Real Estate Investment in Poland Your Legal Guide Introduction

Dear Friends and Business Partners,

Poland is the largest economy in Central Europe, with a population of ~38 million. The implementation of large urban and infrastructure projects is one of the pillars of the new economic policy that the Polish government has recently adopted to meet the UEFA requirements (Poland is one of the countries co-organizing UEFA EURO 2012 Football Championship) and to minimize the negative influence of the turmoil in global markets on the Polish market. Large investments are expected to reduce the unemployment rate and secure the further growth of Poland's economy. It is estimated that the value of the infrastructure projects implemented in Poland within the next 7-8 years will amount to at least EUR 60-70 billion. The sectors of vital importance for the further Poland's development will be: real estate, energy & infrastructure, as well as transport & logistics.

Our Clifford Chance Warsaw Real Estate, Construction & Infrastructure Department covers all legal aspects related to the successful completion of large real estate and infrastructure projects. We have the same business objectives as both private and public investors: working on a better infrastructure in Poland.

We advise investors, developers, contractors, financial institutions, and professional consultants involved in the development process.

We have a wide range of expertise in relation to the development of retail, office, warehouse, residential, mixed-use, energy, industrial plant as well as PPP and infrastructure projects, as well as a long record of experience in contracts based on forms such as FIDIC and AiA. We also offer unique expertise in negotiating contracts with marquee international architects and engineers as well as in negotiating contracts concerning PPP projects.

We hope that our publication covering major legal and tax issues related to the real estate and construction sector in Poland will become your guide helping with planning new investment projects on this promising and rapidly developing market.

We will be delighted to join our capabilities with you working together on Poland's development.

Daniel Kopania

Partner Head of the Real Estate, Construction & Infrastructure Department Clifford Chance, Warsaw

© Clifford Chance, Janicka, Krużewski, Namiotkiewicz i wspólnicy spółka komandytowa 2011 contents © Cli ffo rd 1. 2. 5. 4. 3. 9. 8. 7. 6. 10. Chance, Janick, SECURING DEVLOPM LETING CONSTRU REAL ENVIROM COST SELING INSURA APEND Kru ESTA TE R żewski, NCE eal IX THE THE Est NTA NT I ON Namiotke wicz SCHEM FINACG ate PROCEDU LAND L ISUE LAW Inve E S i stme w Your spóln icy nt L spółka egal in Pola komandyt ow Guide nd 23 1 17 27 35 3 39 43 51 5 a 201 3 1 1.1 Titles 5 1.2 Registration of real estate 6 d 1.3 Unregistered land 7 1.4 Restitution claims 7

n 1.5 Title insurance 8 1.6 Preliminary agreement 8

a 1.7 Purchase from public bodies 8

l 1.8 Pre-emptive right 9 1.9 Acquisition of real estate by foreigners 9

e 1.10 Energy Efficiency Certificate 9 h t g n i r u c e s

1.1 Titles land is becoming more and more popular termination date, the owner must extend (as a matter of fact, it was quite popular the term, unless there are serious "social even during the communist era, reasons" for not doing so. The perpetual 1.1.1 Introduction especially with respect to farmland). usufructuary may also request an The existence and form of legal title to extension earlier if developments are land is a vital issue that any developer or 1.1.3 Perpetual usufruct planned on the land, which will be investor must be clear about before One of the most important property depreciated over a period longer than the becoming involved in a new project. This interests in land, specific to Poland, is the remaining term of this right. involves answering a number of important right of perpetual usufruct to land questions: How does the legal title secure (użytkowanie wieczyste). If the holder of the title breaches the the position of the beneficiary? Can it be provisions of the contract concerning the mortgaged? Can construction works be The concept of the right of perpetual development, it could lead to an increase carried out on the basis of a given legal usufruct to land arises from the historical in annual fees, or even the termination of title? What are the costs of maintaining reluctance of the State to hand over the contract. the title? How attractive is the form of title control of properties to full private for a prospective buyer? ownership. Perpetual usufruct has now Upon the creation of a right of perpetual become a strong and stable right in usufruct by virtue of contract, the The forms of legal title to the land under property, far removed from its origins, the perpetual usufructuary is obliged to pay Polish law include: closest relation to ownership of all an "initial fee" amounting to from 15% to property rights. 25% of the value of the land. Thereafter, - ownership (własność) ; he pays annual fees of 3% of the land Perpetual usufruct may only be created value. The percentage of those fees may - perpetual usufruct (użytkowanie on land belonging to the State Treasury be lower in certain specific cases, for wieczyste); or local authorities. Once created, it can example in relation to some non-profit be inherited, transferred to third parties organisations and for historic monuments. - usufruct (użytkowanie); and encumbered (mortgage, easements, Please see section 8.2.2 for more details. usufruct). The perpetual usufructuary is - easement (służebność); the owner of buildings and other Upon termination of a perpetual usufruct constructions erected on the land. In contract, the perpetual usufructuary loses - 30-year lease (dzierżawa); comparison with the wide powers his right, and the land (together with the granted to the holder of the perpetual buildings and other improvements) is - 30-year lease (najem). usufruct right, the owner of the land (the taken over by the owner. The owner is, State Treasury or the local authority) is however, obliged to reimburse the Ownership and perpetual usufruct are the substantially restrained in its powers: it perpetual usufructuary for the current only titles to the land that can be cannot encumber the property or sell it to market value of the buildings and other mortgaged and that are recognised by an entity other than the holder of improvements legally made on the land. institutional lenders and investors. The perpetual usufruct. Only the holder of the ownership of buildings and other perpetual usufruct right is entitled to use 1.1.4 Usufruct structures is always vested with the and collect income from the land. Usufruct grants its holder the right to use owner (or perpetual usufructuary) of the and collect income from the property in land. Other titles mentioned above either One of the fundamental differences compliance with a notarised usufruct serve an accessory role (e.g. road between perpetual usufruct and contract. Under the contract, the easements) or are temporary (temporary ownership is that perpetual usufruct is usufructuary is granted full economic use leases before the acquisition of supposed to be created for a defined of the property, along with all responsibility ownership or perpetual usufruct). purpose (the development of a project or for making improvements or repairs to the for conducting some sort of activity) as property. Usufruct cannot be transferred 1.1.2 Ownership set out in a contract. The period may vary to a third party, which is a major Ownership is the broadest right in from 40 to 99 years depending on the inconvenience of this right. There is no property, enjoying full constitutional purpose of its creation, but usually it is 99 maximum time limit for which usufruct protection. Public owners of real estate years. may be created. (the State Treasury, local authorities, other public bodies) are not privileged If the holder requests an extension within over private owners. Private ownership of five years before the scheduled

1.1.5 Easements of the lease is 10 years. The other basic opened. Via the Ministry of Justice Polish law recognises three types of contractual right is a 30-year lease website (www.ms.gov.pl) anyone can easements: ground easements, personal (dzierżawa) granting the right to use and check, free of charge, the current status easements and transmission easements. to collect income from the object. The of the entries in a relevant mortgage Ground easements are established for main practical difference between them register. The search is only possible if one the benefit of the owner (or perpetual lies in the scope of the tenants' rights. knows the number of the mortgage usufructuary) of neighbouring land, After the lapse of their statutory personal easements are established for maximum terms, both contracts register. The next stage of the reform the benefit of an individual and transform into agreements for an aims to allow print outs of the content of transmission easements are established unspecified period of time (and are thus the mortgage register, which will have the for the benefit of a business entity which subject to termination upon notice). status of original excerpts. intends to build, or owns on the third Without entering into theoretical nuances, party land, utilities infrastructure. Ground it is fair to say that dzierżawa may be The mortgage register is broken down easements are transferred together with signed with respect to farmland and into four sections. The first section the property (whether dominant or operating businesses, rather than green- contains a physical description of the servient) and personal easements may field intended for development. property and lists the rights attached to not be transferred. A transmission easement is transferred to (i) a purchaser the property as a dominant one (e.g. of an operating business, part of which 1.2 Registration of real granted easements). In section two, the shall constitute utilities equipment or owner (and perpetual usufructuary, where installations or (ii) a purchaser of just estate appropriate) is specified. Section three utilities equipment. Depending on the contains all encumbrances other than easement deed, the holder of the There are two parallel types of land mortgages (easements, usufructs, leases, dominant property may exercise various register in Poland: (i) the land and pre-emption rights etc.). It also includes rights such as: using the servient property mortgage register or "perpetual book" restrictions in disposal, such as warning to a defined extent (e.g. road easement) (księga wieczysta) , registering titles, notices (e.g. enforcement proceedings, or or requiring the holder of the servient encumbrances and claims, maintained by property not to exercise some of his the courts, and (ii) the land register rights to his property (e.g. not to build (ewidencja gruntów i budynków) , whose closer than x metres from the boundary). main purpose is to describe the physical As a rule, any installations necessary to features and the use of the land and exercise the easement should be buildings. financed, maintained and repaired by the holder of the dominant property. Ground 1.2.1 Land and mortgage register and personal easements expire if they are Land and mortgage registers (further not exercised for more than 10 years. A "mortgage registers") are kept by special transmission easement expires at the divisions of district courts competent in latest with the end of the liquidation the relevant area. They include a process of the beneficiary of such description of the property and register easement. In general, an easement is not titles, claims and encumbrances. The a suitable title for a development, but it long-term target of the mortgage register does have a subsidiary function, which system is to have all properties among other things enables the provision registered. of connections to the municipal utilities network or an access road, for example. Reform of the mortgage register system is still in progress; about half of traditional 1.1.6 Leases "hard copy" mortgage registers have now The basic contractual right allowing the been converted into electronic registers. use of a property is a 30-year lease The conversion of all land and mortgage (najem) , granting the right to use the object unless a party to the lease is not a registers will probably take 2–3 more business entity or a sole trader, in which years. Recently, on-line access to all case the maximum (statutory) fixed period electronic mortgage registers has been

the status of the register not being in 1.2.2 Land register The land register is supposed to be conformity with the actual legal status). Land registers, in comparison to mortgage converted into a cadastral register; Section four contains mortgages. registers, have a rather technical function. however this is not likely to happen soon The registers concern physical features of because of the huge amount of work the land (surface, borders etc.) as well as necessary to value properties. Certain rights are created or, as the case its use (agricultural, forest, construction may be, transferred upon registration purposes etc.) and the class of land etc. (e.g. perpetual usufruct, mortgage etc.). Land registers are kept by powiats (local- 1.3 Unregistered land The sequence of registration determines government units at a level between gmina the ranking of the rights. Registered rights – district, and województwo – region or There is no official statistical data as to rank higher than unregistered rights. voivodeship). what percentage of the land in Poland has been recorded in mortgage registers. According to the "public warranty of land The land register is used for reference A new register is set up only when an and mortgage registers", everybody may only and is not conclusive in all application is made in respect of a circumstances. The information rely on the contents of a mortgage particular plot(s) of land. For those plots evidenced in the land register is binding register with respect to registered rights. A of land that do not have a mortgage only for the purposes of, for example, good-faith purchaser of a registered right register, there should be a collection of economic planning, zoning, tax documents (zbiór dokumentów) kept by acquires this right in the shape described assessment and classification of land in the court until a mortgage register is in the mortgage register and from the the mortgage register. The mortgage established. The rules regarding reliance person registered as the holder of the register is the only register that defines on entries in mortgage registers do not right (even if such person did not actually the legal status of land. apply to these collections of documents. hold it). It should also be noted that there When buying unregistered land, a is a legal presumption of good faith in thorough title due diligence (including a Polish civil law, i.e. the burden of proof is report on title) is advisable. on the party questioning good faith. 1.4 Restitution claims

Restitution claims are a repercussion of the nationalisation processes under communist Poland. There is no reprivatisation law that would generally solve this problem, and restitution occurs through individual court claims. Although restitution claims are a fact of life throughout Poland, and especially in Warsaw, it should be stressed that real property may be securely acquired, provided that the buyer acted in good faith (i.e. the buyer did not know, despite due diligence, about any restitution claims).

