Converting perpetual usufruct into ownership: Unconstitutional giveaway from local governments to private businesses | In Principle

Poland’s Constitutional Tribunal has held that regulations giving economic entities the right to demand conversion of perpetual usufruct of land into ownership violate constitutional principles of social justice and local government autonomy.

In its judgment of 10 March 2015 in Case K 29/13, the Constitutional Tribunal held that Art. 1 (1) and (3) of the Act on Conversion of Perpetual Usufruct into Ownership of 23 November 2005 is inconsistent with the Polish Constitution insofar as it awards the right to convert perpetual usufruct into ownership to persons who did not have that possibility as of the effective date of the Act of 28 July 2011 Amending the Real Estate Administration Act and Certain Other Acts.

The judgment was issued in joined cases initiated by petitions filed by the Poznań City Council, the Szczecin City Council and the Ustronie Morskie Commune Council. The Prosecutor General supported the petitioners, while the Sejm sought a ruling upholding the constitutionality of the provisions in question.

Background of Case K 29/13

Under the 2005 act, until the amending act went into force, conversion of perpetual usufruct to ownership could be sought only by:

• Natural persons (and their legal successors) who were perpetual usufructuaries of land developed for residential purposes or with a garage, or designated for such construction
• Natural persons (and their legal successors) who were owners of units with a share in joint property covered by the right of perpetual usufruct
• Natural persons (and their legal successors) who were perpetual usufructuaries of agricultural land
• Natural persons (and their legal successors) who obtained the right of perpetual usufruct as compensation for expropriation or seizure of land or pursuant to Art. 7 of the Warsaw Decree of 1945
• Residential cooperatives (and their legal successors) who were owners of residential buildings or garages.

In other words, until the 2011 amendment went into force, the entitlements under the 2005 act were reserved for individuals and residential cooperatives, and specific to land used for residential or agricultural purposes or garages. The amending act substantially expanded the group of entities entitled to seek conversion of perpetual usufruct into ownership, to include legal persons, and eliminated the requirement that the land be used for these specific purposes.

Under Art. 1 of the act, conversion is essentially mandatory if the conditions are met, and most applicants are also entitled to seek conversion under preferential terms pursuant to Art. 69 of the Real Estate Administration Act of 21 August 1997.

The amending act established a cut-off date of 13 October 2005, allowing certain perpetual usufructuaries to seek conversion of their title to ownership only if they were holders of perpetual usufruct as of that date. However, the use of this cut-off date was not reviewed by the Constitutional Tribunal in Case K 29/13.

Scope of constitutional challenge

The petitioners alleged that Art. 1 (1) and (3) of the act, as amended, violated the principles of social justice (Constitution Art. 2), the autonomy of local governmental units (Constitution Art. 165), and the financial independence of local governmental units (Constitution Art. 167).

The communes argued that the main beneficiaries of the changes were economic entities not pursuing residential or agricultural purposes, which could acquire perpetual usufruct only to turn around and convert this right into ownership, at a significant profit—at the expense of the local government, which would also lose a substantial future income stream from perpetual usufruct fees. They claimed that this violated the property rights of the communes, harmed their financial condition, and endangered their long-term financial and development plans.

An example raised at the hearing was an attractive seaside plot of 44 hectares which was owned by the Commune of Ustronie Morskie. The land had a market value of PLN 18 million, but the perpetual usufructuary—a commercial entity—sought to convert usufruct to ownership at a price of only PLN 6 million, to be paid in instalments over 20 years.

The petitioners also pointed out that allowing businesses to convert perpetual usufruct to ownership raised issues of impermissible state aid which were problematic to the European Commission. Indeed, at the request of one of the petitioners, the Poznań City Council, Poland’s competition authority, the Office of Competition and Consumer Protection, had filed a notification of state aid with the European Commission.

Ruling by Constitutional Tribunal

The Constitutional Tribunal held that Art. 1 (1) and (3) violated the principle of social justice under Art. 2 of the Constitution insofar as the amending act awarded the right to convert perpetual usufruct into ownership to persons who did not have that right prior to entry into force of the amending act. With respect to conversion of title to land owned by local governmental units, the tribunal also held that the amending act violated the principle of the autonomy of local governmental units under Art. 165 of the Constitution.

As the reporting justice pointed out from the bench, the ruling was consistent with the line of precedent from the tribunal concerning perpetual usufruct—a right which may be freely shaped or even entirely eliminated so long as the regulations doing so are consistent with the Constitution. However, the tribunal objected to vesting entitlements in arbitrarily selected groups of entities without any constitutional justification, and this is what the amendments in question had done.

The amending act could vest title in entities who acquired the right of perpetual usufruct not during the period when land was uniformly owned by the state and private ownership was practically impossible, but, instead, the tribunal reasoned, it could vest title in those who became perpetual usufructuaries after the system changed, at a time when they had a choice as the type of rights they could acquire: outright ownership, or perpetual usufruct, which was less expensive than ownership but more restricted.

By choosing to acquire the right of perpetual usufruct, these entities decided on a concrete range of rights and obligations with respect to the property, and this range could not be expanded under preferential terms through conversion after meeting the conditions set forth in Art. 1 of the act. In consequence, the tribunal found, vesting ownership in these entities is inconsistent with the constitutional principle of social justice. In every other instance of conversion to ownership under Art. 1 of the act prior to the amendment, the tribunal found that there was a connection between vesting title in a specific category of perpetual usufructuaries (holding land for residential or agricultural use or for garages) and constitutionally recognised values. But expanding this group to include commercial entities was, in the tribunal’s view, arbitrary and not tied to any constitutionally protected values.

The most tangible consequence demonstrating the violation of the principle of social justice, according to the tribunal, was the enrichment of private commercial entities at the expense of public entities (local government or the State Treasury), which in practice would occur as a result of conversion of title under preferential terms.

The reporting judge also pointed out that it was particularly striking that the Parliament had expanded the group of entities allowed to convert perpetual usufruct into ownership under preferential terms when the Parliament so often complains before the tribunal about the excessively high cost of a reprivatisation act in the broader range of reprivatisation cases. On one hand, the Parliament claims that the cost of redressing expropriations from the post-war era which were clearly unlawful is exorbitant, while on the other hand it generously permitted conversion of title at a fraction of the value, thus depriving the State Treasury and local government of an ongoing source of revenue.

The finding of violation of the principle of social justice applies to conversion of title to land currently owned either by the State Treasury or local governmental units. Because the petitioners also relied on Art. 165 of the Constitution, the tribunal also found a violation of the principle of the autonomy of local governmental units, but consequently found that the claim of violation of Art. 167 was moot and did not rule on that claim.

Practical significance of judgment

This judgment by the Constitutional Tribunal concerns the constitutionality of only one set of provisions within a more extensive act.

The key to the ruling here was the significant expansion of the set of entities entitled to seek conversion of perpetual usufruct into ownership to include the whole range of legal and natural persons regardless of the use and designation of the land held in perpetual usufruct. This permitted commercial entities generally to obtain ownership of land under preferential conditions.

The cases involved not only legal persons, but also individuals operating their own businesses. But it does not affect the rights of individuals and cooperatives with respect to residential or agricultural land or garages. Nor does it affect individuals who obtained the right of perpetual usufruct in exchange for expropriation or seizure of their property or under Art. 7 of the Warsaw Decree of 1945.

Radosław Wiśniewski, Reprivatisation Practice, Wardyński & Partners