Sanctions for violations of the Agricultural System Act | In Principle

The primary stated purposes of the Agricultural System Act of 11 April 2003 are to strengthen family farms in Poland, ensure the country’s food security, and promote sustainable agriculture with an emphasis on environmental protection. Therefore, the act imposes severe sanctions for violation of its provisions: nullity of the transaction or forced buyout of the agricultural property.

The National Support Centre for Agriculture

Under the amendment that came into force on 30 April 2016, the Agricultural System Act introduced strict rationing in the trading of agricultural property, including the trading of shares in companies, and granted broad powers to the National Support Centre for Agriculture (KOWR), an executive agency under the Minister of Agriculture and Rural Development, in particular with regard to:

• Issuing approval for acquisition of agricultural property by a person who is not an individual farmer
• Exercising the pre-emptive right or the right to acquire agricultural property or shares of companies
• Issuing approval for disposal of agricultural property or placing it in dependent possession within five years after acquisition
• The possibility of forced buyout of agricultural property for the purpose of implementing agricultural policy.

Additionally, KOWR has the authority to oversee compliance with the obligations under the act, which we write about in more detail in the article “Obligations of the purchaser of agricultural property.” KOWR may enter the agricultural properties of the entities undergoing inspection, and demand information related to the inspection, as well as presentation or access to relevant documents.

Nullity of the legal act

If KOWR discovers a violation of the Agricultural System Act, it has the right to bring legal proceedings to annul a transaction performed in violation of the act. The act does not impose a time limit on the use of this remedy.

This issue is regulated by Art. 9(1) of the act, according to which the acquisition of any of the following pursuant to a transaction contrary to the Agricultural System Act is invalid:

• Ownership of agricultural property
• A share in co-ownership of agricultural property
• The right of perpetual usufruct of agricultural property
• A share in perpetual usufruct of an agricultural property, or
• Shares in a company or dominant company within the meaning of the Commercial Companies Code.

This is an open-ended catalogue of transactions covered by the sanction of absolute nullity.

Notably, the amendment of 13 July 2023 clarified that acquisition of agricultural property on the basis of a transaction is invalid, and not, as before, also on the basis of other legal events. Regardless, the catalogue of cases in which the law is violated and which are covered by the sanction of nullity also lists the acquisition of property based on legal events and court rulings without the required notification to KOWR of its right to acquire the asset. This means that the act is not consistent in this regard, and leaves open doubts in interpretation as to the mode by which, for example, a merger of companies without notifying KOWR should be declared invalid.

In the catalogue of cases in which, among other things, there is a sanction of invalidity, the following are listed:

1. Performing a legal act without notifying the holder of the pre-emptive right or without notifying KOWR.

Pursuant to Art. 3 of the act, a tenant is entitled to pre-emptive purchase of agricultural property, provided that the tenancy agreement was made in written form, with a date certain, and has been performed for at least three years, and the property is part of the tenant’s family farm.

On the other hand, among other things, KOWR must be notified:

• In the event of a change of a partner or accession of a new partner to a partnership (if the partnership owns an agricultural property of at least five hectares or several agricultural properties with a total area of at least five hectares)
• When a joint-stock company adopts a resolution to apply for admission of its shares to trading on a regulated market (if the company is the owner of an agricultural property of at least five hectares or several agricultural properties with a total area of at least five hectares)
• When acquisition of an agricultural property occurs as a result of entering into an agreement other than a transfer agreement, a unilateral legal act or a ruling of a court or administrative authority, a judicial or enforcement authority, or any other legal act or other legal event, in particular, prescription (adverse possession), succession, or specific bequest, the subject of which is an agricultural property or an agricultural holding, or the division or merger of companies.

2. Disposal or transfer of possession of agricultural property without the approval of the director of KOWR within five years from the date of transfer of ownership of such property
    
3. Acquisition of agricultural property based on false statements, forged documents, or documents purporting to confirm false statements.

Forced buyout of agricultural property

The second type of sanction for violations of the Agricultural System Act is the forced buyout of property. Art. 9(3) of the act specifies situations in which KOWR may apply to the court for acquisition of agricultural property at a price corresponding to its market value (taking into account encumbrances as of the date of acquisition of the property by the purchaser), if the purchaser does not fulfil the obligations arising from the acquisition of agricultural property.

This provision specifies such situations in detail, listing in particular failure to take up operation of a farm, or ceasing to operate a farm (and in the case of a natural person, failure to take up, or ceasing to operate, a farm personally) which included the acquired agricultural property, within five years after acquisition of the property.

Both of these sanctions for violation of the act are severe and difficult to reverse. In the case of entering into an agreement for transfer of an agricultural property without applying KOWR’s statutory pre-emptive right, the sanction of absolute nullity cannot be remedied. Alternatively, the parties could redo the transfer agreement, but this is not always possible (for example, if one of the parties to the transaction has lost its legal existence), not to mention the hard-to-predict tax consequences.

That is why it is so important to analyse the potential restrictions under the Agricultural System Act before carrying out any transaction that may be covered by the act.

Sylwia Moreu-Żak, attorney-at-law, Gabriela Kuszewska, Real Estate practice, Wardyński & Partners