Vistula River in Warsaw (one of the last major unchannelled rivers in Europe) Photo by Paulina Matuszewska

The current situation regarding Warsaw incoming purchaser being unable to rely order to be valid. In the case of a real estate is a consequence of the city’s upon the "public warranty of land and preliminary purchase agreement, this is destruction during the Second World War mortgage registers". the subject of the sale and the purchase and the effect of a nationalisation law, price. It is also advisable to provide for a justified at that time by the need for the Title insurers have developed a series of long-stop date by which the parties entire reconstruction of the destroyed products to cover these risks; ranging should execute the final agreement. city. On the basis of the "Warsaw from Single Risk Indemnity Policies Decree" of 1945, all properties in Warsaw (known in the UK as Defective Title If a preliminary purchase agreement is not located within the post-war boundaries of Policies), which will cover identified title or notarised and one of the parties rescinds the city, were "municipalized", i.e. seized off-title flaws, to comprehensive title it, the other party may claim only by the City of Warsaw. The Decree, while covers offered through Owner and compensation for damage (basically "municipalising" the land granted then Lender Title Indemnity Policies, which are limited to the costs related to owners of the buildings and their legal closely modelled on the US full title negotiations). If, however, a preliminary successors, the right to claim a perpetual policies. purchase agreement is signed in notarial lease (dzierżawa wieczysta) or a right to deed form, then it is possible to claim a build (prawo zabudowy) , which were specific performance, so that a court unified in 1961 and became perpetual 1.6 Preliminary agreement verdict substitutes the signature of the usufruct – for a symbolic fee. The owners reluctant party. and their successors had the right to file Where the immediate acquisition of a an application within six months from the property (or shares in a company holding City's taking over the land, unless it was real estate) is not possible because of 1.7 Purchase from public not in compliance with the zoning of that certain circumstances or not desirable bodies time. Unresolved applications or because of the need to complete a due applications resolved contrary to the diligence, the parties may conclude a provisions of the Decree are currently the The largest Polish landowners are public preliminary purchase agreement. bodies, i.e. the State Treasury and local most common reasons for re-establishing Commonly, the function of this the rights of previous owners (or their authorities (mainly gminas ). The agreement is to fill the time gap between acquisition of real estate from public successors) to their properties or for the drawing up a letter of intent (which, apart payment of compensation. bodies (or the granting of the right of from clauses on exclusivity and perpetual usufruct to their land) is confidentiality, is not usually binding on A legal due diligence in Poland will regulated by the same civil law regime the parties) and executing a final that is in place for transactions between necessarily involve an assessment of the purchase agreement. A preliminary risk of restitution. individuals. However, because of the purchase agreement solves the problem public status of the land, it is additionally of legal uncertainty remaining between subject to specific regulations contained the parties during this period. 1.5 Title insurance in the 1997 Real Estate Management Act. As a rule, the acquisition of public land is Over the past few years, title insurance Buyers are sometimes reluctant to go to subject to the principle of transparency has become an option for resolving title the expense of conducting a due eflected by a general obligation to and off-title matters as specialised diligence review unless they know that dispose of land via public tenders. The insurers have entered the market. There they will have an enforceable right to relevant authority selects the purchaser of are situations where even a thorough acquire the property if their due diligence the land from bidders in an oral or written legal due diligence cannot conclusively does not reveal any unacceptable risks. tender. An oral tender is used if the determine whether or not there are highest price is considered, while a outstanding or unknown third party As well as a title due diligence, it is written tender is used if there are aspects challenges to the legal title to the land. usually advisable to undertake an to take into account other than simply Similarly, there are scenarios where environmental due diligence (see 2.6 and price. known title issues and contraventions are 9.12 below) and, in the case of identified in respect of title, such as developed land, a technical due diligence encroachments, deficiencies in the of the improvements on the land. conveyancing/auction procedure, lack of permits required by law, restitution issues A preliminary agreement must include the and other situations which result in the essential content of the final agreement in

The Act exempts certain disposals from and the Agency have one month to 1.10 Energy Efficiency the tender procedure. The most important exercise their rights. A disposal of exemption is an in-kind contribution to a agricultural land in violation of the Act or Certificate company. As a matter of fact, several without notifying the entitled tenant or the reputable developments have been carried Agency is invalid. As a part of a "going green" policy, out in this more flexible way: Municipalities Poland implemented EU Directive selected developers in a less formal 2002/91/EC referring to the energy procedure, set up common SPVs and sold 1.9 Acquisition of real efficiency characteristics of buildings. On their stake of the shares once the the basis of this directive, from 1 January rdevelopment was completed. However, estate by foreigners 2009 new buildings have to have Energy this scheme is no longer popular because Efficiency Certificates. The law also of the recently introduced restrictions on The 1920 Act on the Acquisition of Real requires the seller of a building or a flat or the acquisition of shares held by public Estate by Foreigners provides for a part of a building constituting an bodies. They must be sold via a public restrictions on the acquisition of real estate independent unit to deliver to the tender, or another public procedure, in by foreign nationals or companies. Based purchaser a relevant Energy Efficiency other words a private shareholder already on this Act, before acquiring land in Certificate. Similarly, landlords should holding shares in such an SPV has no Poland, a foreigner is obliged to obtain a make available to tenants copies of their priority in the acquisition. permit from the Ministry of Internal Affairs respective Energy Efficiency Certificates and Administration ("MOI"). The same act for each subject of lease – be they flats of law imposes restriction on foreigners or buildings or a part of a building 1.8 Pre-emptive right who are not citizens or business entities constituting an independent unit. Even from the European Economic Area ("EEA") though this legislation has been in force acquiring shares in a company with its for nearly two years, it is still uncommon In certain cases, public bodies may have a in non-institutional transactions for a statutory pre-emptive right to properties registered office in Poland having ownership or perpetual usufruct right to seller to hand over a relevant Energy put up for sale. If such a property is sold Efficiency Certificate to the buyer. This without observing this right, the sale is null property. The obligation to obtain an MOI permit applies if as a result of acquisition of results from a lack of sanction in the law. and void. This involves the district’s The situation is different with institutional (gmina’s) pre-emptive right (almost always shares by a foreigner, the company becomes controlled by a foreign transactions, in which buyers are more waived) applying to the sale of the following aware of their rights and require the kinds of properties: (i) undeveloped land shareholder. The obligation to obtain an MOI permit for share acquisition is very rare Certificate to be delivered as part of the previously acquired from the State Treasury basic property documentation. The or from a local authority; (ii) undeveloped nowadays as the Ministry of Internal Affairs considers Polish-based SPVs acting as Certificates are valid for a period of ten land held in perpetual usufruct; (iii) land for years. which a public use is provided for in the purchasers as undertakings from the EEA, local master plan (if the pre-emptive right is even if they are fully controlled by entities registered in the mortgage register); and (iv) from outside the EEA. historical monuments (if the pre-emptive right is registered in the mortgage register). A property sale agreement or share The district in question has one month purchase agreement executed without a following the notification of the conditional required MOI permit is null and void. sale agreement by the notary to exercise its right, failing which the parties may enter However, following Poland’s accession to into the final sale agreement. the EU, the Act was changed to include wide exemptions to the requirement to In addition, the 2003 Agricultural System obtain an MOI Permit. According to the Act introduced a pre-emptive right for Accession Treaty (which prevails over tenants of agricultural land. If there are no national legislation) undertakings from the qualifying tenants, the pre-emptive right EEA cannot be prevented from purchasing may be exercised by the Agricultural real estate in Poland, apart from agricultural Properties Agency. However, the pre- land and forests. The obligation to obtain emption right of the Agricultural Properties an MOI Permit for agricultural land and Agency applies to agricultural properties forests by undertakings from the EEA bigger than five hectares. Both the tenant expires on 1 May 2016.

r 2.4 Building permits 12 2.5 Construction works exempted

u from building permits 13 2.6 Environmental procedures (see also section 9) 13 d 2.7 Time factor and appeals 13 2.8 Changing designs and illegal

e constructions 14 2.9 Change of use of the building 14

c 2.10 Permit for use 15 2.11 Land subdivision 15 o r p

t n e m p o l e v e d

2.1 Required Permits that should be taken into account when a zoning study, either. (See section 2.2.2 zoning study or master plan is being above.) In general, development of land requires prepared. Subordinate to the Acts of a building permit (see 2.4 below) and, in general application are various "local The draft master plan is subject to a many cases, it also requires a planning laws", the most important of which are "public review" procedure. Any interested permit (see 2.3 below) and an the master plans and, in some locations, party may file motions regarding the draft environmental impact assessment (see landscape protection ordinances. master plan, concerning any specific 2.6 and 9.9 below). The development zoning issue in any area, but the City is must conform to the local development 2.2.2 Zoning study not obliged to take such motions into plan for the area in which the property is Before adopting a new plan a municipal account. Then the draft master plan is situated, if there is one. unit is obliged to develop a so-called sent for approval/opinion to various public zoning study. The zoning study is an bodies and finally voted on by the City internal document of the City that third council. parties cannot rely upon. It sets general 2.2 Zoning issues zoning guidelines for the whole of a local Any interested party may appeal against district’s ( gmina’s ) territory and the master plan to the administrative 2.2.1 Zoning situation in general determines the content of the master court. It will be invalidated if there has The zoning situation in Poland has not plan. Under the current law, a master been any (even insignificant) breach of been very stable for the past few years. plan cannot be in contradiction to the the law or a significant breach of In 2003, a new Zoning Law came into provisions of the zoning study; previously procedure. force replacing the one from 1994. There a master plan had to comply with the have been discussions about changes in provisions of the zoning study. As f the adoption of the master plan restricts the planning system in Poland, but they explained in the justification to the recent the use of the property, the owner may have not translated into any official draft amendment to the Zoning Law, the require the authorities to compensate him legislation yet. A number of changes have requirement of a master plan to be in for his loss or to buy the land (and the been made to the Zoning Law after 2003 compliance with the relevant zoning study authorities may, in return, propose a land but in general, the zoning situation has was a major burden affecting the not improved. Recent changes to the law adoption of master plans because if a swap). If the new master plan reduces will allow local communities to adopt certain issue was not clearly regulated in the value of the property and the owner master plans in a shorter period of time the zoning study, a master plan could not sells it, the seller may require the City to but still the overall complex implementation be adopted to regulate something which pay the difference in value. Conversely, if process and cost of it are the main factors was not provided for in the zoning study. the value increases, the seller may be why most of Poland is not covered by The procedure for adopting a zoning asked to pay a so-called "zoning fee". local master plans. study under the 2003 Zoning Law is quite The new master plan becomes an act of similar to the procedure for adopting a local law at the earliest 14 days after it is By virtue of the 2003 Zoning Law, all master plan (public review, motions, published in the voivodeship journal of master plans adopted before 1 January external approvals/opinions etc.). 1995 ("old" master plans) expired on laws. 1 January 2004. The practical impact of 2.2.3 Master plan this law was quite damaging – only about The master plan is voted on by the City 2.2.4 Specific constraints: shopping 20–30% of the territory of Poland (and council and constitutes the most centres about 20% of Warsaw – mainly residential important zoning tool, as well as being an Large retail units may only be developed districts on the outskirts of the city) is act of local law. The new Zoning Law if the site is covered by a master plan now covered by master plans. describes in detail matters regulated by providing for retail space in excess of the master plan (i.e. they are mandatory). 2,000 square metres. It is a subject of Various aspects of urban planning are The "new" procedure (under the 2003 dispute in the relevant jurisprudence and regulated in many other Acts, such as Law) of voting on the master plan is quite secondary legislation ordinances to the complicated and can take more than legal doctrine as to whether a shopping Zoning Law, Environmental Protection seven months. The draft master plan centre development on a site not covered Act, Protection of Nature Act, Protection must take into account all general and by a master plan is possible or not (i.e. of Monuments Act, and various Acts specific constraints applicable to the based on a planning permit – see section concerning the security of the State etc. given site. As mentioned earlier, it cannot 2.3 below). These are Acts of "general" application be contrary to the provisions of the

2.3 Planning permits Any interested party may obtain a Building permit documentation must be planning permit, irrespective of whether it approved in advance by various If the land is not covered by a master holds legal title to the site. Planning authorities, including (as applicable): the plan (and, as mentioned, this is the case permits are also transferable to third sanitary inspector, environmental for most land in Poland), a planning parties. protection inspection, the cultural and permit must be obtained before the heritage inspector, the road management building permit documentation is A planning permit expires if another authority, the work safety administration, submitted. The law makes a distinction developer obtains a building permit for the fire brigade etc. A large part of the between planning permits for public the site, or if a master plan is adopted land in Poland is considered "agricultural" developments and those for private that is inconsistent with the planning (the formal criterion is a relevant entry in schemes. "Private" planning permits are permit (unless a final building permit has the land register). In the case of a site much more difficult to obtain. This has already been granted). located outside the boundaries of a town been widely criticised and this criticism or a city, before a building permit can be will probably lead to changes in the issued, the land should be excluded from legislation. 2.4 Building permits agricultural use (otherwise the building permit would be null and void). This Obtaining a "private" planning permit Building permits may be obtained if the involves payments from the owner, in ten requires a number of conditions to be project complies with the master plan. If annual instalments, depending on the fulfilled, including: securing utilities there is no master plan, then a building category of the land. (See section 8.2.5 connections and ensuring architectural permit may be obtained if it complies with for details.) compliance, including height parameters, the planning permit. density and functions, with neighbouring In most cases, building permits are developments (although the City may A building permit is usually composed of issued by the starosta (head of a mid- decide not to apply this criterion in two basic elements: approval of the level administrative unit called powiat ). In "justified cases"). The local authority designs and permission to start the bigger cities, the mayor exercises the architecture department has to prepare a works. If the project is phased, the functions of the starosta . As with a "zoning analysis" in order to verify developer may request permission to planning permit, a building permit may be whether those conditions are met, and if start the works for the initial phase(s) transferred to a third party, provided that not, whether they can be waived. only. In this case, the building authority it holds title to the site. must approve the "site development The planning permit procedure may be plan" (which is part of the building suspended (at the City’s discretion) for up documentation) and detailed architectural to nine months. If a master plan for a designs for the initial phase. This flexibility given development or territory is allows considerable savings in terms of "obligatory", the planning permit the preparation of architectural designs procedure is suspended until the for subsequent phases (which may be adoption of the master plan. approved at a later stage, when permission to start the works for such In summary, a planning permit makes it future phases is granted). possible for the authorities to approve only those developments that they In order to obtain a building permit, the consider appropriate. Obtaining a developer should hold legal title to the planning permit may also prove risky for site (not necessarily freehold – it may the developer, as the developer has to even be a simple lease), but it is also satisfy claims relating to restriction of use acceptable if the owner of the site gives or loss of value of neighbouring plots its approval in writing. caused by this decision.

