Recent changes to the right of perpetual usufruct came with the amendment to the rules for converting the right of perpetual usufruct into the right of ownership and annual fees updates, adopted by the Polish Parliament on 28 July 2011. The amendment entered into force on 9 October 2011.

Background

The right of perpetual usufruct was introduced to the Polish legal system in 1961 as a limited property right enabling the right holder to use state real estate with the aim of developing it. Along with the entering into force of the Civil Code (1964), the right of perpetual usufruct took finally the form of a concept between ownership and limited property rights. Currently, the right of perpetual usufruct means giving real estate (usually located in a city and owned by the state treasury or a territorial self-government unit) for use by a natural or legal person for a period of 40 to 99 years. This period may be extended. The purchaser undertakes to pay fees to the real estate owner and to use it in a strictly defined manner; for example, he is obliged to develop the real estate. The rights of the perpetual usufructuary are similar to those of the owner (eg, the perpetual usufructuary may, without the consent of the real estate owner, sell his right to a third party).

Fees

Fees for establishing perpetual usufruct are based on the price of the real estate, meaning its value (usually based on a real estate appraisal) and a percentage rate depending on the contractual purpose for which it is given. The fee is composed of the following:

  • first fee – from 15% to 25% of the real estate price (may be split into instalments); and
  • annual fees (excluding the year when the right of per petual usufruct was established) – depending on the purpose determined in the agreement, from 0.3% to 3% of the real estate price, eg, for residential purposes, the annual fee is 1% of the real estate price.

Changes to rules re first fee

The real estate owner may give discounts on both of the above rates. Before the amendment, discounts could have been given only for purposes detailed in the act on real estate management, for example, when the real estate was given for a residential, sacral, or charitable purpose. A change of perpetual usufructuary (eg, assigning that right to another entity) or not using the real estate for the purpose determined in the agreement resulted in the obligation to terminate the discount by the owner. Moreover, when the real estate was registered as an historic monument, the perpetual usufructuary was entitled to a mandatory discount of at least 50% of the perpetual usufruct fees.

The amendment has abolished statutory limitations for granting discounts by the real estate owner. They no longer apply only to certain statutory purposes for which the real estate is given for perpetual usufruct. The specific conditions for granting a discount by the real estate owner and the discount amount will be determined by executive authorities – in regulations of the provincial governor or resolutions of territorial self-government bodies.

The above, depending on the practice of administration bodies, may significantly extend the scope of discounts.

Changes to rules re annual fees

Prior to the amendment, the real estate owner also had a right, no more than once a year, to raise the annual fee if the real estate value increased. A perpetual usufructuary is also entitled to apply for an annual fee update for changes to the value of the real estate, such as if the value falls due to changes on the real estate market.

The amendment imposes limitations on the real estate owner on the frequency of paying and manner of calculating annual fee updates. After the amendment entered into force, updates may be made only once every three years. If the updated fee exceeds twice the amount of the current annual fee, the perpetual usufructuary need pay no more than twice the current annual fee; the remaining part of updated fee is divided into instalments, increasing the annual fee for the next two years.

The change is of significant practical importance as it provides a clear picture of possible maximum increases of costs related to annual fees. In practice, an update of annual fees is conducted very irregularly, despite a quick and steady increase in the value of real estate. So, it often resulted in a high, single update, even up to 1000%.

Changes to rules of conversion

The right of perpetual usufruct may be converted into a right of ownership. Perpetual usufructuaries are entitled to request such conversion only in certain cases provided in the statute. The request may be made only by natural persons who are perpetual usufructuaries of real estate developed for residential purposes, with garages or agricultural lands, as well as by occupants of real estate received in exchange for real estate misappropriated or taken over prior to the political changes in 1990. Prior to the amendment, in the event of perpetual co-usufruct (eg, a multi-family building erected on one piece of real estate), such request could be made after obtaining the consent from all right holders. In practice it proved difficult as, especially in cases of large multi-family building, there may be several dozen perpetual usufruct co-holders.

The amendment decreased the ratio of shares required to make a decision on conversion. An absolute majority of right holders now suffices. If at least one right holder objects, the court decides.

The change is significant as the decreased ratio will encourage right holders to initiate the conversion. This may expedite the process of converting perpetual usufructs to ownership.

This article was originally published in the schoenherr roadmap`12 - if you would like to receive a complimentary copy of this publication, please visit: pr.schoenherr.eu/roadmap.

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