Property law: the disadvantages of perpetual usufruct from the investor's viewpoint (part II) - the practical aspect.

Perpetual usufruct usually causes two sorts of problems for national and foreign investors.

The first one often comes up during examining the legal status of real estate and it concerns potential risks connected with questioning the title to real estate to which State Treasury or local government units are entitled to. An investor usually meticulously examines the legal status of real estate, thus, he examines both the civil law aspect (land and mortgage register, legal proceedings, registration files) and the administrative aspect (zoning, actual destination for the area). During such examinations it often turns out that title transfer (made by the owner which is either State Treasury or local government units) can be questioned by the inheritors of the former pre-war owners. Such a risk, even a theoretical one, can cool down a potential investor’s will. Additionally, such information can also cool down financial institutions before they give the credit. However, there is usually no easy solution to this problem as an investor does not have any guarantee that his perpetual usufruct and title to real estate would’nt be questioned. This moment is very crucial for a potential investor because it is mostly during these times that something collapses. And it is no surprise that a bank or investor does not want to spend, for example, 50 million PLN on a piece of land in the centre of Warsaw if there is even a slight risk that a third party might want to get this land back.

The second problem which stems from the legal status of perpetual usufruct is that perpetual usufructuary must abide by conditions listed in the agreement or decision establishing the right to perpetual usufruct. The failure to abide by these conditions might be the reason for termination of this agreement. Let us take a look at the following example: an investor intends to realize an investment on post-industrial areas and build housing estates on a land held in perpetual usufruct. The usufructuary is obliged to use the land as defined in the agreement and “keep the building in good condition”. Then, the investor receives an outline planning decision (WZ decision) and s/he can build nowadays popular apartment buildings. Such WZ decision defines the intended use of the land as land with housing estates. Therefore, building housing estates in conjunction with WZ decision is simultaneously in accordance with the conditions listed in the agreement. Yet demolition of buildings on land would be contrary to the land use defined in the agreement and could be a reason for termination of the agreement establishing the right for perpetual usufruct. So a potential purchaser of such real estate will probably think twice before he risks losing his/her money.

It should be remembered that perpetual usufruct is a right to derive benefit from a property which belongs to someone else. Thus, perpetual usufructuary should use real estate according to the owner’s provisions as well. Such a situation can be risky and challenging for investors as the owner may interfere with their decisions and the legal status of perpetual usufruct allows him/her to do so.