2.5 Construction works (i) fun parks, golf courses and There is also a separate environmental accompanying infrastructure; procedure in the case of the exempted from building developments mentioned above. The permits (ii) garages, car parks or car park developer has to obtain a "decision on complexes, with accompanying environmental conditions" ("EIA decision") Certain construction works do not require infrastructure, with a usable area before applying for a building permit a building permit, but simply a notification no smaller than 0.5 ha (0.2 ha in (without the need to secure the title to the to the building authority. The notification areas covered by the nature site). The EIA decision must be consulted should include appropriate drawings, as protection and their buffer zones); upon with the sanitary and environmental well as opinions and approvals from usable area means the sum of the authorities. The EIA decision is valid for various administrative bodies (if footprint and area occupied by four years and is binding on the building applicable). The works may be started if other above-ground and authority granting the permit. The 4-year the building authority does not raise any underground levels along the term may be extended if the conditions objections within 30 days from the external footprint of the elevation specified in the EIA decision do not notification. of the building facility; change and the project is developed in phases. Environmental NGOs have the Such works include: car parks with no (iii) shopping centres and right to participate in the environmental more than 10 spaces, certain temporary accompanying infrastructure with procedure. They have to submit specific objects, fencing, renovation works (except a usable area no smaller than 2 ha remarks and motions (within a certain for structures entered in the register of (0.5 ha in areas covered by the deadline) in order to take part in the historical monuments), certain advertising nature protection and their buffer procedure. Environmental NGOs do not billboards, reconstruction and zones); usable area means the participate in the building permit modernisation of roads etc. The list of sum of the footprint and area procedure. construction works that may be occupied by other above-ground commenced via the notification procedure and underground levels along the has been extended in recent years. In external footprint of the elevation 2.7 Time factor and particular, the general rule of a building of the building facility; permit being required no longer applies to appeals the construction of power, water, sewage, (iv) industrial or warehouse gas, heating and telecommunications developments with accompanying 2.7.1 Duration of the procedure connections, irrespective of whether such infrastructure, with a footprint no The duration of the procedure depends works are related to the construction of smaller than 1 ha; footprint means on the location of the development (some the building or work performed on an the area of land occupied by the authorities are busier than others) and on undeveloped piece of land. building facilities and other areas the complexity of the project. The intended for transformation as a statutory term for issuing a building result of the implementation of the permit is 65 days (provided that the project; documentation is complete), but in 2.6 Environmental practice it may take longer. Although procedures (see also (v) residential developments with there is no statutory guideline for planning section 9) accompanying infrastructure: permit proceedings, their duration is - covered by the arrangements of comparable, or slightly longer (because of the local master plan – no the need to prepare a zoning analysis – Developments that may have an impact see above). on the environment (listed in a special smaller than 2 ha in areas ordinance) are subject to special rules. covered by the forms of nature protection or their buffer zones If an appeal is filed, the matter is sent to The procedure is open to the public second instance proceedings conducted (public announcements are placed in the and 4 ha in other areas; - not covered by arrangements of by the voivode (head of region). Such City hall and on the City’s website) and proceedings usually take two months. environmental NGOs have the right to the local master plan or local take part in it. reconstruction plan – with a footprint no smaller than 0.5 ha Developments which may require the in areas covered by the nature preparation of an environmental impact protection forms and their buffer assessment report include: zones and 2 ha in other areas.

2.7.2 Ordinary appeals the developer may satisfy its claims from works, works executed until that time are Any party to the procedure can submit the cash deposit. Cash deposits were not deemed illegal. ordinary appeals. This includes: the designed to stop the parties from developer, the owner of the site (which appealing against building permits just for A developer (members of the management might not be the developer) and other sake of making the developers’ life harder. board) of an illegal construction risks parties having a "legal interest" in the criminal prosecution and a penalty of up proceedings. In planning permit procedures, this last category covers the In principle, decisions of the voivodeship to two years' imprisonment. In principle, owners of adjacent properties. administrative courts may be appealed to any illegal construction (whether Concerning the building permit the Supreme Administrative Court. If the completed or not) should be demolished, procedure, the 2004 amendment to the ruling of the voivodeship administrative though a legalisation procedure may be Building Law defines the parties as court is cancelled, this court should issue initiated if the project complies with the owners of properties located within the a new ruling taking into account the master plan or with the provisions of the "development impact zone". This zone is instructions of the Supreme Administrative final planning permit and it is possible to determined on a case-by-case basis Court. make the construction fully compliant according to various technical regulations with the law, i.e. the existing and, in principle, is narrower than simply all the neighbours of the site. infringements of building and technical 2.8 Changing designs requirements may be cured. During the Ordinary appeals must be filed within and illegal constructions legalisation procedure, the developer must 14 days from receipt of the building file complete building documentation. The permit by the party. If no party has filed A building permit includes an approval of authority will impose a "legalisation fee", an appeal within this period, the permit the design. If the developer decides to the amount of which depends on the becomes final. depart from such approved designs, it scale of the project and its function. should consider whether such an 2.7.3 Appeals to the Administrative alteration is "material". Material alterations Courts are allowed only after an amendment to 2.9 Change of use of the There are two "stages" as regards the building permit is issued. If the building administrative courts in Poland: the developer makes material alterations voivode administrative courts and the without a prior amendment of the building The owner or authorised occupier of a Supreme Administrative Court. permit, such works will be considered building or premises is entitled to make illegal. In such a case, the building improvements and alterations in the Once ordinary appeals have been authority requests the developer to submit building or in the premises. If the exhausted, a party may file a lawsuit with an amending design and requests alterations are aimed at changing the a voivodeship administrative court. The fulfilment of other conditions necessary to current use of the building or the lawsuit must be submitted within thirty bring the works to the state compliant premises, it is necessary to notify the days from delivery of the second instance with law, within the specified period of relevant building authority before actual decision. time. Failure to comply with the building change of use. According to the Building authority's requirements may lead to Law a change of use of a building or its The lawsuit does not automatically demolition of the completed works or part is action or omission leading to suspend the building permit (which means issuance of a decision disallowing change of fire safety, labour safety, that the works may be commenced), but continuance of the building works. sanitary or other legal requirements. If the the court may decide to suspend it. In scope of alterations or improvements such a case, the appellant may be Any construction works requiring a requires receipt of a building permit or the obliged to pay a cash deposit to secure building permit or a notification (in the intended change of use is contrary to potential claims of the developer in relation case of smaller works) carried out without provisions of the master plan or planning to the suspension of the permit. If the such permit or notification are also illegal. permit or if the intended change of use court rules that the lawsuit is entirely or If, however, the construction works were may lead to inadmissible consequences even partially justified, the cash deposit carried out pursuant to a building permit specified in the Building Law, the building will be repaid. If the lawsuit is dismissed, that has been declared invalid during the authority issues an objection.

If a notification concerning change of use Labour Inspectorate and fire brigade of complies with the applicable regulations of the building or its part is lodged with the completion of the construction works or if it complies with the provisions of the the building authority and is not objected and of the intention to use it. If there are planning permit. to in the form of a decision within 30 no objections or official statements from days from receipt of notification, the the relevant authorities within 14 days of Regardless of the provisions of the change of use of the building can be the notification date, this is to be treated master plan or lack of it or the planning effected within the following two years. If as tacit consent to use the building permit, the regulations also allow the the alterations were made without a structures. subdivision of co-owned land on which required building permit, the building there are two buildings (to enable authority may order them to be removed, Use of the building structures without termination of the co-ownership). There and the owner of the building also risks notifying the relevant authorities or are ten (10) other circumstances provided criminal prosecution. without a required permit for use is in the Real Estate Management Act in considered illegal. Apart from the which the subdivision of the property can administrative consequences of illegal be achieved. 2.10 Permit for use use, such as a fine, which may be imposed by the relevant authorities, the The subdivision process has two stages. Use of the completed building or lack of notification or occupancy permit In the first stage, the City confirms the structure may be commenced upon causes fundamental problems where projected subdivision's compliance with notifying the relevant authority (i.e. leasing the building is concerned. the master plan (if applicable). In the construction supervisory), subject to second stage, the draft subdivision cases specified in the Building Law. The For most forms of development there is a prepared by a professional surveyor is investor may take occupancy if the requirement that before the completed finally approved by the mayor. authority has not reported any objections development may be brought into use, an It is possible to subdivide a plot within the within 21 days of delivery of the occupancy permit should be obtained footprint of a building. However, the notification. However, in some cases from the relevant authority. This is in borders of new plots should run along notification is not sufficient and an effect a "sign off" by the authorities that vertical walls of the building and the parts occupancy permit is required. This the development has been constructed in of the building located on separate plots applies to the following: (i) where a accordance with the consents issued and must be fully independent, including building permit was required for the conforms to all relevant planning and separate entrances and installations. This erection of the structure and the structure building regulations. should be taken into account while falls within the relevant category as designing buildings with a view to their stipulated in the Article 55 (1) of the future legal subdivision. Building Law, (ii) where use of the 2.11 Land subdivision structure is to be commenced before the If, following the subdivision of a piece completion of all construction works, Needless to say, the proper configuration land, its value increases, the mayor of a (iii) illegal construction projects, if the of plots is essential in many various municipality may impose a betterment body conducting the legalisation respects. This concerns access to public levy ( opłata adjacencka ). The amount of proceedings imposes such an obligation roads and other infrastructure (and the the betterment levy is established in a on the investor, and (iv) when the building necessity, or not, to establish resolution of the municipality council and works were temporarily halted owing to easements), the phasing of the project it cannot exceed 30% of the difference in "material" deviations from the approved (and allocation of various phases to the land value after subdivision. The design or other conditions as indicated in various SPVs) and cutting out plots betterment levy can be imposed within the building permit. dedicated to specific functions (e.g. three years from the date the subdivision roads) etc. decision became final. The issue of an occupancy permit requires a mandatory inspection by the As a rule, land subdivision must comply relevant authorities provided for in the with the master plan. This means that it is Building Law. generally more difficult (sometimes impossible) to subdivide an unzoned site. Moreover, if the investor is obliged to Unzoned land may be subdivided if the obtain an occupancy permit, it should City has not yet started the master plan also inform the Environmental Protection procedure (otherwise, the subdivision Inspectorate, the Sanitary Inspectorate, procedure will be suspended), and if it

n 3.5 Security 19

i 3.6 Usury interest 21 3.7 Typical real estate loan structure 21 c n a n i f

e t a t s e

l a e r

3.1 Introduction which initially finance the construction of outstanding loan and the rental income the development, and are then converted on the property, decreased by the Since the mid-1990s, the Polish real into investment loans. operating costs of the property. The estate financing market has been borrower is required to maintain the ratio developing strongly, and a wide range of 3.2.2 Floating rate and fixed rate at a certain agreed level. products is available to developers and facilities investors. Banks, both Polish and foreign, The vast majority of commercial loans for Loan to value ratio is the ratio between offer a variety of construction and construction purposes will bear interest at the amount of the outstanding loan and refinancing facilities, mixtures of the two, a floating, rather than a fixed rate. The the value of the property established as well as various hedging options. As a floating rate will vary periodically to reflect through a valuation completed by a rule, banks are prepared to finance up to the cost to the banks of providing the reputed valuer. 80% (depending on the risk profile of a money. In respect of euro loans, it will be project) of the total investment costs, and usually based on EURIBOR, with US In the case of construction loans, the the investor is expected to provide its dollar and Polish zloty loans at LIBOR debt to equity ratio is also introduced. own equity to finance the remaining and WIBOR respectively. costs. Debt to equity ratios for If any ratio provided for in the agreement construction facilities are usually lower A fixed rate is more likely to be selected is not respected, an event of default is and are connected to the pre-let. in transactions where the borrower’s cash triggered. It is, therefore, vital from the flow generated from its main activities is borrower’s point of view, that the facility Equity may be financed through expected to reach a certain level (e.g. if agreement envisage a cure period to mezzanine lending. Mezzanine lending is the loan is intended to refinance the remedy the level of the ratio. characterised by a low security level and acquisition or construction of an office the mezzanine lender is sometimes able building in which the rental payments are 3.2.5 Default to have second ranking security over the fixed). Facility agreements preview standard assets encumbered in favour of the representations and warranties as well as senior lending bank(s). It should be As the fixing mechanism requires the events of default. It is worth noting that noted, however, that there are not many lenders to take refinancing for a long term most facility agreements include the mezzanine lenders on the Polish market. (in line with the fixed rate term selected in concept of a potential event of default, Quasi-mezzanine financing may be the loan agreement), the loan meaning a situation in which it might be provided by parent companies or affiliates documentation will normally either expected that an event of default will through subordinated loans or other prohibit the borrower from making occur shortly. Furthermore, an event of forms of equity contribution. In this prepayments of the loan, or will require default is triggered if any circumstances respect, thin capitalisation rules should be the borrower to bear all costs resulting occur that have an adverse effect on the taken into account at the stage of from such prepayment. borrower’s performance of obligations structuring forms of equity. Those rules under the facility. apply to loans that exceed three times 3.2.3 Currency the share capital of the borrower, and The market offers loans in various disallow the tax deductibility of interest currencies. To decrease foreign exchange allocated to the excess. Interest on loans risks, the currency of the loan should granted by unrelated entities will not be match the currency of the rents payable subject to thin capitalisation. by tenants in the property concerned. As buildings are usually rented in euro, it is advisable to match the currency of the 3.2 Loan Agreement income with currency of the loan. 3.2.4 Financial Covenants 3.2.1 Types All types of facility agreements most often There are three main types of loan include two financial ratios that the documentation reflecting the type of borrower needs to maintain during the transaction: (i) financing the construction lifetime of the loan: (i) debt service cover of a development; (ii) refinancing an ratio and (ii) loan to value ratio. existing development (including Debt service cover ratio is usually the acquisition) and (iii) convertible facilities ratio between the amount of the

3.3 Interest Hedging

Hedging is a way of reducing some of the risk resulting from a fluctuation of interest rates, which, if they go too high, will result in debt service obligations that may not be met by cash flow generated by an asset. The benefit of interest hedging must be weighed against the hedging cost. If the marginal benefit of reducing the risk with an individual transaction is less than its marginal cost, it is not worthwhile hedging that risk.

The most popular interest hedging transactions in property financing transactions are (i) interest rate swaps ("IRS") and (ii) "cap and collar" transactions.

