The main sources of real estate law in Poland include:
The coronavirus pandemic has caused a slowdown in real estate transactions and a shift in the assets that investors were most interested in. The transaction volume on the Polish real estate investment market in 2020 reached EUR5.3 billion. This represents a drop of approximately 25–30% from the 2019 volume, which has been assessed as EUR7.8 billion.
Polish office investments in 2020 slowed down; however, the logistics market reached a peak, whereas the volume of retail transactions was low.
The prices for retail properties decreased. Office building prices were temporarily affected as well; however, supply also decreased as some investors decided to hold on to their assets longer and refrained from selling them during that turbulent year.
Nevertheless, the market remains attractive for investors, and in 2020, investors from the USA and China, as well as from South Korea, the UK, Germany and France invested in real property in Poland. Funds from Hungary and the Czech Republic were also active.
Experts say that the market stabilised at the end of 2020. According to the experts, 2021 should bring a significant increase in the transaction volume.
Blockchain technology has become a tool used in certain types of standardised lease agreements. This cutting-edge technology was used for the first time on the Polish real estate market by a Polish start-up, ShareSpace.
The access, verification and validation of the documents and commercial arrangements took place through a decentralised platform that significantly reduced the time for the negotiations while maintaining the security guarantees of the online process, even with multiple entities engaged. The agreement template was also developed based on blockchain technology. The Hogan Lovells Warsaw office provided comprehensive legal consulting services at all stages of the transaction.
The latest amendment to the Act of Building Law of 7 July 1994 stipulates the following solutions aimed at simplifying the construction process:
The Act amending the Law on Real Estate Management enabled the elimination of the title risk related to the use of a real estate contrary to the so-called purpose of its perpetual usufruct right. This applies to many shopping malls, office buildings and logistics properties.
The use of a real estate in a way contrary to the purpose of the right of the perpetual usufruct causes the theoretical risk of losing the legal title to said property.
Until now, any change to the purpose of a perpetual usufruct involved a lengthy and expensive procedure; and the right to change the purpose was not always guaranteed. In the event of a positive decision, the fee was often a high percentage of the difference between the current value of the property and its historical value. The amendment grants the perpetual usufructuary the right to change the purpose of the perpetual usufruct. This change is possible when a new purpose results from the master plan, the zoning permit, the occupancy permit, or the notification on construction works.
Under Polish law, there are two types of freehold title to real properties:
The legal issues relating to the transfer of titles to a real property are regulated under the Civil Code. There are several other regulations that can affect the transfer of titles, such as the Law on Land and Mortgage Registers and on Mortgages, the Law on Real Estate Management, and the Law on Acquisition of Real Estate by Foreigners.
The transfer of an ownership right, or perpetual usufruct right, requires the conclusion of an agreement in the form of a notarial deed between the involved parties, otherwise the transfer is invalid. In relation to the ownership right, the transfer takes place at the moment of the conclusion of the sale agreement, or any other right transferring agreement.
In order to have the full legal effect of the transfer of a perpetual usufruct right, it is necessary to disclose the transfer in the land and mortgage register.
Buyers usually carry out commercial, legal and technical due diligence of a real property prior to its acquisition. In these due diligence processes, commercial, legal and technical advisers are involved. The due diligence is performed on the basis of the documents that the seller has made available in the virtual data room.
The scope of the due diligence varies depending on the type of property; in particular, whether the property is undeveloped or developed, or whether a building is still under construction or has already been built. A typical legal due diligence report includes the examination of the property title and its encumbrance (the land and mortgages books are reviewed), analysis of the lease agreements (if applicable), verification of any potential tax liabilities affecting the property, zoning and building permits, environmental issues, construction and architect contracts, and service agreements. In the case of a share deal, the due diligence also covers the corporate documentation concerning the target company, financing, employment, litigation and contract documentation.
Generally, at the beginning of the pandemic in 2020, investors refrained from entering into new real estate transactions. In the course of the year, after an initial suspension, buyers returned to investing in office space, but more conservatively and attempting to negotiate more favourable terms. In connection with the coronavirus pandemic, due diligence on lease agreements in office and retail premises additionally covers the issue of possible rent reductions; in particular, tenants' requests relating to the COVID-19 crisis, as well as additional agreements for a suspension of rent and service charges.
