Real Estate Due Diligence in Poland – Introduction
Before investing often substantial funds in the purchase of real estate in Poland, all risks associated with the transaction should be examined. Failure to check certain legal aspects may result in the failure of the investment or a significant increase in its cost. Also in the case of individuals purchasing real estate for their own needs, it is advisable to verify the legal status of the real estate before purchasing it, following the principle "better safe than sorry". More and more individuals and companies are choosing to carry out "due diligence" on a property in order to gain the best possible understanding of its legal status before making important financial decisions. While the legal analysis is important, it is also worthwhile to carry out a tax, financial, technical and environmental due diligence of the property and the related transaction or future investment.
Legal Due Diligence of Real Estate
Legal due diligence a property allows to establish the legal status of the property and the risks associated with its acquisition. It covers particularly the following matters and areas of risk:
- Examination of legal title to the property and the subject of the transaction,
- Potential encumbrances on the property (mortgage, other limited rights in rem such as easements, usufruct, pledge, lease agreements related to the property),
- Potential third-party claims to the property,
- Legal classification of the land in terms of the feasibility of the transaction and subsequent development,
- Analysis of aspects related to the development
conditions for the real estate,
in particular the conditions arising out of zoning plan or zoning decisions;
- Examination of compliance with requirements under building regulations,
- Checking issues arising from environmental legislation,
- Determination of access of the property to the public road,
- Examine the application of historic preservation legislation to the property,
- Annual property tax charge,
- Determination of the possible amount of the perpetual usufruct fee.
1. Legal title to the property
The examination of the title to the property in Poland primarily involves an analysis of the land register maintained for it, as well as verification of the basis on which the property was acquired by the current owner and the existence of reported or potential third-party claims to ownership of the property. In particular, it should be verified whether the property was not sold shortly before the examination. If the subject of the report is the perpetual usufruct of the real estate, it is examined for what period of time the real estate has been given for perpetual usufruct and for what purposes it may be used by the perpetual usufructuary.
Sources of Legal Due Diligence of Polish Property
The primary sources for verifying the legal status of the property located in Poland are:
- electronic version of the Land and Mortgage Register (in Polish: "Księgi wieczyste"),
- documents constituting the basis for the acquisition of title by the current owner, and
- Land and Mortgage Register files at the competent district court.
2. Encumbrances on the property
An important element of the property's due diligence is the verification of the Land and Mortgage Register for possible encumbrances, such as mortgages, easements or usufruct. It should be borne in mind that encumbrances on the property do not expire upon transfer of ownership. The documents constituting the basis for the entry of encumbrances on the real estate in the Land and Mortgage Register should also be analysed. A flat or plot of land may also be the subject of a lease or tenancy agreement. Upon its purchase, the buyer may become a party to the agreements in question. Basic information regarding possible encumbrances on the real estate can be found in the content of the electronic Land and Mortgage Register and in the register files available at the district court. It is also necessary to analyse potential contracts to which the real estate is subject (e.g. lease, rental) and determine the possibility of their termination by the real estate buyer.
3. Potential claims of third parties to the property
The question of possible claims of third parties to the property
should also be investigated.
In particular, it is necessary to request certificates from the relevant authorities as to whether proceedings for restitution (including reprivatisation proceedings) or compensation for loss of title to the real estate are pending. Failure to verify the above may, under certain circumstances, result in the purchase of a property in respect of which third parties will be able to assert their rights even though the buyer is unaware of their claims.
4. Legal classification of land
An important aspect of real estate due diligence is the verification of the legal classification of the land. It is necessary to examine the data contained in the Land and Building Record (in Polish: Ewidencja Gruntów i Budynków), whether it is agricultural, forestry or building land. In the case of agricultural land, you should additionally check the provisions of the local zoning plan applicable to the property. This will allow you to determine whether the property can be freely purchased without obtaining the consent of the National Agricultural Support Centre (KOWR) or without risking the right of first refusal in favour of the KOWR or the tenant of agricultural land.
In addition, if the investment is to be located on agricultural land, it is necessary to change the designation of the land and then exclude it from agricultural production. In the case of certain classes of agricultural land, prior approval is required to exclude it from agricultural production. These are therefore extremely important issues, the verification of which may affect the fate of a future investment.
5. Development conditions for the property
It should be verified whether the property is covered by a local spatial development plan (zoning plan) and, if so, what is the designation of the covered area in the relevant local plan. This is especially important from the point of view of a future investment, as it has to be verified whether a certain type of building can be built on the site at all. It is also worth paying attention to check draft local plans which are not yet in force and which may change the zoning of the area comprising the property in the future. If the property is not covered by a local zoning plan, the zoning decision issued for the property should be examined. Local zoning plans are available on the websites of the relevant municipalities. It is also possible to apply for a certificate on the subject of the inclusion of the property in the local plan and its designation in the plan.