3.3.1 IRS transactions Warsaw's Old Town An interest rate swap is, in fact, an Photo by Paulina Matuszewska exchange. In an interest rate swap, two parties agree to swap their interest the cap strike. If the floating rate falls charged, calculated as a percentage of obligations. During the term of the swap, below the floor strike, the borrower pays the undrawn facility from time to time. the borrower pays a fixed interest to the the swap provider the difference between The commitment fee is sometimes swap provider (who sometimes is the the floor strike and the floating rate. drafted to run from the signing of the loan lender). The level of the fixed interest is agreement, even if the borrower has not agreed in the swap agreement. Standard yet satisfied the conditions precedent. ISDA agreements are often used for 3.4 Cost of lending these purposes. In return, the swap If a borrower cancels any part of the loan, provider pays the borrower variable 3.4.1 Fees it will be required to pay a "cancellation interest (LIBOR or EURIBOR, as A bank may charge a fee in return for the fee" If the loan is prepaid, the borrower applicable). initial work it must do to put the loan will pay a "prepayment fee". together (e.g. due diligence and 3.3.2 "Cap and collar" transactions negotiation). In a syndicated loan, there The borrower purchases the "cap", may be several bank fees, including an placing a ceiling on the interest rate he arrangement fee (since the arranger bank will pay, and sells the "floor" to obtain a is responsible for the initial work in premium to pay for all or part of the cap. constructing the facility, taking a lead role A collar transaction limits the borrower’s in due diligence and negotiating, and also interest rate payments to a range for putting together the syndicate). bounded by the agreed strike rates of the cap and floor. If the floating rate rises A bank which takes on an agency role above the cap strike, the contract (e.g. administrative or security agent) will provides for payments from the swap demand an agency fee to compensate it provider to the borrower, constituting the for the extra responsibilities involved. difference between the floating rate and A "commitment fee" may also be

3.4.2 Expenses "undertaking" to have a single mortgage precedent for the draw-down of the In any transaction, it is necessary to securing their claims. To this end, the facility. Usually it is the filing. At the same consider who is to bear the costs relating creditors will need a mortgage to the performance of the agreement. On administrator to exercise their rights and time, the lending bank(s) may require that a gap insurance agreement be entered general legal principles, the costs of claims on their behalf. The mortgage into for the purpose of insuring against performing an agreement, in the absence administrator will be registered in the land the occurrence of the situation where the of specific provisions to the contrary, lie and mortgage register. The creditors court refuses to register the mortgage. where they fall. Express provisions will be could appoint the mortgage administrator included in most facility documentation among themselves or a third party. The speed of registration of a mortgage making the borrower liable for further depends on the court. In big cities, it may costs. Usually the banks agree to cover The amendment to the mortgage law take several months, in smaller ones – a introduces the concept of the disposal of any syndication cost themselves. week. Mortgages in favour of banks have "released mortgage position". Each registration priority according to the mortgage is allocated a specific "position" court's internal by-laws. If the process is 3.4.3 Stamp duty and value added tax in the land and mortgage register in really in delay, it may help to address an There is currently no stamp duty payable which it is evidenced. When an original "acceleration motion" to the president of on the execution of a straightforward loan mortgage expires (for example as a result the court. As mentioned in section 1.2.1, instrument, but usually banks cover the of the repayment and discharge of the the courts are gradually introducing an risk of potential stamp duty in the future, original secured claim) the original electronic mortgage register system, or foreign stamp duty, by shifting it onto position allocated to the original which substantially shortens the the borrower. mortgage becomes vacant because the registration period. secured claim ceases to exist. In such a case the holder of the title to the real Under current Polish law, there is no VAT property encumbered with an original payable on bank fees, but banks usually mortgage may create another mortgage cover the risk of potential VAT in the (up to the original amount) and allocate future in facility agreements. the original position to such newly created mortgage.

3.5 Security The possibility to effect such disposals is designed to provide more options to the holders of title to real properties. 3.5.1 Mortgages A mortgage is the most typical security in As a rule, and subject to certain the case of real property financing, and a exceptions, a mortgage created before lending bank almost never agrees to 20 February 2011 is governed by the finance a real property without this type new laws (if such mortgage was created of security. On 20 February 2011, the as a ceiling mortgage [ hipoteka kaucyjna ]) laws amending the existing regulations on or by the old laws (if such mortgage was Polish mortgages took effect. The existing created as fixed amount mortgage distinction between a ceiling mortgage [hipoteka zwykła ]). (hipoteka kaucyjna) and a fixed amount A mortgage may be established either in mortgage (hipoteka zwykła) has been the form of a notarial deed or through a abolished as there is now just one type of written statement of the borrower (with a mortgage, its features resembling the Polish bank). It will be possible to express existing ceiling mortgage. Under the new a new mortgage in a currency different law a mortgage may secure multiple than the currency of the secured claims. claims of a single creditor arising under various contractual relationships. The new It is a matter of negotiation whether filing regime makes it possible for multiple a motion to register the mortgage or the actual registration thereof is a condition creditors financing the same

3.5.2 Pledges registered with the National Pledge claims under the facility to a certain Polish law recognises three types of Register. amount (or up to a certain amount) and pledges: (a) registered pledge, (b) by the date stipulated in the statement. ordinary pledge and (c) financial pledge. It (b) Registered pledge over assets has become market practice that banks Polish banks are allowed to accept granting property financing secure their Under this agreement, the written submissions to execution under claims with a registered pledge and a company pledges all of its current financial pledge over shares in the and future assets, including any the Polish banking law provisions, company to which the facility is granted, rights, especially rights to the whereas foreign banks and other entities as well as a registered pledge over the accounts. It is the equivalent of a may accept such submissions only in the rights and assets of that company. floating charge under common law . form of notarial deeds. Sometimes they require separate financial pledges over bank accounts. The sub- Upon enforcement of the loan, the 3.5.4 Assignment sections below present the main bank may sell the enterprise at Typically, the borrower assigns to the information on the three types of pledges: public auction, lease the enterprise lender – as security for the claims arising or take over administration of the under the facility – its rights under lease (a) Registered pledge over shares enterprise. agreements, bank account agreements, Until recently, banks accepted A standard registered pledge insurance agreements, construction registered pledges only over agreement includes a negative agreements and management shares in limited liability companies pledge clause where any form of agreements. The assignment includes a and joint stock companies. disposal of shares is forbidden clause in which the borrower agrees to However, when, for tax reasons, without the prior written consent assign its future rights immediately upon borrowers began to develop of the bank. entering into any future agreement of a property belonging to limited given kind. partnerships, there were attempts The pledge agreement should be to pledge interests in limited entered into with a date certified partnerships. by a notary and registered on the Assignment agreements should be same terms as described above. entered into with a date certified by a Registered pledges over shares notary. established by the parent (c) Financial pledge company(ies) of the borrower, 3.5.5 Other collateral allow the lending bank, upon This is a relatively new form of Other collateral includes: (i) suretyships enforcement of the loan, to seize security, resulting from the and corporate guarantees, (ii) the shares or sell them at public implementation of the EU Financial subordination agreements and (iii) a auction. The value of seized Collateral Directive. It may be power of attorney for bank accounts. shares is established by the established on monies (bank parties. accounts), financial instruments and shares. Upon enforcement of A standard registered pledge the loan, the encumbered assets agreement includes (i) a negative will be seized or sold in an pledge clause where any form of enforcement procedure as provided disposal of shares is forbidden for by the Code of Civil Procedure. without the prior written consent of the bank, (ii) an obligation to 3.5.3 Submission to execution pledge any new shares created in This instrument is very popular with the company, and (iii) an ordinary lenders and allows the lending bank(s) to or financial pledge clause with shorten any enforcement procedures. expiry upon registration of the registered pledge. In submission to execution, the borrower A pledge agreement must be makes a statement to the lender in which entered into in written form and it allows the lender to enforce all its

3.6 Usury interest

According to law (Art. 359 § 2 1 of the Civil Code), the maximum annual interest rate amounts to four times the Lombard rate published by the National Bank of Poland (i.e. as at 25 January 2011: 4 x 5.25% p.a.). If the parties to a contract provided for an interest rate higher than the maximum interest rate, then the debtor is obliged to pay only the maximum rate (i.e. currently 21% p.a.). The provisions of the law prevail if the parties choose a foreign law. Lenders of non-consumer loans may try to compensate for the effects of this maximum interest rate by increasing various fees, commissions and costs related to the preparation and continuation of the loans.

3.7 Typical real estate loan structure Bank Chart 1

© Clifford Chance, Janicka, Krużewski, Namiotkiewicz i wspólnicy spółka komandytowa 2011 4.1 Market standards 23 4.2 Warranties in construction s contracts 23 4.3 Employer’s liability to e subcontractors 23 4.4 Employer’s payment

u guarantees 24 4.5 Terms of payment 25

s 4.6 Dispute Resolution Mechanism 25 s i

n o i t c u r t s n o c

4.1 Market standards Standard construction contracts, like 4.3 Employer’s liability to FIDIC, that are used in Poland contain subcontractors In principle, construction contracts defects liability clauses. Defects liability relating to developments carried out in clauses essentially confer a right on the employer to call for the physical return of The legal relationship between employers, Poland operate in the manner anyone general contractors and subcontractors with practical experience with the contractor to the construction site to rectify defects for an agreed period of on construction projects are regulated by development projects in other the Civil Code's provisions introduced in jurisdictions in the EU would expect. time after take-over of the works. Such corrective works are almost always 2003, which were designed to create carried out more cost-effectively by the joint and several liability of both employer There is no standard form of construction and general contractor to subcontractors contract used in Poland, but major original contractor than by a new one. Under Polish law, it is of vital importance on construction projects. The employer construction projects are mainly based on and general contractor are jointly and international standard contracts from the to clearly determine the defects liability period in the construction contract. severally liable for the payments of FIDIC (Orange Book, Red Book, Yellow remuneration to subcontractors, provided Book and Silver Book). (From time to that the employer has approved the time, AIA contract documents are in use.) Additionally, clauses concerning the contractor's guarantee for construction contract between a relevant subcontractor and the general contractor. Employers and developers need to be materials and installations in the constructed buildings are usually included (The employer's failure to give an answer aware that Polish law may significantly within 14 days is treated as approval.) affect the use of standard international in the construction contracts as a market forms of construction contracts. This standard. The detailed scope and time stems from the fact that the above- limit of the above guarantee (gwarancja) mentioned standard forms do not is always subject to a contractual automatically take account of specific arrangement, but is usually for one year Polish legal institutions and requirements and entails an exchange of the defective regulated by the Civil Code and the elements or installations at the Building Law. contractor's cost.

Areas of international standard construction contracts that primarily need National Stadium in Warsaw, being built for UEFA to be fine-tuned in Poland are: warranty, EURO 2012 and a railway passage defects notification period, payments Photo by Michał Matera issues and dispute resolution.

4.2 Warranties in construction contracts

Under Polish law, warranty (rękojmia) is structured as the contractor's liability for defects revealed after the building has been delivered and accepted at hand- over, and entails strict liability. The statutory warranty time limit is three years for buildings and one year for the fittings of a building. The parties may vary this 3-year period by agreement. Typical market practice in Poland is to expand the contractor's liability for defects by extending the warranty period in respect of specific elements of the construction works to up to 10–12 years.

It needs to be highlighted that, pursuant amount up to the value of the contract. contract period. Moreover, in the absence to the Civil Code, despite the liability for He may also demand an extension of the of a clear statutory restriction, employers fees towards a subcontractor, the guarantee for additional works agreed link the starting point of their payment employer does not have any right to during the term of the contract. If the obligation towards the contractors with claim the performance directly from a employer fails to deliver a guarantee, the the final acceptance by the employers of subcontractor and does not directly contractor – because of the fault of the all works of the contractor executed benefit from the warranties issued by the subcontractor. (This issue may be employer – may terminate the contract. under a given phase of the development. resolved only if the agreement between Failure to provide the contractor with the the general contractor and subcontractor payment guarantee constitutes an takes into account the necessity to obstacle to carrying out building works protect the interests of the employer in for which the employer is responsible. the future, so it is vital for the employer to The contractor's rights may not be limited carefully review the subcontracts before or excluded contractually. The employer approving them.) Given that the employer may not terminate the contract because and general contractor are jointly and of a claim on the payment guarantee. severally liable towards a subcontractor, the subcontractor is allowed to raise any Both parties of the contract bear in equal claims concerning remuneration with the parts the costs of obtaining the payment employer and the general contractor at guarantee. the same time. As a result, if there is no proper exchange of information between To protect their financial interests, employer and general contractor, the employers seek to structure payment subcontractor could be paid twice for the terms so that the contract is "back same works. Some employers insure loaded" with proportionately higher themselves against such risk. As a rule, amounts due to be paid later in the the costs of the above insurance are passed on to the subcontractor.

If an employer on a project does not expressly consent to a subcontract entered into by a general contractor, then such subcontract between the general contractor and subcontractor is unenforceable against the employer.

4.4 Employer’s payment guarantees

The Civil Code grants a contractor the right to demand a payment guarantee for construction works from the employer. The guarantee may be issued in the form of a bank guarantee, an insurance guarantee, a letter of credit or a bank's suretyship.

The contractor may demand the payment guarantee at any time during the construction contract term and in an

4.5 Terms of payment The Act increases the risk resulting from the employer’s liability for subcontractors’ Employers and developers should also be fees. (See above.) It may turn out that, aware of the implications of the 2003 Act even if a sub-contractor is paid in full by a on Terms of Payment in Commerce. general contractor, the subcontractor will According to that Act, payments not be entitled to claim interest directly from made within 30 days from the date on the employer if the payments were late. which any service is provided or goods delivered attracts statutory interest from the 31 st day, regardless of the contractual 4.6 Dispute Resolution term of payment. Mechanism

From the construction industry Arbitration has become a standard perspective, the above Act does not method of dispute resolution under apply to agreements financed by construction contracts in Poland. This is international organisations of which mainly because public courts in Poland Poland is a member or with which it has are slow and, as a rule, trial judges do signed agreements on co-operation, and not have the required sector-related to agreements financed from non- expertise. Currently, it is difficult to find a refundable aid funds of the European large construction contract without an Union, structural funds or the Cohesion arbitration clause. However, the parties to Fund. small construction contracts still prefer to leave dispute resolution to the public courts. (Court fees in public courts are significantly lower.)

For those using FIDIC and other international forms of contract, the use of a dispute adjudication board is a concept that developers and contractors operating in Poland are not familiar with. Alternative dispute resolution is yet to take root in Poland, and therefore consideration will need to be given to amending the part of the standard contract dealing with the above issues.

