Due diligence of real property under polish law

When rationally planning an investment a component of which is to be real property, it is worth preparing for it properly. One of the first steps that should be taken by an investor before purchasing real property or an enterprise that owns real property is a legal audit of the real property to be purchased, i.e. a due diligence. A properly conducted due diligence enables early detection of legal risks and defects associated with a property. This gives a chance to repair them or minimise their effects until the transaction itself. The report on the due diligence may also be a reason for ending negotiations if the legal defects in the real property prove to be so significant that they would cause too much financial or other risk to the buyer. The due diligence report often has a significant impact on business negotiations too, e.g. negotiations over the price of the property or enterprise to be purchased, as early detection of irregularities related to the property gives a stronger negotiating position to the buyer, who can take advantage of it, e.g. by negotiating a more favourable price for the property or enterprise to be purchased. When deciding to carry out a transaction in Poland, it is all the more advisable to carry out a due diligence, as the Polish legal conditions concerning real property are, in certain aspects, very different from those outside its borders. A crowning example of the specificity of Polish legal regulations on real property is the institution of perpetual usufruct right. It is one of the forms of property law which is, in essence, most similar to real property ownership and it is a common legal title to real property in Poland. A perpetual usufruct right is limited in duration and is usually established for 99 years (never for less than 40 years). Moreover, the perpetual usufructuary has to pay an annual fee for the right (of 0.3% to 3% of the real property value). A perpetual usufructuary of real property has rights very similar to those of a real property owner (e.g. it may freely dispose of its right), though it may be subject to certain restrictions and even additional obligations. These obligations and limitations may result from the document based on which the perpetual usufruct was established, i.e. an agreement establishing the perpetual usufruct right or a unilateral decision in this respect. Therefore, if a transaction involves real property held in perpetual usufruct, when examining legal title to the real property one cannot stop at examining the agreement (or other document) based on which the perpetual usufruct right was acquired from another entity. In this situation, it is also necessary to examine the document that is the source of the perpetual usufruct right (a decision or agreement establishing the perpetual usufruct right). This document may contain a number of provisions imposing on the perpetual usufructuary obligations or limitations related to the use of the real property. Breach of these obligations or limitations may even lead to the loss of legal title to the real property. A very important aspect of a due diligence of real property located in Poland should also be a check of whether the real property is treated, under Polish regulations, as agricultural or forest land, as Polish regulations provide for a number of restrictions on buying and selling agricultural or forest land, which, depending on the type of transaction, may include:

i) a right of first refusal vested in state authorities,

ii) the obligation to obtain the prior consent of a given institution prior to the transaction, or 

iii) the subsequent right of a relevant authority to acquire a given real property after the transaction. In the case of agricultural land, it is also important to note that, following acquisition and for five years thereafter, it may be used by its acquirer solely for agricultural purposes. Breach of any of the above obligations may even lead to the acquisition of the land being invalid. Given the above, the acquisition of real property that, under Polish law, is agricultural land should be preceded by a detailed analysis as regards the planned manner of use, taking into account any limitations resulting from Polish regulations. Of course, the aspects described above are not the only ones that should be taken into account when purchasing real property in Poland. Depending on the real property, the issues may vary and require professional evaluation.

Full text of this article authored by Lech Żyżylewski, Partner and Co-Head in Real Estate Practice, and Anna Okła-Woźniak, Senior Associate, is also available in Iberian Lawyer magazine.