According to the Polish Civil Code, the seller is liable to the buyer if:
The parties can extend, limit or exclude the warranty liability; however, this limitation of the liability is ineffective if the seller deliberately concealed a defect from the buyer.
In commercial real property transactions, the statutory warranty is usually excluded and replaced by the seller’s set of representations and warranties. In these cases, the sale agreement regulates the scope, duration and monetary limits of the seller’s liability for a breach of the representations or warranties.
Real property investors should be aware of the provisions of the Civil Code that regulate the scope of freehold and leasehold titles to real properties. The Commercial Companies Code regulates the entities used as vehicles for real property acquisitions, and the Construction Law regulates the building investment process. Finally, investors from outside the European Economic Zone should consider the limitations set out by the Law on the Acquisition of Real Estate by Foreigners.
In general, the buyer of a land is responsible for the clean-up of any contamination based on the land occupier’s principle of responsibility. There are certain defences that the buyer of the land can use to shift liability on to other entities; however, using defences often requires evidence, which can be difficult to obtain.
Under the law, there is no obligation to carry out a soil surface contamination assessment. However, if the concentration of pollutants proves to be excessive, the public authorities can oblige the property owner to carry out a soil decontamination or remediation.
Therefore, prior to an acquisition and/or investment, especially in respect of brownfield investments, the buyer/investor should carry out a soil assessment. Additionally, it should also be verified whether the property is revealed in the historical register of surface pollution, or in the register of environmental damage.
The possibility for the development of a given real property is determined by, among other things, the Zoning Law, the Building Law and the Environmental Law. In order to assess the feasibility of a particular investment, it is crucial to investigate the existence of any legal limitations that might apply.
The major determinants of a planned development are the zoning requirements that are regulated by the provisions of a local zoning plan or zoning permit. The local zoning plan regulates the major zoning principles applicable for a particular area. The local zoning plan is adopted by a city council and constitutes the basic framework for any investments to be executed after it has entered into force.
In cases where a local zoning plan has not been adopted, the investor needs to obtain a zoning permit specifying the development possibilities of the real property.
In certain cases the investment can only be performed if a local zoning plan has been adopted; eg, in retail centres with a sales area exceeding 2,000 square metres, or wind farms.
In accordance with the Constitution of the Republic of Poland, expropriation is permissible only if it is carried out for public purposes and only for compensation.
Public purposes can constitute, among other things, the construction of a road, railway line or airport, or the installation of media connections. In addition, the property must be located within the areas intended for public purposes marked in the local zoning plan, or a decision must be issued to determine the location of the public purpose investment.
Expropriation can cover all or part of a property. If the expropriation only covers part of a property and the remaining part is unsuitable for proper use for the current purpose, upon the property owner’s request the expropriating authority is obliged to purchase the entire property.
Real properties can only be expropriated for the benefit of the State Treasury or a local government unit. Expropriation proceedings must always be preceded by negotiations for the acquisition of the rights to a real property by a contract.
The expropriation is completed by the conclusion of a contract between the owner and the expropriating authority, or by the authority issuing its decision.
If the transaction is structured as an asset sale, it is generally subject to VAT. The VAT consequences for the sale of a real property are described in detail in 8.1 VAT.
In the case of transactions concerning the sale of real properties (the ownership right or right of perpetual usufruct) when the transaction is not VAT-able or is VAT exempt, the transaction is subject to the tax on civil law transactions (stamp duty). The tax rate in the case of a sale of a real property is 2% and is payable by the buyer. The tax is calculated based on the real property’s market value.
The sale of a real property can also be performed as a share deal. In this case, the sale of the shares is subject to the tax on civil law transactions at a tax rate amounting to 1% of the shares’ market value. The buyer is responsible for paying the tax.
The acquisition of real estate by foreigners is governed by the provisions of the Act of 24 March 1920 on the Acquisition of Real Estate by Foreigners. In accordance with this act, foreigners are defined as individuals who do not have Polish citizenship, or legal entities that have a registered office outside Poland, or legal entities that have registered offices in Poland but are directly or indirectly controlled by foreigners. As a rule, the acquisition of a real property, and the acquisition, by foreigners, of shares in legal entities that own real properties in Poland, requires a permit granted by the Minister of Internal Affairs.