Pylon of Holy Cross Bridge in Warsaw Photo by Paulina Matuszewska

n 5.5 Rent and service charge 27

i 5.6 Fit-out 28

t 5.7 Upkeep, renovations and repair 28 5.8 Insurance 29 t 5.9 Early termination and indemnities 29 5.10 Non-competition clauses in shopping e centre lease agreements 29 l 5.11 Enforcement by landlord 30 5.12 Change of ownership, enforcement by the landlord’s creditors and bankruptcy 30 5.13 Residential leases 31

5.1 Introduction (dzierżawa). The 30 year maximum term and warehouses. This requires a relatively of the lease (najem) applies only if the high degree of financial transparency of Polish regulations on leases are in some parties to the contract are business the tenant towards the landlord, and ways old fashioned, with modern entities; if one of the parties is an involves submission of official financial provisions on institutional or commercial individual or a legal entity not carrying out statements (monthly, quarterly or yearly). leases still lacking. However, this does business activity, then the lease can be In shopping centres, in many cases the not mean that a decent institutional lease entered into for a maximum of 10 years. retailer’s tills are connected to the agreement cannot be signed. On the landlord’s computer system. contrary, freedom of contract and the In practice, the average terms of leases small number of mandatory provisions on vary from three to 10 years, and in most Base rent is usually payable monthly, leases (apart from residential leases) cases the minimum required by the whereas turnover rent is payable for mean much can be accomplished. banks financing the development is five various periods agreed in the contract. years. It is very rare to sign a lease for Two months’ delay in the payment of rent less than three years. (or service charge) authorises the landlord to terminate the lease if this default is not 5.2 Standard Forms Extension options have become more cured within an additional grace period of and more popular on the market. It 1 month. Up until now, no common model of a should be noted that, unlike other standard commercial lease has been jurisdictions, in Poland the tenant does Leases need to make a very clear adopted in Poland. However, core not have a statutory priority (or extension) distinction between the rent and the provisions of standard leases seem to be right to conclude a new lease in the same service charge. Landlords tend to include generally accepted. As a rule, every premises. This matter is purely as many items as possible in the service shopping centre, office building or contractual. Extension options are legally charge, but each individual case will warehouse owner has its own standards, binding provided that two conditions are depend on the market position of the and only certain terms and conditions are met: (i) the total term does not go beyond landlord and the tenant. However, it is negotiable (and not the structure itself). 30 years and (ii) the essential terms of the now more common for landlords to make Needless to say, the final outcome of extended lease are already specified a concession on the rent, rather than on such negotiations depends on the market (e.g. the rent). the service charge. Usually, service position of the given scheme and the charges include repairs, maintenance and attractiveness of the potential tenant. upkeep costs of the common areas, 5.5 Rent and service management costs, insurance, security, consumption of utilities in the common 5.3 Letting agents charge areas and land tax. Where the building is developed on land held in perpetual It is quite common for retail developers Euro-denominated and CPI-indexed rent usufruct, it might also include the annual and managers to use letting agents, have become the rule in Poland although perpetual usufruct fee. Building owners although some of them have their own in- references to US dollars also happen. may also create sinking funds (in order to house letting teams. It might be advisable Certain retailers (basically supermarkets finance future major repairs) or marketing for tenants (especially new entrants) to and hypermarkets) or big tenants are funds. use agents as well. Many of the big strong enough to negotiate a international property consultants have PLN-denominated rent, so that they do been present on the Polish market since not incur any currency risk in Poland. The the mid-1990s. rent can be paid in foreign currency now. Because of the fact that VAT has to be paid by the landlord to the tax office in PLN, net rent is usually paid in foreign 5.4 Lease term and currency and the VAT component in PLN. extension options Apart from a monthly base rent, optional As mentioned in section 1.1.6, there are turnover rents are becoming more and two types of lease agreements under more common (at least as a contractual Polish law, now both with a maximum provision, not necessarily put into fixed term of 30 years (najem) and practice) in the case of shopping centres

The service charge is usually paid in 12 monthly instalments (advances) calculated on the basis of a budget prepared by the manager. The actual amount of such monthly advances may vary during the year because of changes in the level of common costs month by month. Each tenant’s share of the service charge budget usually depends on the area of its premises. However, weighting rates are applied to areas occupied by bigger tenants. It is also the case that certain tenants have caps on their service charge contributions, and others do not participate in certain categories of costs (e.g. marketing costs).

VAT at the rate of 23% applies to both the rent and advances towards the service charge. Common costs should be re-invoiced at their face net value with only the landlord’s VAT added Mermaid, symbol of Warsaw (unless the landlord is expressly Photo by Paulina Matuszewska authorised to margins on such costs). The tenant should seek the possibility of carrying out service charge audits. responsibility of the tenant, but the "Fully repairing" leases have now become landlord is obliged to co-operate in this a standard, which means that the There are three basic types of security in respect. The design should be approved relevant costs are included in the service relation to rent and service charge in advance by the landlord, so it may be charge. Sinking funds are also created in payments. The most widely used and advisable to attach it to the lease. The order to finance capital repairs. preferred by landlords with respect to works are supervised by the landlord’s smaller and medium-sized tenants is a site manager and the tenant has to take Any renovation in the building that affects cash deposit (usually three months’ rent out an insurance policy covering the amenity of the tenant (e.g. access to and three months’ service charge plus construction risks. the premises, visibility etc.) should be VAT). Larger tenants deliver bank subject to consent. Many leases contain guarantees in the same amount. Anchors In the "tenant market", fitting out the tenant's upfront consent to such may get away with a parent guarantee, or premises is often offered as part of the works, but they are only valid if they are even a letter of comfort. incentive package for tenants. specific enough (e.g. they define what kind of impact is allowed).

5.6 Fit-out 5.7 Upkeep, renovations The upkeep and renovation of the and repair premises are the tenant's responsibility. Tenants are granted fit-out periods during which they have to prepare their premises Upkeep, renovations and repair of for operation. Such periods are usually common parts is always the landlord's excluded from the lease period, at least responsibility. This also applies to material for the purposes of rent payment. Any parts of the premises, such as structural permits required for fit-out works are the elements and common infrastructure.

5.8 Insurance The landlord is authorised by law to (which is by far the most common reason terminate a fixed term lease in four cases. for a landlord to terminate). The rule is that the landlord insures the Firstly, if the tenant breaches the common areas and the tenant insures its provisions of lease concerning the use of premises. The premium paid by the the premises and fails to cure this default 5.10 Non-competition landlord is usually recovered in the despite being granted a grace period; clauses in shopping centre service charge. It is important to structure secondly, if the use of the premises by the relationships between various policies the tenant may result in their devastation; lease agreements such that the scopes of insurance do not thirdly, if the activities of the tenant overlap. Otherwise there may be disturb neighbours (other tenants), make In the 1990s, when the first modern problems with the payment of indemnity the use of other premises difficult, or if shopping centres began appearing, it as there may be a dispute between the the tenant continually breaches internal was quite popular to include a non- insurers as to which of them is actually regulations; and finally, if the tenant is in competition clause (a so-called "radius bound to pay, and in what proportion. delay with rent (the law does not clause") in the lease which prohibited the recognise service charges) payments for tenant from opening a shop within a Tenants are also required to take out third at least two settlement periods, and does radius of x kilometres from the centre party liability insurance for any possible not pay the arrears despite being granted concerned. damage to individuals or assets they an additional one-month grace period. (their employees, agents etc.) may cause Although there have been no recent in their operations. Sometimes they also Lease contracts often provide for many major Polish cases concerning radius take out "business interruption" insurance more reasons for the landlord to clauses, it is fair to say that such clauses or "lost rent" insurance. terminate the lease, and usually make it run a risk of being found invalid because difficult for the tenant to do so (save for of a potential antitrust law infringement. Landlords’ policies are often assigned (at his statutory termination rights described The reason for this is that they may least conditionally) to the banks that above). It should be noted that, in order foreclose the market to other shopping finance the development. Tenants’ for those contractual termination terms to centre operators and limit the choice of policies may sometimes be assigned to be effective, they should be quite options to customers. With EU the landlord and then further to the banks. specific. It is not enough to say that the accession, the protection of competition landlord will have the right to terminate and customers has become a very the lease if the tenant is in breach of its important issue for the authorities. 5.9 Early termination and terms. indemnities The most typical contractual termination clauses include the following breaches by Fixed term leases may only be terminated the tenant: unauthorised subletting, in cases specified by law and by the changing the scope of activities in the contract itself. premises, stocking hazardous materials, failing to disclose financial information (in The law authorises the tenant to the case of turnover rent), carrying out terminate a fixed term lease if the unauthorised works etc. premises have defects (whether existing at the time of signing or identified during A lease contract usually provides for the term of the lease) making them unfit contractual penalties to be paid by the for the purpose of the lease. The tenant tenant if the lease is terminated because must, however, grant the landlord a grace of a breach of its terms. It should be period to cure such defects and will not noted that Polish courts have the right to have the right to terminate if it knew lower the amount of such "liquidated" about the defects when signing the lease. damages if they consider them excessive. The tenant may also terminate the lease if Moreover, as a contractual penalty may the state of the premises (as delivered by not be stipulated for a breach of the landlord) is dangerous to the health of pecuniary obligations, such penalty its occupiers, even if it knew about this cannot be imposed if the lease is state when signing the lease. terminated because of a lack of payment

On the other hand, such clauses may start enforcement much faster than usual. If the building (the asset, not the often serve a legitimate business Submission to execution is signed by the company) is sold to a third party, the new purpose, in particular by protecting the tenant before a notary, and the entry into owner may terminate each lease subject landlord from "free riding" by the tenant 1. force of the lease is sometimes made upon statutory notice periods, unless dependent on the delivery of this notarial three conditions are met cumulatively: In practice, the assessment of a radius deed to the landlord. Submission to (i) the lease has a fixed term, (ii) the clause will normally be conducted on a execution concerns two things: payments premises have already been handed over case-by-case basis, attempting to and the vacation of premises. However, to the tenant and (iii) the lease has a date determine whether the restriction the enforceability of submission to certain. The "date certain" requirement is imposed on the tenant is reasonable, execution with respect to the vacation of met if the lease has been executed as a justified, proportional and not excessively premises may be questionable. (Standard notarial deed, or with signatures onerous. The landlord's market power in submission deeds do not take account of notarised, or if a public authority (e.g. a the relevant market 2 will also play a role, certain statutory requirements.) notary) made a dated mention on the with dominant landlords or those enjoying copy. If a public document (e.g. a notarial substantial market power being allowed One of the common ways to "discipline" deed containing the tenant’s submission less freedom in imposing such clauses. a tenant in delay with payments is to to execution) refers to a signed lease, it disconnect utilities. It should be noted has the same effect. If none of those that this is possible only if the lease apply, it is advisable for the tenant to 5.11 Enforcement by authorises the landlord to do this on have a copy of the lease seen by a notary landlord "reasonable” terms (e.g. a delay in (who will affix a "date certain" to it). payment justifying early termination, prior The landlord has a statutory pledge on all notice etc.). Otherwise the landlord would If the landlord’s creditor forecloses on the the tenant’s assets (goods, equipment, be liable for all damage incurred by the building and it is sold to a third party, the other moveable property) within the tenant owing to the disconnection of the lease will not expire and the buyer will premises. If the tenant is late with utilities. take it over. The lease must not be payment, the landlord may seize the modified or terminated, either by the assets and foreclose on them. The parties or automatically, in the case of pledge does not release the landlord from 5.12 Change of ownership, bankruptcy of either of them, unless this foreclosure proceedings, which may be enforcement by the is in compliance with the rules of the simplified if the tenant voluntarily submits landlord’s creditors and bankruptcy law, which are briefly to execution – see below. The pledge bankruptcy described below. may only concern assets owned by the tenant, and secures debts due for less If the landlord goes bankrupt, the receiver In certain cases, external circumstances than 12 months. may terminate the lease with three may have an impact on the lease. Those months’ notice. This may happen only if include, in particular, a change of The tenant’s voluntary submission to keeping the lease would make the sale of ownership of the building, enforcement execution (also discussed in section the asset (e.g. building) difficult, or if the by the landlord’s creditors and 3.5.3) is a common requirement of the rent is not at market rates. bankruptcy of either party. landlord in retail leases. It enables the latter to leapfrog judicial proceedings and

1 The tenant's rent may often be a function of its turnover from the outlet in the shopping centre. Consequently, in the absence of a radius clause, the tenant may be incentivised to treat the shopping centre mainly as its advertising outlet, and channel a large bulk of its sales through a nearby outlet, located on more cheaply rented premises.

2 The relevant market is defined both in terms of the product and the geographic aspect. From a product side, the usual approach would be to define the market as lettable retail space in shopping centres (although even narrower definitions, limiting the market, e.g. to lettable retail space to upscale shopping centres, may be possible). From a geographic side, the market is usually defined by a given catchment zone surrounding a shopping centre – which may be limited to a part of a city in the case of bigger cities.

Termination of the lease by the receiver As a rule, in the case of lease agreements would, therefore, be a rare case. Any for an unspecified period, the tenant may advance rent payment the tenant has terminate the lease agreement by serving made before declaration of the insolvency three months' notice. On the other hand, in the case of the landlord, the term of of the landlord – not including payment notice varies from six months to three for the three-month period immediately years, depending on the situation. following the date of declaration of insolvency – will have to be paid again – Rent may be increased every six months, this time to the bankruptcy estate. upon three months' notice. Any increase of rent exceeding 10% annually gives the If the tenant goes bankrupt but the tenant the right to question it in court. court’s bankruptcy decision allows There are also detailed rules covering settlement with creditors, the landlord how the rent increase process should be carried out. must not terminate the lease. The settlement may even prohibit the landlord Since January 2010 residential premises from terminating the lease until the full can be leased out under a special type of execution of the settlement (which may contract – an "occasional" lease take several years). The settlement may agreement, which can be concluded for a contain provisions to reduce and arrange specified period of time, no longer than instalments for rent and service charge 10 years. However, an occasional lease is arrears as at the date of the court available only for those who do not carry decision, but not for future ones (if the out a business activity in respect to leasing premises and concern only those lease is to be continued). premises which are used to meet housing needs and are not intended for the short- term housing of people. 5.13 Residential leases An occasional lease agreement has to be Residential lease agreements are concluded in writing and be submitted to governed by the Tenants’ Protection Act. the relevant tax office of the landlord within 14 days from lease The rules governing the leasing of private commencement day. A tenant has to apartments are less stringent than those indicate in writing other premises which applicable to municipal apartments. can be inhabited by him in case the However, in both cases the Tenants’ landlord forces the tenant to vacate the Protection Act sets out very detailed premises. If the above conditions are met regulations regarding increase of rent and and the tenant voluntarily submits to termination by the landlord, which are enforcement proceedings executed in the extremely favourable for tenants. form of a notarial deed, then the landlord in the case of earlier termination of the One of the most significant deficiencies of lease agreement can evict the tenant the system is that it is almost impossible from the premises without going through to evict a tenant because he or she must court proceedings. be provided with alternative/temporary premises; however, this restriction has been mitigated by a recent amendment, described below.

