Most probably in 2017 or in early 2018, the transformation into ownership of perpetual usufruct of real properties with multi-family residential buildings erected thereon will come into effect.

Scope and purpose of new regulations

The legislator aims to create a situation in which residential buildings with separate ownership of units will be located only on real properties owned by the units’ owners. Therefore, the automatic transformation of an interest in perpetual usufruct (related to the ownership of flats) into ownership is planned. Later on, the transformation is to apply to real properties given into perpetual usufruct for which separate ownership of units will be established after the new regulations take effect. Effects of the new regulations will apply not only to owners of units in buildings on properties in perpetual usufruct, but will also affect future housing investments.

A state of uncertainty

It has not been set when exactly the new regulations will take effect and the most probable dates are 1 July 2017 or 1 January 2018. It cannot be excluded however that the regulations will start to apply at another date or will not be adopted at all. Furthermore, the final wording of the regulations is unknown as the planned provisions may be modified during the pending legislation process. This brings about a state of uncertainty first of all for developers implementing housing investments on real properties given into perpetual usufruct and also for all owners of flats located on such real properties.

Transformation of perpetual usufruct

Automatic transformation

By operation of law, perpetual usufruct of real properties on which buildings where at least half of units are flats and in which at least one flat with separate ownership is located is to be transformed. The transformation will apply to entire perpetual usufruct, thus also to parts of the property related to service units, and units with unseparated ownership. The transformation is confirmed by a body representing the property owner (State Treasury or a local government unit) by issuing a relevant transformation certificate.

The transformation procedure

The transformation certificate should be issued within 9 months of the effective date of the new regulations at the latest or within 2 months of the real property owner’s application filing date. Within 14 days of its issuing the certificate should be sent to the land and mortgage register court to make appropriate disclosures in land and mortgage registers. It can be expected that at least at the beginning of new regulations application, additional obligations related to transformation will prolong the time of handling cases in appropriate courts and offices. Therefore, the time needed to close a unit sale transaction may be longer. For real properties to be transformed following the effective date of new regulations, the perpetual usufructuary (most often the developer) should obtain a certificate specifying transformation terms before separate ownership of the first unit is established. The need to obtain such certificate should be taken into account by developers in the sale of flats in new investment projects.

Transformation fees

Owners of flats, garages and parking spaces will pay a transformation fee for a further 20 years starting from the effective date of the regulations, which fee is equal to the existing annual fee for perpetual usufruct of properties. Owners of other units (e.g. service units) will pay the transformation fee for 33 years. Doubts as to the time since when such time limits should be calculated may arise if on a property, separate ownership of the first unit is established after the new regulations effective date. Furthermore, for such properties if the annual perpetual usufruct fee was not changed to the fee applicable to properties intended for housing purposes before ownership of the first flat is separated, doubts may arise as to the level of the payable transformation fee. It seems that the application of the law by the relevant authorities will be decisive. This makes developers’ situations difficult because before relevant decisions are made, obligations arising from ownership of flats will be unclear.

Summary

The planned regulations will be an important step towards liquidation of perpetual usufruct of real properties and transferring ownership to existing perpetual usufructuaries. In general, regulations as they are now should not have an adverse impact on new investments but they may be connected with difficulties for developers, especially in the initial period of application.

The effects of the new regulations will apply not only to owners of units in buildings on properties in perpetual usufruct, but will also affect future housing investments.