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The Warsaw Voice » Law » March 4, 2009
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Drastic Fee Increases for Perpetual Usufructuaries
March 4, 2009   
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Foreigners entering the Polish property market are frequently perplexed by the medieval sounding term "perpetual usufruct" (użytkowanie wieczyste) which crops up time and again when real property purchase options are being considered.

In fact, usufruct is a concept originating in Roman law, designating a personal servitude, or a real right. Black's Law Dictionary defines it as "a right to use and enjoy the fruits of another's property for a period without damaging or diminishing it." Generally, in modern civil law, a usufructuary is akin to a life tenant, while the property or thing burdened by a usufruct belongs to a so-called naked (or imperfect) owner. But while the concept of usufruct exists in Polish law, its further qualification-viz. perpetual usufruct-seems to be a country-specific idiosyncrasy, and it prompts the question: perpetual for whom?

Because a perpetual usufruct right is typically given for 99 years (it cannot be less than 40 or more than 99 years), it is frequently confused with a straightforward 99-year lease. While the outward similarities are undeniable, there is a fundamental difference which foreign property market operators in Poland must take heed of. And it is one that has come very much to the fore in the past year. Whereas a 99-year lease mortgage affords the leaseholder a degree of financial predictability (pace interest rate fluctuations), a perpetual usufructuary must pay annual fees which may be adjusted in line with fluctuations in the value of their property.

Towards the end of last year, a significant number of perpetual usufructuaries received their fee adjustment notices which for many came as something of a shock. It is estimated that in Warsaw alone, about 3,000 such notices had been served, and in some other places, usufruct fees were quadrupled after adjustment. This issue is of particular concern to multi-million foreign investor projects in ventures such as shopping centers, hotels, luxury apartments, and office buildings.

So the question is: do perpetual usufructuaries have any instruments enabling them to effectively oppose such drastic increases? There are two basic reasons for such increases. One is that Polish property prices have been rocketing especially after the country's accession to the EU, and only recently have naked owners woken up to the fact that their previous fee increases were incommensurate with the values of their properties. If the value of a property is reassessed fairly, the usufruct fee is a lot more difficult to challenge.

Controversies surround the second reason for fee increases; perpetual usufructuaries may do almost anything on their properties, and when their values rise due to any infrastructure improvements they make, the question of compensation for these improvements comes into play. After all, a perpetual usufructuary must weigh up the pros and cons of upgrading their properties: will the rewards for such upgrades, in terms of say the rents they may charge on the buildings/premises they hold, outweigh the increased usufruct fees that will surely come in train of such upgrades.

A perpetual usufructuary has the right to demand deductions for outlays made on technical infrastructure installations or on items that are essential to the technical/occupancy features of the land. The condition for accounting for the latter category of outlay is that the land must appreciate in value as a result. But the regulations on these deductions are imprecise and give rise to divergent interpretations: some argue that they should be accounted for in the course of the adjustment process, others that that should be done after the fee adjustment is set. There are known cases of naked owners refusing to take outlays into account either in the course of the adjustment process or upon its completion. And there have been instances of post-adjustment fees climbing upwards due to increases in property values after their perpetual usufructuaries' infrastructure investments, with naked owners claiming that such outlays could not be taken into account after adjustment.

When a perpetual usufructuary receives notice on the fee adjustment, he may lodge an appeal questioning its basis with his "local appellate college," within 30 days. The party dissatisfied with the local appellate college's ruling has 14 days in which to lodge an appeal which will automatically trigger the referral of the case to a common court. These appeal deadlines are non-negotiable and if missed, the perpetual usufructuary has to accept the adjustment imposed by the naked owner or the rate set by the local appellate college, for at least a year.

In the adjustment process, the new rate is calculated, in the way prescribed by the Real Property Management Act, as a percentage of the land's value which is determined by a valuer. Essentially, such fee adjustment disputes center on the basis for the increase rather than the value of the increase itself. Undoubtedly, the greater the knowledge of the parties regarding the complicated valuation methods, the greater the chance of pushing one's arguments through.

Given the prevalence of perpetual usufructs in Poland, the imprecise regulations concerning the way improvements to real property held in perpetual usufruct may be fairly accounted for, are becoming a matter of legislative urgency. Both parties to a usufruct contract-the owner of the land and the usufructuary on it-have a right to expect clear-cut rules, and it is in the gift of the legislators to serve the cause of common justice.

Sylwester Kret
Jelena Szpak
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