Krużewsk i, insurance Nam i iotkewcz wsp kom spółka ólnicy andy 201 towa Real Estate Investment in Poland 33 Your Legal Guide

6. INSURANCE (ii) "gap insurance", i.e. insurance against failure to enter certain During the development phase and after rights in the mortgage register, is completion of a development project, the often required by banks providing developer will normally carry a financing for projects. Thanks to comprehensive "all risks" insurance policy this instrument, the beneficiary's consisting of casualty, liability and, rights are insured until they are sometimes, loss of rent or business entered in the mortgage register. interruption risks. The Polish insurance market is well served and comparable It is common practice to take out with that in other EU member states. insurance intended to cover the entire construction process. "Construction All Lending banks will require casualty Risks Insurance" (CAR) makes the insurer insurance to indemnify based on full liable for any losses of the insured replacement value, including demolition, regarding unforeseen events during site clearance, professional fees and reconstruction. permitting costs. If the project is rented, loss of rent cover for up to three years is Third party liability (TPL) insurance available (though 2-year indemnity provides cover for the developer when it periods are more common). Lending is required to redress damage caused to banks typically require cover against acts anyone in consequence of a tort or to a of terrorism only if the building is a contractor as a result of a default on a landmark or trophy building. contract.

Indemnity limits for third party liability are generally lower in Poland than in Western Europe and significantly lower than in the United States, reflecting the fact that awards of damages for tortious and other civil claims are lower. Developers and lending banks normally rely on insurance brokers to advise on the appropriate indemnity limits.

It is quite common for insurers to agree to include loss payee, notices and non- cancellation clauses in policies where required by lending banks.

In transactions concerning real properties, there are two specific types of insurance (in Poland offered by two companies):

(i) "title insurance", i.e. insurance against legal defects that allows compensation to be obtained, usually amounting to 100% of the price paid in the event the risks identified during due diligence materialise. This insurance provides an alternative to an indemnity clause; and

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7.1 What to sell such assets and for future corporate asset to the ultimate buyer much easier. income tax purposes (if the exit is Of course, this takes time and costs considered to be through an asset deal). money. 7.1.1 Choice It is also more burdensome to efficiently The two happiest moments in the life of a structure the financing for a share A share deal results in the additional risk developer and an investor are when they acquisition. As external debt is used to of there being undisclosed liabilities of the acquire a property and when they sell it. finance part of the price payable for company holding the assets. This risk The choice of method of sale lies, as in shares in a target SPV holding an asset, can be decreased, but not entirely many other jurisdictions, between the a buyer usually establishes a new SPV in eliminated, through a proper legal and tax sale of shares or the sale of assets. Poland to borrow the funds, pay the price due diligence of the asset-holding and acquire shares in the target SPV. company. 7.1.2 Shares or asset Assuming that the target SPV has also One of the specifics of the Polish borrowed some external debt arranged property market is that the majority of by the buyer to repay its prior existing property transactions are structured and loans, the structure upon acquisition conducted as share deals. For various would look like in the chart 2. reasons (mostly involving taxes and accessibility of proceeds), developers The above means that all the income prefer to sell shares in the companies from leases, and some tax-deductible (mainly in special purpose vehicles costs (depreciation of the asset, interest established in order to carry out a on the refinancing loan), are left with the particular development) holding assets target SPV. The SPV (holder of the target rather than the assets themselves. SPV) has tax-deductible costs (interest on loan to purchase shares), while it has no However, the best structure for a seller current constant income to off set such may not necessarily be beneficial for a costs. Therefore it requires a merger with potential buyer. It would be in his its subsidiary (target SPV) to combine all interests to establish the highest possible tax-deductible costs and income initial value of an asset, which is generated by the asset. It also makes important for depreciation purposes of the flow of profits generated by the Chart 2

Finally, only asset deals benefit from the and problems at the time an asset is Premises of 1994 are applicable; "public warranty of land and mortgage sold. Any defect in this respect may be although the owners can modify these registers" (discussed in section 1.2.1), priced by the purchaser or can make the rules by agreement. which provides additional security as to disposal of individual assets impossible or the existence of the title to the property in a best case scenario, more difficult. itself and the encumbrances. 7.2 When to sell 7.1.4 Selling the premises The cost of a share deal is 1% stamp In certain situations the subject of the Usually, developments are sold once they duty and relatively low notarial and sale is limited to a part of the building have been completed and let. However, it registration fees. Stamp duty on asset only. This situation is typical for sales of deals is 2%, and notarial and court fees shopping malls forming part of large is becoming more common on the Polish are also higher. However, the sale of an shopping centre schemes. market to precontract the sale of the asset is usually subject to 23% VAT investment before it is completed and/or (unless the sale is exempt from VAT). This Two criteria should be met in order for fully leased. In such a situation, a VAT is imposed both on the land price premises to constitute separate developer is often obliged to complete and the building price and is fully properties, and therefore to be sellable. the construction, obtain necessary recoverable. It is common practice to They must be “independent” (which must permits allowing the occupation and take out a separate loan in Polish zlotys be confirmed by a certificate of a local operation of the asset, and sometimes to to finance VAT. The recovery takes architecture department) and legally continue the leasing process during the (depending on circumstances) from separate. (A notarial deed must be signed 25 days to 180 days. creating the premises and a separate agreed lease-up period. The completion mortgage register should be established.) of sale, transfer of title and payment of 7.1.3 Preparing the legal structure of the Legal separation may take place upon the price are often triggered by achieving project sale. the agreed percentage of leased The situation is quite straightforward if a premises in the building. As a result, a developer/investor sells its stand-alone The ownership of separate premises price adjustment mechanism is agreed on asset or an entire scheme (like a carries with it a relevant share in the to reflect the progress in leasing the multiphase logistics park). It becomes ownership (or perpetual usufruct) of the scheme and the additional income more complicated when it decides to sell land on which the building is located and stream. only part of it (for example one building in the ownership of "common areas" of from the entire scheme). In this case, the the building (i.e. entrances, staircases, developer has to consider a number of lifts, structural elements, roof, façade, Another approach to this issue is issues. Are the individual buildings and installations etc.). The share is calculated demonstrated in the situation where the plots on which these buildings are as the proportion of usable area of given seller enters into a "master lease" under located properly divided? Is access to the premises to the usable area of all which it pays the buyer an agreed building being sold, and to all other premises within a building. Therefore the guaranteed rent, and further sub-leases buildings which remain with the subject of the sale is the ownership title the asset to final users or arranges for the developer, properly secured through, for to the premises, a share in the "common release of the area leased under the example, cross easements over the areas" and a share in the ownership (or master lease to new tenants who will "common areas", transferring the roads perpetual usufruct) of the land on which to a separate company or creating a co- the building is located. enter into direct leases with the landlord. ownership structure under which all the This mechanism allows the income individuals co-own the "common areas"? The owners of separate premises stream from the investment to be Do all the buildings have separate utility establish by law a condominium. If there secured for the buyer and for the price to connections allowing them to function are seven or fewer premises within a be established at a higher level than separately? How is the cost of building, the general provisions of the would be possible if the scheme was not maintenance and repair of the common Civil Code applicable to co-ownership will fully leased. areas split among the owners of govern the management of the common individual buildings? All these questions areas and land on which the building is should be considered much earlier – at constructed. If there are more than seven the time the development is being premises (both separated and not planned. Lack of consideration at that separated) in the building, the rules set stage will certainly cause additional costs out in the Act on the Ownership of

7.3 How to sell The need to enter into a preliminary because Polish law does not address this agreement is sometimes caused by the issue sufficiently. 7.3.1 Preliminary sale agreement and fact that Polish law does not allow for the final agreement conditional sale of real estate. This 7.3.3 Price The majority of property transactions on limitation does not apply to share deals, Polish law requires that the price, or at the Polish market are completed in two but for some practical reasons (difficulty least a price-fixing mechanism, be agreed stages. During the first stage, the parties in establishing whether all the conditions in the preliminary agreement. When the enter into a preliminary sale agreement have been fulfilled and when the title to price for the shares is considered, apart pursuant to which they are obliged to the shares finally passes to the from the value of the asset, the parties transfer the shares or asset upon meeting purchaser) two-stage transactions are should agree to an adjustment of the certain conditions. (See section 1.6 for also recommended in this case. The price to reflect the receivables and details.) These may be business or preliminary agreement should also liabilities of the target company. Such an regulatory conditions, such as the establish clear criteria concerning the adjustment is often made on the basis of purchaser's obtaining antimonopoly rights and obligations of the seller in the company's balance sheet as at the clearance for the acquisition of the shares respect of the operation of the date of executing the final agreement. or asset. Antimonopoly clearance for the asset/target company in the interim The price established in the transfer acquisition of shares will be required if the period between the execution of the agreement may also be adjusted to total turnover of the parties to the preliminary sale agreement and the reflect, for example, progress in leasing transaction and their groups of transfer agreement. A preliminary the scheme after transferring shares or an companies exceeded 50,000,000 euro in agreement, like a transfer agreement, asset. Such post-closing adjustments Poland or 1,000,000,000 euro worldwide should be executed as a notarial deed create certain tax and bookkeeping in the previous financial year. (for the sale of real estate) or with the consequences that should be considered signatures of the parties certified by a beforehand. If this turnover threshold was exceeded, notary (for the sale of shares). then antimonopoly clearance will still not 7.3.4 Financing be necessary if the turnover of the target 7.3.2 Warranties Almost every property investment is and its (direct or indirect) subsidiaries in The most heavily negotiated provisions of financed by external debt. Before selling Poland did not exceed 10,000,000 euro preliminary sale and final agreements are the scheme (regardless of whether an in either of the previous two financial usually the seller's warranties. The scope asset deal or share deal has been years. In asset deals, it is worth noting of such warranties is much broader in the agreed), the parties should agree on that this turnover is calculated on the case of a share deal as they have to whether the purchaser would like to basis of the turnover related to the asset cover corporate, financial, tax, litigation retain the existing debt, repay it or constituting the subject of the transaction and other issues. If an asset deal is being refinance it and replace the existing debt (and not the total turnover of the considered, the scope of the warranties with a new one. The last approach company holding the asset), provided will usually be limited to the particular requires an arrangement between the old that the assets to be purchased asset and its legal and physical state, and new lender in respect of establishing constitute part of the business of the leases, construction and environmental security (usually only mortgages) over the holding company and not the whole issues. The parties often try to change asset before repayment of the existing business. On the other hand, with the period during which the buyer is debt. Various mechanisms are put in respect to the need to obtain entitled to make a claim owing to a place, including: escrow; undertakings of antimonopoly clearance, the turnovers of breach of different categories of the existing lender allowing the "groups of companies" (i.e. all companies warranties and to limit the scope of the establishment of a second ranking directly or indirectly controlled by one and damages that can be claimed by the security for the benefit of a new lender; the same ultimate parent company) is buyer. There is no standard warranty in and releasing undertakings of the new treated by the Antimonopoly Office very the market, and warranties vary lender to release its second ranking broadly, and should be calculated very depending on the selling/buying powers security if refinancing fails. carefully. Purchasers should verify of the parties, or even nationalities of the whether, according to their own parties involved and their expectations. jurisdiction, the acquisition of shares or assets in Poland requires antimonopoly It should be noted that the nature of clearance. warranties and consequences of a breach of warranties should be specified in the relevant agreement very carefully

8.1 Transactional costs transfer tax (the tax burden is levied on interest accrues. In practice, many the buyer) and registration fees. VAT is disputes are resolved by settlement. 8.1.1 Introduction paid directly by the buyer to the seller, The level of notary and registration fees who then settles it with the tax office. 8.2.3 Public infrastructure fee depends on various factors: in particular, Owners should participate in the costs of on the value (price) of the property, but public infrastructure developed by local also on the parties (e.g. private or public 8.2 Costs of holding real authorities. The public infrastructure fee is bodies) and the category of the property estate calculated on the basis of the increase in (e.g. agricultural or commercial). They are the value of a property owing to the subject to statutory rates and are development of infrastructure and a 8.2.1 Real estate tax percentage rate adopted by the City calculated based on degressive rates At present, land, buildings and building with caps. In general, if the agreement is council (not to exceed 50%). The structures related to commercial activity payment of the fee may be imposed by signed in the form of a notarial deed, the will be subject to real estate tax. The tax notary collects all payments. the mayor of a municipality within three is payable by owners, co-owners, years following the development of the perpetual usufructuaries, possessors, co- 8.1.2 Notary fees infrastructure. The decision imposing the possessors and in several cases lessees fee may be appealed against to the Fees are payable for the preparation of a of public properties. The tax is based on notarial deed. In general, the maximum appeal committee and further to the area in the case of land, and on useable administrative courts. notarial fees are reasonable and usually area in the case of buildings. The rate of negotiable. tax is defined by the City council, but It is worth noting that the holders of there is a statutory cap. Currently, the tax In share deals, the notary fee is charged perpetual usufruct rights do not on land related to commercial activity participate in these costs. It is deemed per certified signature and is capped at may amount to up to PLN 0.80 per sq.m PLN 300. that the perpetual usufruct fee covers the in 2011, while for buildings related to costs of public infrastructure. such activity up to PLN 21.05 per sq.m in 23% VAT is added to notarial fees. 2011. 8.2.4 Re-zoning fee Usually, the market value of land 8.1.3 Registration fees Property tax returns should be filed by The fees for registration of title and increases or decreases as a result of the 15 January each year, and any tax due adoption or modification of a master plan, various property rights amount to PLN should be settled in 12 equal monthly 200. There are also fixed fees for other or as result of subdivision of land. This is instalments by the 15th day of each because the master plan determines how actions relating to registration of other month. property rights, and to mortgage register the land may be developed. Similarly, the books, that are generally set between configuration of land may have an impact 8.2.2 Perpetual usufruct fee on its value. PLN 60 and PLN 150. Holders of a perpetual usufruct right are obliged to pay the annual perpetual 8.1.4 Transfer taxes usufruct fee by 31 March of each year. In general, sales made by business The annual fee is calculated on the basis entities will be subject to VAT while sales of a rate applicable to the land and the made by individuals not conducting value thereof. The rate is 3% if the land is business activities (who are not designed for commercial purposes, and considered taxpayers within the meaning 1% if it is designed for residential of the VAT Act) are not subject to VAT. purposes. The City council may increase The basic rate of Polish VAT is 23%, but the fee by revaluing the land. The an 8% rate applies in certain cases (e.g. revaluation may take place only once a sale of apartments). year. A holder of a perpetual usufruct right may appeal against the increase of If the sale of real property is not subject the annual fee to the appeal committee to VAT, it is subject to transfer tax at a (Samorządowe Kolegium Odwoławcze) rate of 2% (asset deal) or 1% (share and then to civil courts (two instances). deal). The sale of agricultural properties is During the appeal proceedings, the user not subject to any transfer taxes. pays the old amount of the fee and no The notary is responsible for collecting