The above general rule actually applies to a very limited extent. With respect to citizens and legal entities from the European Economic Area (EEA), the applicability of the Act is excluded. Starting from 1 May 2004, citizens and legal entities established in the territory of the EEA (ie, the European Union, Iceland, Norway, Liechtenstein and Switzerland) are exempt from the obligation to obtain a permit from the Minister of Internal Affairs. As a result, a legal entity such as a limited liability company established in any EEA country (including Poland), even if controlled by a foreigner (including outside the EEA; eg, the USA or Singapore), is considered to be an EEA entity and does not need to obtain a permit for the acquisition of a real property in Poland.
The purchase of a real estate can take place through an asset deal or a share deal. In both situations, the financing is usually provided by concluding a loan agreement that contains a partial financing tranche for the purchase. A typical financing scheme includes 30–40% of the equity and the rest financed through a bank loan.
It is not uncommon that investors finance an acquisition solely from the equity. In certain cases these acquisitions are often followed by refinancing. Also, mezzanine loans are often in place to fill any financing gaps.
The standard security package in a real estate purchase financing transaction includes:
There are no specific limitations on granting securities to foreign lenders. There are also no limitations on repayments made to foreign lenders due to the enforcement of related security.
Most security documents require the involvement of a notary public since they need to be executed in the form of a notarial deed, or with signatures certified by a notary. At a later stage the mortgage needs to be registered in the mortgage register, and registered pledges need to be registered in the register of pledges. Therefore, granting a security involves payment for (i) a notary and (ii) the registration fees.
The amount of the notarial fees is strictly dependent upon the type of activity conducted. Its maximum amount is specified in the Regulation of the Minister of Justice of 28 June 2004 on the Maximum Rates of Notarial Fees.
Before a security over an asset is granted, it should be verified that all the corporate consents required under the law, or under the articles of association, have been given. Therefore, to ensure the validity of the security, the articles of association of each contracting company should be thoroughly reviewed.
A foreclosure can be executed in the case of a default in any payment, or in the case of any other breach of obligation under the facility agreement.
Provided the lender has not agreed otherwise, the lender has the ability to decide which security should initially be executed, usually starting with the attachment of bank accounts and the corporate rights of the company holding the title to the purchased property.
The subordination of a debt, as well as the subordination of securities, can be agreed upon between the parties and put into effect by virtue of contractual provisions.
A lender can be held liable under environmental law if the lender becomes the owner of the property as a result of a foreclosure. Other than that, there are no specific liabilities for a lender for environmental issues.
Should a borrower become insolvent, the amounts obtained from the sale of the borrower's assets encumbered with a mortgage or pledge will be allocated to satisfy the creditors whose claims have been secured on those assets.
By the end of 2021, LIBOR will no longer be supported by the financial investigation authority; therefore, a key point for all parties in the financial documentation should be the smooth transition to the Sterling Overnight Index Average (SONIA). To this end, a change to the financial documentation, in which the maturity falls after 2021, is required by incorporating emergency terminology that ensures a proper alignment with SONIA.
Strategic planning and zoning in Poland is provided on the following levels: national, voivodship (województwo), county (powiat) and municipal (gmina). The municipal authority enacts the directly binding local zoning plans, which are the most important from the investors' perspective.
Prior to the commencement of any construction works, in most cases, the investor should obtain a building permit.
After the completion of the building works, but before the building can be used, an occupancy permit must be obtained or a notification must be submitted, as applicable. The relevant public authority executes an inspection of the building verifying its compliance with the construction design and compulsory law requirements. It is illegal to use a building without first having obtained a mandatory occupancy permit or submitting a notification, as applicable. The use of a building contrary to a manner that is forbidden in the occupancy permit is also illegal.
In the case of minor construction works, the Building Law stipulates a shorter and simpler procedure consisting of notifying the local authority about the commencement and completion of the construction works.
Most of the responsibilities for regulating the development of the land lie with the local authorities. However, there are also various public inspection departments involved in administrative procedures, such as the Sanitary Inspection Department, the Labour Inspection Department and the Fire Department.
The procedure is initiated by filing an application for a building permit, which must include a detailed construction design. The applicant needs to hold the legal title to the real estate. A detailed construction design constitutes the essence of the application.
In respect of the categories of investments listed in the ordinance of the Minister of the Environment as potentially harmful to the environment, an environmental impact report might be required in order to confirm that the planned construction complies with the relevant environmental laws and regulations.
