RPUs face an uncertain future

Recent and proposed changes to Polish law indicate that the right of perpetual usufruct might be coming to an end. Even if there is a trend in that direction, rumours of the death of the RPU seem to be premature.

The right of perpetual usufruct (‘RPU’) over real property in the form of land was introduced into the Polish legal system by virtue of the Polish Land Management Act of 14 July 1961[1] and shortly thereafter incorporated into the new Polish Civil Code of 23 April 1964[2].

The RPU is the broadest real property right after the right of ownership. It has the following distinctive features: (i) it can only be established over real property owned by the State Treasury or by a local municipality, (ii) it is a right established for a defined purpose, namely development of the real property, (iii) it is established for a defined term – in principle 99 years, (iv) the holder of the RPU has to pay annual fees to the owner (generally up to 3% of the value of the land; the value of developed buildings is not taken into account), (v) the holder of the RPU is registered in the land and mortgage register, and (vi) the holder of the RPU can sell the RPU and/or encumber it (e.g., a mortgage can be established over the RPU). Generally, RPUs are established by way of agreements concluded between the owners (public entities) of real property and RPU holders (perpetual usufructuaries). Such agreements should impose an obligation on perpetual usufructuaries to develop a given property by a specified deadline (e.g., with a residential building). Failure to fulfil the development obligation may lead to termination of the agreement and the expiry of the RPU.

RPUs have been part of the Polish legal system for over 60 years but are becoming less and less common. In December 2022, the Polish Government announced its intention of implementing a legal solution that could trigger another RPU expiry wave. Furthermore, recent Polish Supreme Court decisions might cause the RPU to become unattractive to institutional investors.

Step-by-step transformation into ownership

Under the Polish Property Management Act[3], a property held under a right of perpetual usufruct can only be sold to the holder of that right. However, under the Polish Property Management Act such holder (the perpetual usufructuary), has no instruments at its disposal to compel a property owner (a public entity) to sell a property to it (sale is at the owner’s discretion).

The first act on transforming RPUs into ownership rights[4] came into force in 1997. Currently, natural persons who are vested with RPUs may request their transformation under the act of 29 July 2005[5], which replaced the original 1997 act. However, the right to commence a transformation process was granted solely to natural persons[6] and additional formal requirements have to be met (in the case of owners of apartments located in buildings, a transformation motion has to be filed by a group of owners holding at least a 50% share in the relevant RPU). This transformation process does not apply to commercial properties, so institutional perpetual usufructuaries (e.g., companies holding office buildings, shopping galleries or other real estate projects) could not benefit from it (and even the use of the transformation option by natural persons has not been particularly popular – in the case of large residential buildings, it has proved difficult to obtain the required number of owners).

The most significant change made to date occurred in 2018 when the new transformation act was adopted[7]. It did not replace the act of 29 July 2005 (which still remains in force and allows for transformation at the request of natural persons) but provided for the automatic transformation of RPUs into ownership rights by operation of law (with such transformation effective as of 1 January 2019). This transformation process was limited to properties which were developed with residential buildings. Furthermore, the act adopted in 2018 stipulates that upon obtaining an occupancy permit for a new building erected after 1 January 2019, an RPU is automatically transformed into an ownership right. Therefore, in the case of residential projects, the RPU will no longer matter (generally, it is no longer possible to establish an RPU for development of residential projects).

At the end of 2022, the government announced that they are considering introducing a one-off time window during which RPUs might cease in the case of commercial properties (e.g., office buildings, shopping galleries, warehouses, etc.) as well. According to the published draft of the act[8], within 12 months of the act’s entry into force, any perpetual usufructuary (i.e., both natural persons as well as legal entities, e.g., companies) will be able to file a motion for the purchase of a property held under an RPU (upon purchase, the RPU will expire and the perpetual usufructuary will become the owner of the property). In view of the above, the change currently being proposed will not result in the automatic transformation or expiry of an RPU (the perpetual usufructuary has to file a motion and a sale agreement has to be concluded with the owner). Furthermore, the usufructuary will not be able to request a purchase if fewer than 25 years have elapsed since the establishment of the RPU and/or if the land (which is held under the RPU) has not been developed yet.

However, the legislation process is at a very early stage, and that the final wording of the act will differ significantly from the current draft is something that cannot be ruled out.

In practice, it might be doubtful whether the perpetual usufructuaries will use the new mechanism and file for a purchase within the one-off 12-month time window. Commercial lease agreements usually regard annual RPU fees as costs related to common areas which are reimbursed to the landlord by the tenants (as part of the service charges paid by them). On the other hand, the price for purchasing the property (and bringing the RPU to an end) could fall outside the scope of the definition of common costs and would therefore be non-refundable for the landlord (the price would be regarded as investment expenditure). Therefore, institutional investors holding real estate projects might not be interested in purchasing properties and making RPUs expire (however, pursuant to the draft act, discounts on the price might be adopted).

Unhelpful Supreme Court rulings

Other difficulties for perpetual usufructuaries (making RPUs less attractive for institutional investors) stem from Supreme Court resolutions and rulings.

In 2015, the Supreme Court adopted a resolution stating that “a perpetual usufructuary may not divide land which is the subject of perpetual usufruct”[9]. In the resolution, the Supreme Court indicated that only the owner of the property (i.e., the public entity) can decide about property divisions resulting in moving plots of land from one land and mortgage register to another one. In view of this resolution, it might be argued that a partial sale of plots which are covered by an RPU (i.e., selling only some plots from one land and mortgage register) might be invalid.

On the basis of the 2015 ruling, the Supreme Court has adopted and issued other resolutions and rulings which tend in a similar direction.

The rulings have not been well received by legal practitioners as their justification is questionable and they limit the rights of perpetual usufructuaries as well as create additional legal problems. In particular, a perpetual usufructuary loses the right to divide the real estate project and sell only one part of it (unless the usufructuary obtains the consent of the owner to such transaction).

An uncertain future

In the light of the above, it seems that the institution of perpetual usufruct (RPU) is slowly approaching its end. However, given that the transformation of RPUs into full ownership rights will take many years, the end of the RPU is by no means certain. A possibility that also cannot be ruled out is that future trends on the real estate market and/or the financial needs of local municipalities will impart a new lease of life to the RPU. 

[1] Act dated 14 July 1961 on management of land in cities and housing estates (unified text, Journal of Law dated 1969, No. 22, item 159, as amended).

[2] Act dated 23 April 1964 – the Civil Code (unified text, Journal of Law dated 2022, item 1360, as amended).

[3] Act dated 21 August 1997 on property management (unified text, Journal of Law dated 2021 item 1899, as amended).

[4] Act dated 4 September 1997 on the transformation of the right of perpetual usufruct vested in natural persons into ownership right (unified text, Journal of Law dated 2001 No. 120 item 1299, as amended).

[5] Act dated 29 July 2005 on the transformation of the right of perpetual usufruct into ownership right (unified text, Journal of Law dated 2019 item 1314 as amended).

[6] Legal entities owning apartments in residential buildings (i.e., entities holding shares in the RPU to the land on which the building is constructed) could also benefit from those legal provisions.

[7] Act dated 20 July 2018 on the transformation of the right of perpetual usufruct to developed residential properties into ownership right (unified text, Journal of Law dated 2022 item 1495, as amended).

[8] Draft dated 24 January 2023, published at rcl.gov.pl

[9] Resolution of the Supreme Courte dated 13 March 2015 (file No. III CZP 116/14).