Change of the purpose of perpetual usufruct: Is it necessary to conclude an agreement and pay compensation?
Local governments and authorities representing the State Treasury accuse developers of planning projects or making other changes in the current manner of use of real estate inconsistent with the purpose for which perpetual usufruct was established. Then they offer the perpetual usufructuary an agreement changing the use of the property in exchange for compensation. Is there any justification for such actions?
We had the opportunity to take part in a meeting of the Polish Real Estate Developers Association (PZFD) where developers from all over Poland described their struggles with local authorities over projects involving land held in perpetual usufruct. The problem primarily concerns the perpetual usufruct acquired by state or municipal legal persons through so-called enfranchisement.
Acquisition of perpetual usufruct through enfranchisement
Pursuant to Art. 2(1) of the Act of 29 September 1990 Amending the Land Management and Expropriation Act, land owned by the State Treasury or a municipality (or union of municipalities) became the subject of perpetual usufruct by operation of law, with the exclusion of land in the State Land Fund at the date of entry into force of the act under management of state legal persons other than the State Treasury or municipal legal persons. Acquisition of the right of perpetual usufruct of land and ownership of buildings, other fixtures and premises was confirmed by a decision of the province governor in the case of real estate owned by the State Treasury, or a decision by the management of the municipality in the case of real estate owned by the municipality. These decisions are popularly known as “enfranchisement” decisions.
Under Art. 2(3) of the act referred to above, in the wording in force until 24 December 1992, the perpetual usufruct period was set in the enfranchisement decision, observing the rules provided for in Art. 236 of the Civil Code. From 24 December 1992, such decisions also specified other terms of perpetual usufruct. One of the terms and conditions of perpetual usufruct is the purpose for which the real estate was delivered in perpetual usufruct. In most enfranchisement decisions, this purpose is defined as “using the land according to its designation.” This wording did not raise any doubts for a number of years.
Change of purpose of perpetual usufruct
Now, most of the real estate that was the subject of enfranchisement is held in perpetual usufruct by entities other than the originally enfranchised governmental units, and is used differently than at the date of enfranchisement. A significant part of the land previously used for industrial, services or office purposes is being used, or is planned to be used, for housing purposes. Such permanent change in the manner of use leads to a change in the annual fee for perpetual usufruct, from the previous 3% of the land price to 1%.
The State Treasury and territorial government units, mainly in Warsaw and Kraków, have attempted to obtain compensation for the reduction in annual fees for perpetual usufruct. Similar actions have recently been undertaken by the City of Wrocław.
The basis for initiating such actions is to demonstrate that there has been a change in the purpose for which the land was delivered in perpetual usufruct. Thus there are interpretations holding that the obligation to “use the land in accordance with its designation” should be understood as the obligation to use the enfranchised land in a manner consistent with the zoning plan in force when the enfranchisement decision became final.
If this view were justified, nothing would prevent the use from being fixed by reference to the provisions of the relevant plan. Since this was not the case, such wording should be understood instead as a commitment to use the land in accordance with the purpose determined pursuant to generally applicable regulations, during the period when the decision remains in force.
We also encounter the view that the amount of the annual fee for perpetual usufruct set in the enfranchisement decision reveals the purpose of the perpetual usufruct. Under this view, if the rate stated is 3% of the price, that means the land is designated for purposes for which the applicable provisions stipulate a rate of 3%.
But this is an unwarranted interpretation. The purpose of perpetual usufruct is not determined by the amount of the rate. The amount of the annual fee depends on the way the land and buildings are used, and the rate of the annual fee set in the enfranchisement decision corresponds to the factual and legal status of the land on the date of issuance of the enfranchisement decision.
The city as an owner, not as a public administrative body
The Supreme Administrative Court has invalidated orders issued by the mayors of Warsaw and Kraków on the rules for amending perpetual usufruct agreements involving the manner of use and development of real estate delivered in perpetual usufruct, which provided that a change in use could be made only upon payment of compensation by the perpetual usufructuary in an amount set out in the orders. There is also a case pending before the Supreme Administrative Court seeking to set aside a resolution of the city council regarding municipal property.
The Supreme Administrative Court pointed out that a perpetual usufruct agreement is a civil agreement. The conditions under which the terms of such an agreement may be amended, including changes in the manner of use and development of real estate delivered in perpetual usufruct, may only be determined by agreement of the parties, based on the principles of freedom of contract. According to the court, this rule also applies to the determination of possible compensation to be paid to the City of Warsaw, as the owner of the real estate, for allowing the perpetual usufructuary to amend the perpetual usufruct agreement by changing the manner of use of the property. In such matters, the city acts only as the owner of the real estate delivered in perpetual usufruct, and not as a public administrative body granted certain powers to exercise administrative authority.
The Supreme Administrative Court did not consider the possibility of changing the purpose of perpetual usufruct as such, but only the city’s authority to issue an order regulating such a change of purpose. The Mayor of Warsaw has issued guidelines to the heads of the Warsaw districts on how to handle applications by perpetual usufructuaries to change the manner of use of their properties. In general, these guidelines are identical to those provided in the invalidated order, but are only informative and provide no legal basis for demanding the conclusion of an agreement on a change of use. Therefore, the invalidation of the orders does not change the legal situation of developers.
Inequality under the law
We do not dispute the possibility of changing the purpose of use of land delivered in perpetual usufruct by agreement, in the case of perpetual usufruct arising out of an agreement. But objections must be raised to demands by the city when perpetual usufruct was established by operation of law and the administrative decision only declaratively confirmed this and did not impose specific conditions regarding the purpose of perpetual usufruct. As indicated above, the current perpetual usufructuary is entitled to use the land in a manner consistent with applicable regulations and administrative decisions. The owner—that is, the public administrative body—cannot imperatively require conclusion of an agreement or issue a decision amending the enfranchisement decision to redefine the specific use of the real estate.
Regardless of the legal grounds, local governments are exploiting their statutory powers in administrative matters related to the issuance of building permits and geodetic divisions, and in civil matters regarding the merger and partition of property delivered in perpetual usufruct, to force developers to conclude “voluntary” agreements and pay compensation for changing the land use in cases where no such change occurs.
Although it is legally possible to refuse to conclude an agreement proposed by the administrative authorities, and combat the consequences by relying on the existing legal regulations, developers in fact sign such agreements rather than risk long court proceedings when they already have construction contracts and financing in place for these projects.
The compensation demanded varies from city to city. In Warsaw, it is no less than 12.5% of the land value and in Kraków no less than 25%, while in Wrocław developers are anxiously awaiting the amount to be determined. It is hard to reconcile this situation with the constitutional principle of equality under the law, under which everyone has the right to equal treatment by public authorities and no one can be discriminated against in commerce for any reason. For now, a developer of a housing project in Gdańsk is in a better position than one in Warsaw or Kraków. Under the rule of law, this situation is difficult to accept.
Iwona Kasperek, Sylwia Moreu-Żak, legal adviser, Real Estate, Reprivatisation & Private Clients practice, Wardyński & Partners