A building permit can only be issued when the application complies with the local zoning plan or the zoning permit (as applicable).
The applicant and any party with a legitimate interest (eg, neighbours) has the right to appeal against an authority's decision. The appeal should be submitted within 14 days after receipt of the decision.
The local zoning plans can require that a developer who wishes to invest in a specific “revitalisation zone” concludes urban agreements (umowa urbanistyczna) with the municipal authorities. In these agreements, a municipality can oblige the private investors to build, at their own cost, technical and social (cultural, educational, sport) infrastructure, as well as residential apartments, and to transfer free of charge these infrastructures to the municipality. Obtaining a building permit can be conditional upon the conclusion of such an urban agreement.
Another example is the common practice that developers who plan to build residential/commercial investments must agree to finance the construction of certain common roads and any necessary infrastructure linked to the contemplated investment.
It is not possible to obtain a building permit contrary to the restrictions on development. Construction works contrary to the provisions of the building permit, or contrary to any restrictions on the development, are illegal. Should the construction works be conducted without a valid building permit or contrary to such a permit, the authorities can impose various sanctions. The building inspectorate can issue a ban on continuing the construction works or, in a worst-case scenario, issue a demolition order.
Planning and Zoning
Strategic planning and zoning in the Republic of Poland is regulated by statutory law under the Zoning Law and Building Law. The zoning requirements are regulated by the provisions of the local zoning plan or zoning permit. The local zoning plan regulates the major zoning principles applicable for a particular area.
A building permit can only be issued when the application complies with the local zoning plan or the zoning permit (as applicable).
In cases where a local zoning plan has not been adopted, it is obligatory to obtain a zoning permit specifying the development possibilities for the real estate.
In order to obtain a zoning permit, several conditions have to be fulfilled, such as architectural compliance with neighbouring developments. The zoning permit does not specify its validity period, but the permit will expire if the local zoning plan contains provisions contrary to the zoning permit.
The local zoning plan is an act of local law adopted by a city council and constitutes the basic framework for any investments to be executed. It should be noted that in certain cases an investment can only be performed if a local zoning plan has been adopted; eg, in retail centres with a sales area exceeding 2,000 square metres, wind farms, investments in agricultural and forestry land, or investments in former military airports.
Investors who wish to conduct their business in Poland can do so by establishing their economic activity in the form of a subsidiary – a company or a partnership.
The three most common legal forms of investment vehicles are:
The main difference between companies and partnerships is that companies are considered separate legal entities. However, upon registration in the Registry of Entrepreneurs at the National Court Register, both limited partnerships and limited joint-stock partnerships acquire the right to conduct an enterprise under their own name, including the right to purchase real estate, despite the lack of legal personality.
Limited Liability Company
A limited liability company is the most common form of doing business in Poland.
A limited liability company acquires its legal personality upon being entered in the Registry of Entrepreneurs of the National Court Register and from the time of this registration it becomes solely liable for its obligations. Shareholders are generally not liable for the obligations of the company and bear a risk of up to only the value of the shares contributed to the share capital.
A limited partnership is a partnership in which at least one partner is subject to an unlimited liability for the obligations of the partnership (the general partner) and at least one partner is liable up to only the amount specified in the deed of the partnership (the limited partner).
Unless the deed of partnership states otherwise, general partners have the right to an equal share in the profits, whereas limited partners participate in the profits in proportion to the contribution they made to the partnership.
Limited Joint-Stock Partnership
A limited joint-stock partnership is a hybrid of a joint-stock company and a limited partnership in which at least one partner (the general partner) bears personal liability with their personal property for the partnership's debts and at least one partner is a shareholder bearing no personal liability for the obligations of the limited joint-stock partnership.
The general partner and the shareholder participate in the company's profit in proportion to their contributions to the company.
The minimum capital required to set up each type of entity used to invest in real estate is as follows:
As a rule, the minimum share capital must be paid up in full before the company or partnership can be registered in the National Court Register.
Limited Liability Company
A limited liability company is governed by its shareholders’ meeting and management board. A supervisory board or audit committee is optional, unless the share capital exceeds PLN500,000 and there are more than 25 shareholders.
The shareholders’ meeting is the supreme body of a limited liability company and generally elects the members of the management board who represent the company and conduct its business.
A limited partnership is represented by the general partner, whereas the limited partner can represent the partnership only on the basis of a power of attorney granted by the general partner.