If the market value of land decreases (but As a consequence of that Amendment, Properties legally recognised as farmland the owner may still use the land in the the investment process carried out within and forest, located outside towns or same manner as before the modification municipal borders changed with respect cities, can only become non-agricultural or adoption of a master plan), then the to real estate comprising agricultural land (or non-forest) if special conditions are owner (or holder of the perpetual – it is no longer necessary to "de-farm" a met. First of all, the Act on Protection of usufruct) may demand that the local piece of real estate. Agricultural and Forested Land may authority (the City) pay compensation require the local master plan to be in equal to the decrease of the value of the In connection with the abolishment of the force and provide for such area to be land calculated as at the date of sale. obligation to go through the de-farming used for non-agricultural (non-forest) Such a claim may be raised only if the procedure within municipal borders, the purposes. If the local master plan is owner sells or otherwise transfers the title investor is no longer obliged to incur required but is not in force, then no to the land, but not later than five years charges or annual fees provided in investment falling outside of the scope of from the adoption or modification of the abovementioned Act. the current use is allowed. master plan. In extreme cases, when the current use of the property is not possible following the adoption or modification of a master plan, the owner of the land may demand that the local authority buy the affected land.

More frequently, the value of land increases as a result of the adoption or modification of a master plan, e.g. a green-field is re-zoned as land on which a shopping centre may be built. In such a case, if the owner sells or otherwise transfers the title to the land (e.g. by means of an in-kind contribution to a company) within five years from the adoption or modification of the master plan, the City will charge a re-zoning fee. The re-zoning fee may not exceed 30% of the increase of the value of the land calculated as at the date of sale. The percentage for calculation of the re- zoning fee must be provided for in the master plan.

Establishing a proper holding structure upfront may help to avoid payment of the above fee.

8.2.5 Exclusion from agricultural use Since January 2009, under the Amendment to the Act on Protection of Agricultural and Forested Land of 1995, agricultural land (użytki rolne) within municipal borders will no longer be restricted to agricultural use by operation of law.

Secondly, the investor must obtain a hectare of farmland. The fee for exclusion special decision excluding a given site of forestry land is calculated per cubic from agricultural (or forest) use. Following metre and it ranges from PLN 250 up to the issue of the decision and the actual PLN 2,000. It should be noted that the change in use of the site, the investor will initial fee is decreased by the market be obliged to pay an initial fee, and then value of the property, which in most of 10 consecutive annual fees (equal to 10% cases means that it is not payable at all. of the initial fee). The actual amount of If the property is sold, the obligation to these charges depends on the class of pay the annual fees passes to the the agricultural land or forest. The fee as purchaser. provided in the Act on Protection of Agricultural and Forested Land varies from PLN 87,435 up to PLN 437,175 per

National Stadium in Warsaw Photo by Michał Matera

© Clifford Chance, Janicka, Krużewski, Namiotkiewicz i wspólnicy spółka komandytowa 2011 9.1 Introduction 43 9.2 Overview 43 9.3 Environmental Protection Act 43 w 9.4 Integrated Pollution Prevention and Control (IPPC Regime) 43 a 9.5 Permits 44 l 9.6 Liability 44

9.7 Contaminated Land Liability Regime 46 l 9.8 EIA Act 47 9.9 Environmental Impact Assessment

a of Projects ("EIA") 47 9.10 Access to Information 48 t 9.11 Public participation 48 9.12 Emissions Trading 48 n e m n o r i v n e

9.1 Introduction (LCP), but only for certain power plants 9.4 Integrated Pollution and combined heat and power plants (CHPs) that are on lists attached to the Prevention and Control Regardless of whether the project Accession Treaty: (IPPC Regime) involves development of a power plant, hotel, highway or school building, certain - from 1 January 2008 to 31 The EPA includes framework provisions environmental law issues must be taken December 2015 – for SO for the transposition of Directive into account by the developer before it 2 emissions; 2008/1/EC of the European Parliament launches the works. As already indicated and of the Council of 15 January 2008 in point 2.6, the development of land in - from 1 January 2008 to 31 concerning integrated pollution prevention many cases requires an environmental December 2017 – for dust and control ("IPPC Directive"). Annex I to impact assessment. Also before acquiring emissions; the IPPC Directive has been transposed land for development, most developers in its entirety in the form of the Minister of undertake some due diligence as to soil - from 1 January 2016 to 31 the Environment Regulation of 26 July and ground water contamination as December 2017 – for NO 2002 on Installations Causing Significant liability for contamination in some cases 2 emissions. Pollution to Specific Elements of the transfers with the transfer of title to the Environment or to the Environment as a land. The environmental law aspects can Whole (the "IPPC Regulations"). The IPPC play a crucial role in the development and Regulations list the industrial activities investment process. 9.3 Environmental falling under the IPPC regime. The IPPC Protection Act Regulations specify which installations fall under the integrated permit requirement. 9.2 Overview The Environmental Protection Act 2001 Non-IPPC installations are covered by a (the "EPA") was originally intended as a different permitting system within which 9.2.1 Poland in the EU framework environmental statute. sectoral environmental permits are A significant part of Polish environmental Although, in practice, this has not been required. (See 9.5 below.) law originates from European law. fully implemented, it does contain certain From 1 May 2004, the date of Poland's basic legal concepts, such as general If a company is covered by the IPPC accession, EU environmental law applies rules on the granting of environmental regime, it can apply for a single to Poland, subject to certain temporary permits as well as the rules of environmental permit (integrated permit) derogations. The process of fine-tuning determining the costs of exploiting the for all activities on a site. An integrated the new legislation will still continue for environment. The EPA contains specific permit replaces an air emission permit, a few years. provisions on civil and regulatory wastewater discharge permit, a waste environmental liability, including provisions permit and a water permit. An integrated 9.2.2 Transitional periods on environmental fees and fines. permit also covers non-IPPC installations Envisaged in Chapter XII of the Accession situated on an industrial site if the Treaty were certain transitional periods for The EPA details the specific structure of operator of the IPPC installation applies Poland in respect of a number of sectors. environmental standards, all of which for this. Some of the transitional periods have must generally be observed. These are already passed, but Poland still benefits environmental quality standards that from some of the temporary derogations relate to the quality of the environment including: (for example: ambient air quality standards for sulphur dioxide) and - waste landfills until 31 July 2012; maximum admissible emission/discharge standards (for example: maximum - treatment of urban wastewater; sulphur dioxide emission from a power four different derogation periods plant boiler of a specific rated capacity). were agreed on depending on the Additionally, the EPA provides that size of the agglomeration. specific emission limit values are to be determined individually for each Poland has also obtained the following installation that requires an integrated derogations from the EU Large permit (the IPPC regime). Combustion Plant Directive 2001/80/EC

9.5 Permits authority (Article 190 of the EPA). fulfilled. These include a significant Moreover, before acquiring an installation deterioration of the condition of the environment or a threat to human health. The operation of the non-IPPC an interested party may apply to an If an installation is operating either without installations requires separate environmental authority for a permit that an integrated permit where one is required would become effective once the environmental permits for particular or in contravention of an integrated permit transaction was effected. This mechanism activities on the site. The general rules on for more than 6 months, then the the granting of permits, or other related enables a potential purchaser to confirm environmental enforcement authority is relevant issues in this regard, are the environmental conditions imposed on required to issue a regulatory order to contained in the EPA. In accordance with the future operator before the acquisition. require the cessation of the activity. EPA provisions, the relevant environmenta l The permit expires if the legal title is not protection authority may issue the transferred or established within 1 year Fees constitute an economic instrument for environmental protection, therefore following types of permits (in addition to from the date the permit is issued. they bear more similarities to taxes than the integrated permit discussed above): to compensation for environmental All permits are issued by the starosta , damage. Under the EPA the similarities marshal of voivodship or the Regional (i) air emission permit, between environmental fees and fines (ii) wastewater discharge permit, Environmental Protection Directors, and taxes have been further enhanced, (iii) waste permit. depending on the type of activity involved. as Chapter III of the Tax Ordinance Act was made applicable to fees. Fees are However, specific obligations can also payable for air emissions, for the appear on the grounds of the Water Act 9.6 Liability discharge of wastewater, for the abstraction of underground and surface (e.g. the obligation to obtain a water water and for the storage of waste. The permit) or the Waste Act. 9.6.1 Types Operators of industrial facilities may suffer rates per unit of emission/discharge and liability from the application of the the methods of calculating the amounts Moreover, as far as waste permits are administrative, criminal or the civil law payable are provided for in the EPA and concerned, depending on the type of regime. In practice civil liability has been in secondary legislation. waste and the volume generated, the less frequent to date, despite a very operator can be required to obtain the liberal approach by Polish courts to the Increased fees are payable for operating approval of the hazardous waste establishment of the causal link in without a permit for the emission of management programme. environmental cases. Administrative gases or dust into air and for the intake sanctions are the most common method of waters or the discharge or sewage into waters or into the ground. From a Another type of permit is one that needs of enforcing environmental requirements. Environmental enforcement officers functional perspective they are equivalent to be obtained by entities engaging in any impose fiscal measures rather than to a fine for not obtaining a permit in activity associated with the shipment, criminal penalties on companies. time. They amount to 500% of the fees recovery or recycling of waste. Pursuant that would have been payable if the to the Waste Act the regulatory liability for 9.6.2 Administrative liability permit had been obtained. Increased fees waste transferred to a third party, i.e. the Regulatory liability is enforced by public are payable in addition to regular fees for potential liability to pay fines and to clean authorities vis-à-vis private parties, emissions. Increased fees are also paid up the place where the waste is illegally i.e. operators of installations and other for illegal storage of waste. deposited, would only be transferred to a polluters. Consequently, the position of waste disposal contractor in a case the parties to the proceedings is not equal. Any decision of a public authority where such contractor had obtained a can be appealed against to a higher permit for its operations. authority and ultimately, to the Administrative Court, which reviews the The environmental rights and duties decision on points of law only. resulting from permits under the EPA (i.e. permits associated with emissions from Regulatory orders to cease the activity in an installation) are transferable subject to question can be issued by environmental the prior consent of the environmental authorities if specific legal conditions are

Fines are payable for an infringement of the conditions of a permit. Even though they are referred to under the EPA as an economic instrument and are imposed in administrative proceedings, in fact they have a penal function. However, fines are often subject to a specific "debt-to- environment swap" under the EPA. This mechanism enables the operator to apply to the environmental authority for the suspension of a fine and the subsequent investment into an abatement technology aimed at terminating the reason for the fine. If an amount equivalent to the fine is spent, the fine will be cancelled. Similar rules apply to increased fees. The mechanism is criticised as promoting "end-of-the-pipe" solutions and resulting in a lack of any responsibility for infringements of permit conditions on the part of operators.

9.6.3 Criminal liability The Polish Criminal Code of 1997 contains a number of criminal offences in relation to the environment. At present penal sanctions under the Polish Criminal Code can only be applied to natural persons. However, Polish law does recognise the concept of criminal liability of corporations, therefore in some cases penal sanctions can be imposed on corporations. Criminal liability of corporations is a consequence of a conviction of natural persons, as envisaged under the Act on Liability of Corporate Entities for Acts Subject to Criminal Sanction of 28 October 2002. Once a natural person is convicted, e.g. managers responsible for the act or omission constituting a criminal act, penal sanctions could also be imposed on a corporation in a situation where the corporation benefited from the criminal act of such natural person acting in its name. These sanctions could consist of fines, prohibitions to participate in public tenders or benefit from state aid schemes. However, the practice of the Polish courts to date shows that that this Act has very limited significance.

