Reimbursement of investments in reprivatised real estate

A public entity will not always be compensated for investments made in real estate regained by the right owners through reprivatisation.

Following unlawful seizure of real estate by the state in the People’s Republic of Poland, as well as during the Third Republic after the end of the communist era, various types of investments were made in such properties, including development of socially beneficial facilities, such as schools and hospitals. Sometimes such investments were made after the rightful owners had already taken steps to regain the property—and thus at a time when the public entity holding the land was already aware of the risk that the land might have to be returned to the rightful owners. In consequence, in many instances the public entities in question do not have a valid claim for reimbursement of the investments they made in the property.

Investment in this sense refers to voluntary application of one’s own assets for the benefit of another person, regardless of the other person’s intent. Under Art. 226 of the Civil Code, such investments may be divided into “necessary investments” and “other investments.”

Necessary investments are expenditures for the purpose of maintaining an object in a condition fit for normal use for its intended purpose. Necessary investments do not include expenditures resulting in creation of something new (such as a new structure or expansion of an existing building) or connected with maintaining such newly created objects.

It is universally accepted that “other investments” include expenditures seeking to improve an object or increase its functionality (useful expenditures) or to provide the object features specific to the predilections of the holder, for purposes of luxury (opulent expenditures).

Reimbursement of investments may be sought only by an autonomous holder of real estate—that is, an entity that controls the property as if it were the owner.

But the range of potential claims by an autonomous holder of real estate depends on the nature of its possession of the real estate—in good or bad faith. A holder of property is in bad faith if under the circumstances it is or should be aware that it does not have legal title to the property. Good faith is excluded by lack of awareness caused by negligence. The case law indicates that loss of good faith on the part of a public entity which is the autonomous holder of real estate occurs upon service on the entity of the notification by the relevant administrative authority of commencement of an administrative proceeding seeking to undermine the process of nationalisation or expropriation of the property.

An autonomous holder in bad faith—but also in good faith—may obtain reimbursement for investments in real estate only to a limited degree.

An autonomous holder in good faith may obtain reimbursement for necessary investments only to the extent that they have not been recouped from the benefits the holder has obtained from the object. The autonomous holder has the burden of proof with respect to these circumstances. It may obtain reimbursement of other investments only to the extent that they increase the value of the object as of the time possession is delivered to the rightful owner.

An autonomous holder in bad faith may obtain reimbursement only of necessary investments, and even then only to the extent that the owner would otherwise be unjustly enriched at the holder’s expense. Thus a holder in bad faith may not seek reimbursement for “other investments.” The rationale for this is that a holder in bad faith, knowing that it does not have rights to the property or that its rights are disputed, should limit its expenditures to those necessary to maintain the object and protect it from deterioration. If it makes other investments, it does so at its own risk, in the awareness that it will not be entitled to seek reimbursement of the expenditures later. The law thus protects injured rightful owners from the obligation to bear the costs of investments made without their knowledge or consent or even over their express objection.

The ability to seek reimbursement of investments in real estate is also limited in time. Like any property claim, it is subject to the statute of limitations, which in this case is 10 years. The question, however, is when the limitations period begins to run. This issue is not addressed uniformly in the case law or the legal literature. With respect to certain categories of investments, the statute of limitations begins to run when the expenditures are incurred, and with respect to other categories only from the time the property is returned to the owner. It is only at the latter time that it can be determined whether the owner has been unjustly enriched or if the value of the returned property has increased due to the investments. Moreover, a public entity may assert a claim for reimbursement of investments no later than one year after the property is restored to its rightful owner. This period does not allow the public entity to resurrect claims that have already become time-barred, but only reduces the limitations period for claims that are not yet time-barred.

The fact that property was unlawfully seized by the state during the process of nationalisation or expropriation generates negative consequences for the public entity when pursuing claims for investments in the property. It significantly limits the ability to recoup investments by conditioning reimbursement on proof of a number of circumstances associated with the use of the property over the course of many years, and also related to the value and condition of the property at the time it is returned, compared to the value and condition of the property when it was seized.

Leszek Zatyka, Reprivatisation Practice, Wardyński & Partners