Limited Joint-Stock Partnership
A limited joint-stock partnership is represented by the general partner, whereas the shareholder can represent the partnership only on the basis of a power of attorney granted by the general partner.
A supervisory board is optional unless there are more than 25 shareholders.
Maintenance and accounting compliance costs depend on the type of legal entity.
Among the described types of legal entities, the highest annual costs relate to a limited joint-stock partnership.
Mandatory costs in a limited joint-stock partnership include accounting, the rental of a registered office and legal costs (ie, the minutes of meetings must be drawn up in the form of a notarial deed). These costs depend on the service providers with which the company concludes agreements and on the level of activity of the company (frequency of amendments to the articles of association, or changes in the governing bodies).
In addition, as of 2020, all limited joint-stock partnerships are required to have a register of shareholders maintained by a brokerage house. The service fee for the maintenance of the register of shareholders will cost approximately EUR1,000–1,200 annually.
Therefore, the maintenance costs of a limited joint-stock partnership should not exceed EUR5,000 per year.
In the case of a limited liability company, the costs for conducting business activity are lower than those for a joint-stock partnership. There is no obligation to draw up minutes in the form of a notarial act (unless the articles of association are amended). The main costs are accounting and the rental of a registered office.
The costs for conducting business activities in the form of a limited partnership are the lowest. The partnership can use simplified accounting and the minutes do not need to be in the form of a notarial deed.
Polish law distinguishes between two kinds of lease agreements under which real estate properties can be held. The most common type is a lease agreement (najem), under which a landlord grants a tenant the right to use the subject of the lease in exchange for rent. The other type is a lease agreement (dzierżawa), under which a landlord agrees to grant a tenant the right to use the subject of the tenancy and, moreover, to collect the profits generated by it in exchange for rent.
The division is specific to the Polish legal system and has no foreign law equivalent. For editorial purposes only, the authors will further refer to najem as a “lease agreement” and dzierżawa as a “tenancy agreement”.
Typical commercial leases are in the form of lease agreements. Tenancy agreements are mainly used in relation to the use of agricultural land or the operation of enterprises. Lease agreements are governed under Articles 659–692 of the Polish Civil Code. The statutory provisions concerning the lease apply respectively to the tenancy.
The provisions of Polish law relating to lease agreements do not use the term “commercial lease” as such. The only statutory regulation explicitly relating to commercial lease relations is concerned with the maximum period of time of a lease concluded between entrepreneurs. As a result, the only criterion that can possibly enable one to qualify a lease agreement as a commercial lease is based on the character of the parties of the agreement, irrespective of the purpose of the leased premises.
The parties of a lease are entitled to freely negotiate and agree upon the amount and currency of the rent. It is very common that the rent of a commercial lease is expressed in euros but payments are made in zloty calculated according to the average exchange rate of the National Bank of Poland as of the date of issuance of the invoice.
There are no statutory requirements as to how the rent should be calculated, therefore it could be a lump sum, or a relevant amount calculated per square metre of the leased premises.
COVID-19 legislation introduced regulations providing for the suspension of mutual obligations under lease agreements (including rent payments) concluded by tenants whose businesses were covered by the ban on conducting business (shops, restaurants) in large-area shopping centres. As a matter of law, such tenants were automatically entitled to a rent suspension during the period of the ban for their activities in the shopping centres, provided they made an offer to extend the lease period. The rent suspension enters into force during each case of a mandatory ban on activities in shopping centres caused by the COVID-19 pandemic.
In general, the parties are also entitled to freely agree upon the terms and conditions of the lease agreement. There are, however, certain limitations.
Firstly, a lease agreement must be concluded in writing under pain of invalidity.
Concerning the duration of the lease agreement, a lease agreement can be concluded for a definite or indefinite period.
A lease concluded for a period longer than ten years, when at least one of the parties is a non-entrepreneur, is deemed, after the lapse of this period, to have been concluded for an indefinite time. A lease concluded between entrepreneurs for a period longer than 30 years is deemed, after the lapse of this period, to have been concluded for an indefinite time.
If a lease agreement has been concluded for a fixed time, any termination clauses included within this lease agreement must specify a cause for which either party can terminate the lease agreement.
