Real estate issues
When selecting the form of the transaction, it is important to reflect the benefits or limitations connected with transactions involving real estate located in Poland.
In an asset deal, due diligence with respect to proper acquisition of title to real estate may be restricted to a review of the legal status disclosed in the land and mortgage register for the property, with the limitations described below. This results from the fact that an acquirer of real estate as part of an enterprise or organised part of an enterprise enjoys the protection of the warranty of public reliance on the land and mortgage register. A condition for functioning of the warranty of public reliance is that the transfer of ownership or other rights to the property is made to the acquirer by the person entered in the land and mortgage register as the holder. It should be stressed that the warranty of public reliance does not protect the acquirer of real estate or perpetual usufruct by way of universal succession. However, the predominant view in the current case law is that sale of an enterprise or an organised part of an enterprise constitutes the totality of the transactions concerning sale of specific elements of the enterprise; therefore there is no universal succession and the warranty of reliance on the register applies.
The principle of the warranty of public reliance on the land and mortgage register means that if there is a discrepancy between the legal status of the real estate disclosed in the land and mortgage register and the actual legal status, the content of the land and mortgage register will decide in favour of a person who acquired ownership or other in rem right to the property in a transaction with the person disclosed in the land and mortgage register as the rightful holder. It should be stressed, however, that data concerning the real estate that are included in the first section of the land and mortgage register are of an informational nature only (e.g. the area of the property) and are not subject to the protection of the warranty of reliance on the register. Thus, while a third party may have full confidence in the entry of the right and therefore effectively acquire the right from a person entered in the land and mortgage register, even if the seller is not the true holder of the right, at the same time the acquirer may not have certainty with respect to the boundaries or area of the real estate it is acquiring. There is also no information in the register about the designated use of the property in the zoning plan, and in the case of perpetual usufruct there is no information in the register about the obligations under the contract delivering the land in perpetual usufruct. Therefore, it is very important to verify the parameters of the real estate to be acquired, based for example on information included in the register of plots and buildings, registers maintained by the public administrative authorities and the zoning plan, and, in the case of perpetual usufruct, to examine the contract, which is binding on the acquirer.
A real estate acquisition transaction is covered by the warranty of public reliance on the land and mortgage register if it occurs for consideration and the acquirer acts in good faith. An acquirer is regarded as acting in bad faith if it knows that the content of the land and mortgage register is inconsistent with the true legal status, or could easily determine this. It is accepted that the acquirer need not conduct a detailed inquiry in order to determine whether the listed owner of the property acquired it properly, or whether reprivatisation claims have been asserted to the property. An ordinary degree of diligence is sufficient, meaning that the acquirer should review the content of the land and mortgage register and determine who is in possession of the property. The warranty of reliance on the register is excluded when there is a notation in the register concerning a motion with respect to the property, a challenge to a ruling by a referendary, an appeal or cassation proceeding, or a reservation with respect to the legal status reflected in the register.
There are certain exceptions from the warranty of public reliance on the land and mortgage register. It does not operate against rights that encumber the real estate by operation of law without an entry in the register, a life estate, servitudes established pursuant to a decision of a competent public administrative authority, servitudes for a necessary access road, or servitudes created by crossing a boundary in erection of a building or other installation.
Some courts had previously held that the warranty of reliance on the register does not operate with respect to acquisition of the right of perpetual usufruct to real estate in the case of defective entry in the land and mortgage register of the State Treasury or local governmental unit as the owner of the land. Ultimately, however, the principle of security of legal transactions prevailed, and priority has been given to the warranty of reliance on the register.
A significant restriction that must be considered in an asset deal is the statutory right of pre-emption with respect to real estate, under which certain public entities are provided a right of priority to acquire real estate. When there is a statutory pre-emption right, it is necessary for the parties first to conclude an agreement promising to sell the property on condition that the holder of the pre-emption right does not exercise the right. The regulations and case law have not clearly resolved whether the statutory right of pre-emption applies to a transaction involving sale of an enterprise or organised part of an enterprise which includes real estate as an element. There are arguments for the position that the statutory pre-emption right does not apply because the subject of the pre-emption right and the subject of the transaction are different: the right of pre-emption concerns the real estate, while the sale agreement concerns an enterprise of which the real estate is only one element. However, given the established position of the courts treating sale of an enterprise as the sale of its specific elements and requiring application to the sale of an enterprise of statutory restrictions or exclusions with respect to the permissibility of transfer of specific elements of the enterprise, for the sake of safety it is better to reflect the statutory right of pre-emption in deals concerning assets or an enterprise (or organised part of an enterprise). If a sale agreement is concluded in avoidance of a statutory right of pre-emption, the sanction is the invalidity of the transaction.
Most frequently encountered in practice is a statutory right of pre-emption on the part of the local commune in the case of sale of undeveloped land previously acquired from the State Treasury or local governmental unit, or in the case of sale of the right of perpetual usufruct of undeveloped land regardless of the form in which the seller acquired such right. For example, there is a statutory right of pre-emption in favour of the National Center for Support of Agriculture in the case of the sale of agricultural land and in favour of the Polish State Forests in the case of forest land. Similarly, the administrator of a special economic zone has a right of pre-emption with respect to ownership or perpetual usufruct of real estate located in the zone.
Agricultural real estate
New regulations entered into force on 30 April 2016 significantly limiting trade in agricultural real estate. Only agricultural property with an area of up to 0.3 hectare may be freely traded, as well as land designated for non-agricultural uses in the local zoning plan or decisions on construction conditions issued prior to 1 May 2016. In other instances, agricultural property may be acquired only by farmers operating a family farm (up to 300 hectares). There are only a few exceptions to this rule, not applicable to businesses. Where there is no zoning plan in force, a business cannot acquire a plot of agricultural land larger than 0.3 hectares, even if it is only a small part of a larger property that has no connection with agriculture. It is similar with the sale of plots of land: if there is no zoning plan, only an individual farmer can be the acquirer of an agricultural plot larger than 0.3 hectare, even if it is part of an industrial or commercial property.
Acquisition of agricultural or forest land in violation of the right of pre-emption referred to above is subject to the sanction of invalidity.
Share deals and other forms
In share deals, and generally in transactions involving merger, division or conversion of companies, acquisition of real estate will not be protected by the warranty of public reliance on the land and mortgage register. In a share deal the subject of the transaction is the shares in a company, and not the company’s assets, including real estate. In the case of a merger, division or conversion of companies, the warranty of reliance does not function because the transaction involves acquisition of the assets as an entirety of rights through universal succession. Thus, in such transactions due diligence should include an assessment of the correctness of the acquisition of real estate.
On the other hand, the restrictions arising out of the statutory right of pre-emption will not apply in such transactions.
But if a company (other than a listed company) is the owner of agricultural real estate with an area greater than 0.3 hectare, which is not designated for non-agricultural use in the local zoning plan or a decision on construction conditions issued before 1 May 2016, then the National Center for Support of Agriculture has a right of pre-emption to the shares, regardless of the subject of the company’s business.