6. Examination of compliance with requirements under building regulations
In the case of the acquisition of buildings or parts thereof, the building permit issued for the property is subject to examination. This is an administrative decision necessary for the commencement and execution of construction or construction works. In particular, it must be verified that the decision was issued on the correct legal basis and by the competent authority. It is important to verify that the conditions of the building permit correspond to the building being constructed.
Use of the facilities is possible after obtaining an occupancy permit. This will allow the legal use of the property for its intended purpose. It is therefore necessary, first of all, to check whether an occupancy permit has been issued for the property and whether all the prerequisites indicated therein have been fulfilled (for example, certain works have been carried out within the specified time limit). In the case of some buildings (usually smaller or less technically complicated), it is sufficient to submit a notice of completion of the works (for example, single-family residential buildings, if their area of influence is entirely within the plot or plots on which it was designed). Use may then commence if the competent authority does not object within 14 days of service of the notice.
7. Environmental issues
The questions of the application of environmental regulations are an important step in the analysis of the legal status of the property. First of all, it is necessary to verify whether the property is located in a national park, in a Natura 2000 area and whether any form of nature protection (e.g. a nature monument) is present in the area covered by the property. In protected areas, certain developments may prove difficult or even impossible to carry out. The above issues can be determined on the basis of the publicly available service of the General Directorate for Environmental Protection and by obtaining the relevant certificates.
It is also necessary to obtain the relevant certificate that the property is not designated for afforestation on the basis of a decision on land development conditions and that it is not covered by a simplified forest management plan or by a decision of the district governor on the basis of a forest inventory, as well as information in the location of the property in a revitalisation zone.
8. Access of the property to a public road
The property's access to the public road should also be verified. According to the regulations, every plot of land should have actual and legal access to a public road. A property may have direct access to a public road, access through an internal road or through the establishment of a road easement (through a neighbouring plot). Verification of access to a public road is made by obtaining an appropriate certificate in this respect. Lack of access to a public road may result in the notary public refusing to draw up a notarial deed for the transfer of ownership of the property, and may also prevent a construction works from being carried out on the property.
9. Monuments protection
Another issue to be checked is whether the property is listed in the municipal and national register of historical monuments and whether there are any movable monuments or archaeological sites on the property. Monuments are subject to special legal protection and their owner is obliged to secure and maintain the property. In the case of renovation work on a property, the consent of the conservation officer is often required to carry it out.
Verification of the above is done, among other things, using the online resources of the National Heritage Institute, as well as by obtaining certificates from the competent authorities.
10. Property tax
Ownership of real estate in Poland entails the payment of real estate tax. The amount of the tax depends on the area of the real estate and the respective rates indicated in the resolution of the municipal council. The tax is payable in monthly (legal persons) or quarterly (individuals) instalments to the municipality of the property's location. In order to verify the yearly amount of the tax on the real estate, it is necessary to analyse previously submitted real estate tax declaration as well as local tax regulations. This is important from the point of view of the buyer, who from the month following the month of the transaction is obliged to pay instalments for property tax in the appropriate amount.
11. Perpetual usufruct fee
If the right of perpetual usufruct of the real property is subject to sale, it is necessary to determine the amount of the annual fee on this account. The annual fee is usually between 1 and 3% of the value of the land (without taking into account the value of buildings or structures located on the land). The fee is updated no more often than once every 3 years. In the event of a change to the fee, the competent authority shall notify the holder thereof. An element of due diligence on the property should therefore be the determination of the current annual fee and the date of a potential update of the fee.
Property Due Diligence Report
Following the analysis of the above-mentioned issues, a property due diligence report is usually prepared. The scope of the examination depends on the needs of the specific transaction. Sometimes it is subject to an arrangement between the investor concerned and the Law Firm performing the due diligence. Usually, however, experienced lawyers dealing with such matters know what needs to be investigated.
Findings, Risks and Recommendations of the Real Estate Due Diligence
The report should identify:
- legal status of the property and
- any risks associated with the investigated aspects, also assessed from the point of view of the specific transaction.
The property due diligence aims to estimate the risks associated with the purchase of the property, but also future costs, such as the costs of adapting the investment to the legal requirements related to zoning or environmental protection, as well as taxes or perpetual usufruct fees. If the property is leased or rented, it is also important to determine the revenue generated from this (rent, service charges) and whether and to what extent it will cover the potential operating costs of maintaining and managing the property (OPEX) and the costs of expected capital investment in the property (CAPEX). In case of bigger investments the recommendations also covers forms of investment, e.g. via foreign structure, branch or registration of company in Poland.
Property Due Diligence Risk Markers
The risks associated with a prospective transaction should be categorised by category and potential impact on the transaction - ranging from high-risk factors that could even result in the nullity of the contract, through medium-risk aspects to less significant issues that a prospective buyer should nevertheless take into account.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.