The length of a lease is determined by the parties. The agreement can be concluded for a definite or indefinite time. Lease agreements between entrepreneurs are typically concluded for a definite time. The typical duration of a commercial lease depends on the industry. In the logistics sector, typical leases are from three to ten years. In the case of the retail and office sector, the short leases start from five years. The parties usually stipulate the right of the tenant to extend the lease term under the same conditions for a term of an additional number of years, as well as to shorten the original lease term after the lapse of a certain time.
Under Polish law, a landlord is obliged to hand over the premises in a condition appropriate for the purpose for which it was leased and maintain it in this state throughout the lease. This is why the landlord remains responsible for any structural or major repairs, whereas the tenant carries out repairs and internal decoration connected with the ordinary use of the premises.
The lease agreements often provide that the tenant can be entitled to rent reduction or rent suspension if, due to the landlord’s lack of performance, the tenant is unable to use the premises. However, these provisions are not useful in the case of a ban on the activities addressed to the tenants (as is the case for the ban on sales activities in shopping centres due to the COVID-19 pandemic).
The typical terms of lease agreements provide for a force majeure defence. The applicability of these provisions to a pandemic situation is disputable. Force majeure constitutes the defence for damage claims. This defence applies in the case of non-performance of specific contractual obligations that, as a result of force majeure, become impossible. This does not, however, provide a release from the obligation to pay the rent.
In the absence of the applicable contractual relief, tenants can seek to apply the rebus sic stantibus clause provided in the Civil Code. This statutory provision grants the court the authority to change terms of the agreement if, due to an extraordinary change of relations, fulfilment of the obligation would be connected with undue difficulty or would threaten one of the parties with significant loss. The determination of whether tenants were entitled to relief under a lease agreement is a matter for the courts and should be assessed on the grounds of the specific case.
This tool is not very useful in practice when facing a pandemic situation, because it could take years until the court issues judgment on the matter and the appeal procedure is exhausted. The rent is usually paid monthly in advance; however, other payment frequencies can be agreed.
The parties can agree on an indexation of the rent. The parties usually adjust the index to the currency in which the rent was established; for example, if the rent is expressed in euros, the most commonly chosen index would be the Consumer Price Index (CPI). In the case of the rent being expressed in zloty, the chosen index would be that of the price of goods and consumer prices as published by the Polish Central Statistical Office (Główny Urząd Statystyczny, or GUS).
The Polish Civil Code contains a specific regulation that states that the landlord of a premises can increase the amount of rent after notifying the tenant no less than one month in advance of the planned increase with effect at the end of the following calendar month. The right is usually excluded in fixed-term institutional lease agreements; in these agreements the rent is stable or can only be changed in specific cases as stipulated within the contract.
Rents and leases constitute services within the meaning of the VAT Act. Generally, rental payments are subject to VAT of 23%. Renting residential buildings for housing purposes only is subject to VAT exemption.
The tenant will bear part, or all, of the costs of any adaptation works should the premises need to be adapted to the tenant’s needs.
The issue of operating costs is not regulated under the Civil Code. In practice, the operating costs associated with the proper functioning and management of the subject of the lease and the common areas of the real estate on which the subject of the lease is located are usually borne by the tenant. The tenant’s share in these operating costs is usually calculated as a proportion of the leased area to the total leasable area. Metered utility costs and other identifiable services are usually re-invoiced by the landlord to the tenant.
The triple net lease concept is well recognised in Poland.
Unless the parties agree otherwise, the costs of the metered utilities are usually re-invoiced by the landlord to the tenant. The parties can also agree that the tenant will enter into direct contracts with the utility provider for specific utilities.
The landlord usually provides the all-risk insurance for the building up to its reinstatement value, and the tenant insures any goods brought into the premises against loss or damage. The tenant can also be obliged to obtain a general civil liability insurance with respect to its business activity. The insurance premiums borne by the landlord are allocated to the tenant as part of the operating costs.
Throughout the lease, the tenant can only use the premises in the manner stipulated in the agreement, and where the agreement does not determine it, in a manner that corresponds to its nature and its intended use. Any change of usage by the tenant is subject to the landlord’s approval.
Without the landlord’s consent, the tenant cannot change the object of the lease. Therefore, more significant works, alterations or improvements require the landlord's consent.
The law specifies that if the tenant has improved the premises, the landlord can, upon its own discretion, either retain the improvements while paying the amount corresponding to their value at the moment of its return, or can demand that the premises be returned to its original state.
