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The Warsaw Voice » Law » December 21, 2011
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Converting Perpetual Usufruct Into Full Ownership
December 21, 2011   
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A large proportion of the land in Poland belongs to the State Treasury or to local government units, which can grant the right of perpetual usufruct (“RPU”) to their lands against a fee.

An RPU holder enjoys almost all the rights of full ownership (“FO”), as he can transfer, sell, encumber and even receive a mortgage on his RPU.

However, one of the main differences between RPU and FO is that the transfer of the RPU only becomes effective once it has been entered in the land and mortgage register, whereas a deed of sale executed before a notary is sufficient in order to transfer full ownership.

Therefore, if the RPU has not been registered, the property cannot be sold, or it can be difficult to obtain financing or certain authorizations.

In addition, even though RPUs are common in investment transactions, the fact that a RPU has a limited duration (from 40 to 99 years) may sometimes be questioned by investors or financing entities.

For these reasons, RPU holders are increasingly interested in converting their RPU into genuine FO.

Former restrictive regime
The legal regime of converting RPUs into FO was introduced to Polish law in the Act on the Conversion of the Right of Perpetual Usufruct into Property Ownership Rights, dated July 29, 2005, which entered into force on Oct. 13, 2005 (the “Act”).

Under this Act, only individuals and a few “legal entities” (or the legal successors of such individuals or legal entities) were entitled to request the conversion of their RPUs, and only where land for residential or agricultural purposes was concerned.

Recent extension of the scheme
An amendment to the Act, dated July 28, 2011 (which entered into force on Oct. 9, 2011), has extended the conversion regime to any legal entities, and no longer restricts the scheme to residential and agricultural land.

In addition, the amended Act does not provide for any time limitation for submitting a transformation application (previously, entities had to submit demands by Dec. 31, 2012).

Procedure
According to the code of administrative procedure, decisions on transforming RPU into FO are issued by:
- county administrators in the case of real estate owned by the State Treasury; and
- district administrators, mayors, city presidents, county boards or province boards (as appropriate) in the case of real estate owned by local government units.

RPUs are transformed into FO on the date on which the decision becomes final. The decision constitutes the basis for entering the relevant information in the land and mortgage register.

The cost of the transformation
The transformation takes place against payment of a fee, fixed in the decision on conversion.

The fee is calculated taking into account the generally binding rules for calculating the price when real estate held by the State Treasury or a local government unit is sold without a tender. The fee corresponds to the real value of the real estate, and the value of the RPU is accounted towards this fee. The price results from valuations by a real estate surveyor.

It is possible to request to pay the fee in installments. In this case a mandatory mortgage is secured over the real estate. In certain cases (mostly where individuals are concerned) the perpetual usufructaries can also request a reduction in the fee.

Conversion as a condition precedent to sale?
Anyone intending to purchase land held under a RPU may wish to make the acquisition conditional on the effective conversion of this RPU to FO.

As a matter of law, there are no restrictions in this respect: the parties to a preliminary sale agreement can provide for a condition subsequent to concluding the final sale agreement consisting in the seller (the perpetual usufructary of the land) transforming its usufruct right into FO.

Accordingly, the subsequent condition would, among other things, oblige the seller (i) to obtain a final decision on transforming its RPU and (ii) to reveal its newly granted FO in the land and mortgage register.

Hugues Moreau, advocate and partner Gide Loyrette Nouel law firm

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