National Stadium in Warsaw Photo by Michał Matera

9.6.4 Civil liability the general public in cases where the Quality Standards can be considered Pursuant to Article 435 of the Polish Civil damage is likely to affect the environment contaminated land. This definition does Code, strict liability rather than fault- as a common good, i.e. when damage not cover groundwater, although there based liability applies to damage caused can be attributed to the general public. has been a controversial interpretation by by the operation of an industrial facility the Ministry of the Environment that in that is put into motion by so-called "Impact on the environment" as defined certain cases groundwater is also natural forces, i.e. steam, gas, electricity, under the EPA includes impact on human covered. etc. The EPA extends the operation of health. Therefore, all civil law rules on Article 435 to all facilities that, due to the exemplary damages and pensions Under the EPA contaminated land presence of hazardous substances, awarded to persons whose health has regime, the starosta was the enforcement would be defined as causing an been impaired would be applicable to authority and later, under the PREDA, the increased risk or high risk, irrespective of cases where environmental damage competences of the starosta with this whether or not the said facilities are put under the EPA had impaired the health of respect have been taken over by the into motion by natural forces. This a person. voivode. Currently the Regional classification of substances is meant to Environmental Protection Directors are reflect the Seveso II Directive (96/082). enforcement authorities with respect to 9.7 Contaminated Land damage to the environment. Civil liability for damage resulting from impact on the environment can occur Liability Regime 9.7.2 Obligation to clean up irrespective of the terms and conditions The entity using the environment which of regulatory permits obtained by the 9.7.1 Overview causes the "imminent threat of damage" defendant. Hence, it is not an effective The contaminated land liability regime or "damage to the environment" (or – in defence for the operator to prove that the introduced in EPA and the Transitional case of damages that occurred before terms and conditions of such permits Act finally became effective on 19 April 2007 – the holder of the land) is have been observed. The only available October 2002 (when the Ordinance of the legally obliged to clean it up. It should defences would be force majeure , an act Minister of the Environment on Soil apply to the Regional Environmental of a third party or the fault of the party Quality Standards came into force – see Protection Director for a clean-up who suffered damage. below). Almost 5 years later, in April decision. The clean-up decision states 2007, a new Act on Prevention and the method, scope and the date of The EPA includes a number of provisions Remedying of Environmental Damage completion of the clean-up. If the owner which constitute departures from 2007 (the "PREDA") came into force of contaminated land has not applied for traditional civil law concepts. These implementing into the Polish legal system a clean-up decision, the regulator can include Article 326, which provides that the provisions of Directive 2004/35/EC on order clean-up. The order will require the polluter is obliged to reimburse any environmental liability with regard to the such remediation as is necessary to bring party who restores environmental prevention and remedying of the environment back to a condition damage caused by the polluter, to the environmental damage ("Environmental where soil quality standards are met. extent that the costs incurred are Liability Directive"). The PREDA justified. introduced new rules regarding contaminated land liability, but did not Any party can demand that an unlawful repeal the former regime: while the EPA impact on the environment be contaminated land regime only applies to discontinued even if such party has not "damage to the environment" (soil and yet suffered damage because of the subsoil) which occurred before 30 April action, but may suffer damage due to it 2007, the PREDA is applicable to an (precautionary action). The claimant can "imminent threat of damage" or "damage demand that the defendant uses to the environment" occurring after appropriate abatement techniques and it 30 April 2007. The relationship between is only where this proves impossible or the two Acts is complicated and not particularly difficult that the court can easily reconciled. order the activity to be discontinued. Moreover, the EPA authorises the State Land which does not comply with the soil Treasury, local government authorities quality standards set out in the Ordinance and NGOs to bring claims on behalf of of the Minister of the Environment on Soil

9.7.3 Parties liable 9.7.4 Liability of former owners - projects for which an EIA report The EPA contaminated land regime Contamination of purchased land can be is mandatory (List I) i.e. projects introduced a new principle: that the considered a defect and can result in the likely to always significantly holder of contaminated land is liable for former owner’s liability pursuant to the impact the environment; cleaning up the contamination. However, Civil Code warranty provision (Article 556 - projects for which a screening if the registered title-holder is a different of the Polish Civil Code). Under this process is applied to determine entity than the actual holder of the land, provision, the seller is liable to the buyer if whether an EIA report is required the title-holder is liable (for example, the asset sold has defects or lacks other (List II) i.e. projects likely to when land is subject to perpetual relevant properties which reduce its value potentially significantly impact usufruct). The old principle of "polluter or use with respect to the purpose the environment; and must pay" has not, however, been stipulated in the contract or to other removed from the EPA. Under this relevant circumstances. However, if the - projects other than the projects principle, the liability for clean-up rests seller successfully proves that the buyer on List I and II that are likely to with the person who caused the knew about the defect when the contract significantly impact Natura 2000 contamination. The principle applies, for was being concluded, the warranty is sites (a European network of example, to accidental pollution. It also excluded. protected sites). applies to liability for ongoing damage to the environment under the PREDA. The threshold for requiring an EIA for 9.8 EIA Act projects likely to significantly impact the In consequence, generally, the land environment (both List I and List II contamination that occurred before Due to the fact that the European projects) is defined on the basis of the 30 April 2007 is, as a rule, governed by Commission has found the Polish Council of Ministers Ordinance of 9 the provisions of the EPA and is based on regulations on environmental impact November 2010 on undertakings which the principle of the "holder of land" liability. assessment as not being fully compliant may significantly affect the environment The environmental administrative liability with the respective EU regulations, a new ("EIA Regulations") (previously it was set for contamination caused after that date act has been passed in order to ensure in the Council of Ministers Ordinance of 9 is governed by the PREDA and is based, compliance, namely the Act on access to November 2004 on projects that require as a rule, on the "polluter pays" principle. environmental information, public an environmental impact assessment to participation in environmental protection be drawn up and on criteria for the In case the "holder of land" liability and environmental impact assessment of determination of projects that require an applies, the holder of land cannot be 3 October 2008, which came into force EIA report). released from liability by claiming that the on 15 November 2008 (the "EIA Act"). damage was caused by a third party The EIA Act repealed the relevant The EIA Regulations are generally based before the holder obtained legal title to regulations of the EPA with respect to EIA on the Environmental Impact Assessment the land. This results from the basic legal procedure, access to information and Directive (85/337). rule that liability is transferred together public participation in environmental with the legal title to land. However, if a protection. In case of List I and List II projects, the third party caused pollution after the investor is required to obtain decision on holder acquired the property and after the environmental conditions of the consent entry into force of the EPA and the holder to implement the project ("environmental is able to prove this fact, the holder will 9.9 Environmental Impact decision"). Only then can the planned be released from liability. If the owner is Assessment of Projects project be implemented. In such case the released from liability, the regulator cleans ("EIA ") EIA procedure is undertaken within the up the land and seeks reimbursement of procedure for issuing the environmental costs (as a tax liability) from the actual A number of public as well as private permit. Before issuing the environmental polluter. Both the holder and the polluter projects are subject to an environmental decision, the issuing authority consults would be jointly and severally liable for impact assessment. According to the EIA with certain environmental and sanitation clean-up if the holder knowingly Act, an EIA is or can be required for: authorities on the conditions of the EIA permitted contamination to occur, even permit. though it was caused by a third party.

In case of projects likely to significantly an obligation to review the motions and impact Natura 2000 sites, the EIA is complaints and to refer to them in the undergone within the procedure for justification of its final decision. The scope issuing a project permit (in particular, of public participation and the access of building permit). the public to justice on environmental matters is very limited despite the fact that Public participation is automatic in cases Poland ratified the Aarhus Convention. where an EIA report is drawn up. The procedure consists of letting the public know about the proceedings by 9.10 Access to Information way of making a public announcement giving 21 days for public review and for Public authorities are obliged, subject to submitting motions and complaints. A certain limitations, to make available to the public hearing may be scheduled but is public any information concerning the not mandatory. environment. Any interested party can take advantage of this obligation without When the statute requires participation of being required to prove direct and the public in the regulatory proceedings individual interest. The obligation to reveal (integrated permits and environmental information is very broad and practically all impact assessment proceedings), applications for permits, environmental environmental NGOs are authorised to impact assessment reports, post- participate in them "acting as a party" completion reports, mandatory (Article 44.1 of the EIA Act). They have the environmental audit reports, monitoring right, among others, to appeal to data and fees and fines payable by an administrative courts without requiring operator must be revealed. Document consent from any other party to the registers are to be drawn up for the process. purpose of facilitating access to environmental information by the public. NGOs in Poland often co-operate with local pressure and interest groups. The The definition of "public authority" covers established national network of any entity engaged in performing any environmental movements has proved to public duty related to the environment. be very effective. An operator may request that certain information be excluded from public access in particular by reason of its 9.12 Emissions Trading potential impact on the competitive position of the operator. Since 1 January 2005, EU Member States have participated in the EU Emissions Trading Act on Emissions Trading 9.11 Public participation (transposing to the Polish legal system the provisions of the Scheme (the "ETS"). In The public has the right to participate in Poland the existing emissions trading proceedings for the granting of an scheme is based on the 2004 activities, integrated permit and those in which it is e.g. operation of professional power required that an environmental impact plants, cement or glass industries. assessment report be drawn up. Public Companies Emissions Trading Directive participation has limited scope as it 2003/87/EC). Generally, it applies to amounts to the right to file motions and specified heavy industrial participating in complaints. Since the public does not the emission trading scheme in Poland enjoy the right of a party to the are required to obtain permits allowing proceedings, the public authority is under them to participate in the ETS.

Krużewsk i, appendix Nam i iotkewcz wsp kom spółka ólnicy andy 201 towa Real Estate Investment in Poland 51 Your Legal Guide

Investing In Infrastructure to transfer attractive properties to the Warszawa have expressed their desire to private partner or engage in the implement such projects. In Poland, only - A New Option For implementation of joint property 4.5 percent of waste is recycled and Developers In Poland development projects. composted. Therefore there is a chance that this will become an area of PPP The availability of the EU funds and the Poland's famously under-developed road development on a large scale. The EIB financing is shrinking so the financial system has finally started to improve, and Ministry of Regional Development is very means that Poland has in order to the Polish Motorway Agency has become active in these fields, most notably, develop infrastructure in 2011 are even the largest employer in Poland for several developing concepts of marrying private more insufficient to meet the demand domestic and foreign construction funds with the EU funds under a so- than a year earlier. There is also a companies. called hybrid financing scheme. growing concern about the increasing public debt, which results in a number of Approximately 95 per cent of the railway All Polish international airports have investments in infrastructure (a number of stations owned by PKP, the state-owned already started large-scale redevelopment road projects, most recently) being put on railway company, are crying out for investments concerning their airside hold. immediate investment. Many facilities. In addition, a large number of municipalities have realised that without them plan to invest in the development of Investment in key transport, sports and their active involvement, even so-called airport cities and intend to telecommunications infrastructure is still commercially well-located railway stations initiate co-operation with private Investors boosted in preparation for the UEFA may remain undeveloped and become a interested in investing in retail units, EURO 2012 football championships, co- symbol of "indolence". A €240 million re- offices, hotels and car parks to be built hosted by Poland and Ukraine. But in development project for Katowice's main next to the airport terminals. parallel, almost all of the large Polish railway station is, however, the only big municipalities have invested considerable project under way, where a private The availability of external financing for funds in the development of social investor is involved. Many other PPP-like long-term PPP projects is growing, yet infrastructure and urban regeneration railway station re-developments (most commercial banks are still not willing to projects. The scale of investment needs notably in Warszawa, Poznań, Szczecin provide long-term financing (above 10 encourages the public sector to look for and Łódź) are still in their preparatory years) and expect equity of at least 20 new ways of funding projects under stages. In addition, the Ministry of percent of the project's value. various finance schemes with the Infrastructure is currently pursuing its Nevertheless, projects based on a participation of private investors. legislative initiative to introduce the scheme where the availability risk lies on concept of "flying freehold" into Polish the public side and where banks are A comprehensive legal framework law. This is expected to facilitate projects more likely to be interested because of enabling the implementation of PPP where the ownership of the underground various security instruments provided by schemes is already in place with the new infrastructure (e.g. a railway line) should the public side (e.g. keepwell Act on PPP and the new Concessions not interfere with the ownership of the agreements) are likely to be financed by Law. The new laws provide for flexibility in buildings (e.g. shopping centres). commercial lenders (especially if they building contractual and financing provide financing along with non- arrangements with private partners. In There are also a number of other urban commercial lenders, such as the EIB or addition to standard PPP, a number of regeneration initiatives. Several of these the EBRD). projects may still be implemented under projects have the potential to become various special-purpose-vehicle schemes, commercial developments, especially for One of the biggest factors encouraging allowing the private partner to exit the retail units, offices and hotels. It is investment in infrastructure in Poland is project relatively quickly without engaging believed that underground car park the notable change in the mentality of the in long-term operation and maintenance, projects (for example in Warszawa, Polish authorities. The biggest Polish thus increasing the bankability of the Kraków and Katowice) have an cities seem to understand PPP better, project. Interestingly, municipalities are unprecedented potential for success (for and - even more comfortingly to private now ready to engage in PPP projects financing reasons). investors - they are willing to retain whereby as consideration for expenses external advisers (financial, technical and incurred by the private investor in Almost all large Polish cities are interested legal) to help them to structure the developing public infrastructure or in the construction of incinerating plants. project, select the private partner and constructing buildings important to the Białystok, Koszalin, Szczecin, Bydgoszcz, conclude the PPP agreements. municipalities, local authorities are willing Łódź, Katowice, Kraków, Poznań and

© Cliff©or dC lCiffhoardn cCeh, aJnacneic, kJaa,n Kicrkuaż,e wKrsukżi,e Nwasmki,i oNtkaimewioictkzi ei wwiscpz ói lwnicspy óslpnóicłyk as pkóołmkaa nkdoymtoawnday 2to0w11a 52 Real Estate Investment in Poland Your Legal Guide

Daniel Kopania, Partner Tomasz Szymura, Counsel Head of the Real Estate, Construction and Tax issues Infrastructure Department

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Bartosz Kaniasty, Counsel Paweł Puacz Real Estate issues Environmental issues

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Wojciech Dmoch, Counsel Marcin Krysa Tax issues Real Estate Finance

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© Clifford Chance, Janicka, Krużewski, Namiotkiewicz i wspólnicy spółka komandytowa 2011 © Clifford Chance, March 2011 This publication does not necessarily deal with every important topic nor cover every aspect of the topics with which it deals. It is not designed to provide legal or Clifford Chance, Janicka, Krużewski, Namiotkiewicz i wspólnicy spółka other advice. komandytowa If you do not wish to receive further information from Clifford Chance about events ul. Lwowska 19, 00-660 Warsaw, Poland or legal developments which we believe may be of interest to you, please either send an email to [email protected] or contact our database administrator by post at Clifford Chance LLP, 10 Upper Bank Street, Canary Photographs by courtesy of Paulina Matuszewska and Michał Matera, Real Wharf, London E14 5JJ. Estate, Construction and Infrastructure Department, Clifford Chance Warsaw. www.cliffordchance.com

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