The default conditions outlined above can be altered by virtue of the contractual provisions of the lease agreement agreed upon between the parties.
There are specific regulations with respect to residential premises regulated under the Act on the Protection of Tenant Rights. This Act introduces far-reaching protections for tenants.
Additionally, there are specific COVID-19 regulations providing for the suspension of mutual obligations under lease agreements concerning tenants of space in retail properties exceeding 2,000 square metres whose activity in the property has been banned.
With regard to leases of other categories of real estate – such as residential, industrial, offices or hotels – there are no specific regulations in this manner. Tenants of space in other categories of real estate could seek to obtain a change of lease terms by negotiating with landlords or through litigation, invoking the rebus sic stantibus clause.
Firstly, the landlord is entitled to terminate the lease without notice if the tenant fails to pay the rent over at least two payment periods.
If the tenant has declared insolvency, and the premises has already been handed over to the tenant, the agreement can be terminated only by the trustee in bankruptcy (syndyk). The trustee, upon its sole discretion, can then only terminate the lease upon three-months' notice. The landlord retains the right to claim compensation for the premature termination of the lease, although this compensation is limited to the rent for two years and must be reduced by the equivalent of the tenant's expenditure on the premises.
Although the statutory provisions do not regulate any obligatory securities for the payment of rent, in practice, bank and insurance guarantees, cash deposits or parent company guarantees up to an agreed amount (which is generally the equivalent of three months’ rent), and service charges plus VAT are widely used. A typical lease agreement usually states a bank guarantee or cash deposit for the equivalent of three months’ rent.
Should a tenant be in arrears in the payment of the rent, or any other payments, the landlord has the statutory right of pledge on the tenant’s movable items that the tenant brought into the leased premises up to the amount of the payments due for the preceding year.
If, after the lapse of the lease term, the tenant continues to use the lease object with the consent of the landlord, it should be considered, in the case of any doubt, that the lease was extended for an indefinite period.
In all other situations, the tenant is obliged to lease the premises and remove its movables before the end of the lease period.
There is a market practice that lease agreements stipulate the contractual penalties of 200% or 300% of the daily rent (as an indemnity for the landlord) for each day of delay in vacating the premises.
According to a general provision of the Polish Civil Code, the assignment of rights and obligations jointly under a lease agreement requires the consent of the other party to the lease agreement. In addition, a tenant wishing to sublease requires the landlord’s consent. Please note, however, that the lease agreement can stipulate the general right of the tenant to assign and/or sublease without any further consent from the landlord.
A lease agreement concluded for a definite time expires after the lapse of the agreed period.
A lease agreement concluded for a definite time can be terminated by the parties only in the case of occurrences specified in the agreement, whereas leases concluded for an indefinite time can be terminated with a one-day up to three-month notice termination period depending on the frequency of the rent payments under the lease.
According to the provisions of the Polish Civil Code, the parties are also entitled to terminate the agreement in the following situations:
There are no registration requirements concerning lease agreements.
It is possible to enter a lease agreement into a land and mortgage book in order to benefit from the public disclosure of the fact that the lease agreement has been concluded; however, the legal effect of this disclosure is not particularly significant and therefore it is not common practice.
A tenant is obliged to leave the premises after the termination or expiry of the lease.
Should the tenant not leave the premises voluntarily, the landlord can start an eviction proceeding and obtain a court judgment. On the bases of the court judgment, the forced eviction of the tenant can be performed by a bailiff. The length of an eviction procedure depends on the effective capacity of the given court handling it.
The Act on the Protection of Tenant Rights establishes a number of situations where the forced eviction of a tenant (natural persons in residential leases) is prohibited.
During the COVID-19 pandemic, evictions from residential premises have been suspended. Also, during the first lockdown caused by the pandemic (ie, the first half of 2020), tenants in general were entitled to extend their leases until 30 June 2020, and during this period, landlords were not allowed to terminate the lease agreements or increase the rent.
According to the Polish Civil Code, if a leased premises is sold (or expropriated) during the period of the lease, by virtue of law, the new owner will replace the transferor in the lease relation. The new owner is then entitled to terminate the lease while observing the statutory time limits for the notice of termination.
The right of an earlier termination cannot be vested if the lease agreement was concluded (i) in writing and contains an authenticated date, and (ii) is for a definite time. If the tenant must return the premises earlier than under the obligation of the lease agreement as a result of the termination of the lease by the buyer of the leased premises, it can demand from the transferor compensation for damages.
