real estate market, the price of the right of perpetual usufruct often does not differ from the amount to be paid for ownership of the land. Therefore, applying these new regulations may result in actually paying twice the amount for the same property, in particular in cases where the investor has acquired the right of perpetual usufruct in recent years. For many investors, the new regulations will simply not pay off and it may be more beneficial to leave the land in perpetual usufruct. Certainly, some companies will benefit from the new rules for the purchase of commercial land, but for many the short time to submit an application (twelve months from entry into force) and the related high price could be an insurmountable barrier.

Taking this into consideration, perpetual usufruct may well remain part of the Polish real estate landscape for many, many more years to come.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.