The traditional structure used in construction agreements is the lump-sum contract. In this situation the contractor is not entitled to request any additional payment unless the investor instructs variations. However, after the significant increase of labour and building materials costs that has occurred in recent years in Poland, remuneration based on cost estimation is becoming increasingly popular.
Assigning responsibility for the design and construction of a project depends on the specific project. In many cases the responsibility for the construction of a project and for the design is divided between the contractor, which undertakes the construction works, and the architect, who is involved in the designing activities, under a separate agreement.
The contractor is generally obliged to hand over the project on time and free of defects. If defects occur, as a rule, contractors are liable for these for a period of five years after the handover of the project under the statutory warranty for physical defects (rękojmia za wady fizyczne) or under a contractually agreed quality guarantee (gwarancja jakośći).
The standard practice on the market is the contactor granting contractual quality guarantees for a period of between two and ten years. For example, contractors generally grant a ten-year guarantee for roof watertightness, and a two-year guarantee for any fit-out works.
In order to secure the obligations arising from the guarantee, a small percentage of the contract price is often withheld by the investor for a limited time as a security.
In order to secure the achievement of milestones within the scheduled time, the construction agreements often stipulate contractual penalties for each day of delay. In the case of a substantial delay, the investor can terminate the agreement.
The owner withholding 5–10% of the net value of each invoice issued by the contractor is a standard market security. The above-mentioned amount is to be retained until the final protocol has been signed, all defects and snags indicated in the protocol have been removed, the as-built documentation has been delivered, and a bank guarantee (as described below) has been provided.
Upon the fulfilment of the above conditions, the contractor should provide collateral in the form of a bank guarantee or, less often, a parent guarantee, in the amount of approximately 5% of the net value of the contract.
Under the Civil Code, the contractor is entitled to call the investor to provide a bank guarantee issued on the investor's order for the purpose of securing the timely payment of the agreed remuneration for carrying out the construction works. If the investor does not provide the guarantee within the time limit, not less than 45 days, the contractor is entitled to withdraw from the contract.
Under the Civil Code, an investor is jointly and severally liable with a contractor (general contractor) for the payment of remuneration to any subcontractors. In order to secure the investor's position, the investor usually requires that the contractor provides the investor with the subcontractors’ statements confirming that they have been fully paid by the contractor.
After the execution of all of the construction works, but before the building can be used, an occupancy permit must first be obtained, or notification submitted (as applicable).
In the case of minor construction works, the Building Law provides a shorter and simpler procedure consisting of notifying the local authority about the commencement and completion of the construction works. Within 14 days, the relevant public authority is entitled to submit an objection to using the building. If the public authority does not submit any objection or remarks, the investor is allowed to use the building.
The transaction of a sale of a real property is generally subject to VAT or the tax on civil law acts.
The sale of an ownership or a perpetual usufruct right to undeveloped real properties intended for development is treated as a supply of goods under the VAT regulation and, as a rule, is subject to VAT.
The sale of developed real properties, including the sale of buildings and structures located on the land, is treated as a supply of goods under the VAT regulations and, as a rule, is VAT exempt provided that the sale is not effected within the framework of the first occupation or is not made within two years from the date of handing over the building, structure or their parts for the first occupancy (as a taxable activity). However, in this situation the transaction can be VAT-able if both parties declare to the relevant tax office to do so and under the condition that both parties are registered in Poland as VAT payers.
In addition, if the condition of the two-year period (from the first occupancy of the building) is not met, the sale of the developed real properties is VAT exempt if the following two conditions have been jointly fulfilled:
The basic rate of the due VAT for the sale of a real property is 23%, calculated on the basis of the value of the entire property (both land and constructions). The sale of residential buildings, or their parts, categorised as house buildings covered by a social housing programme is subject to taxation in accordance with a reduced tax rate of 8%.
In the case of transactions of the sale of a real property, when the transaction is not VAT-able or is VAT exempt, the transaction is subject to the tax on civil law transactions (stamp duty). The tax rate in the case of the sale of a real property is 2% of its market value and is payable by the buyer.
The transaction of a sale of real property can be structured as an asset sale. In this case, it may be considered whether the assets do not constitute an enterprise or its organised part. Such a case could be taken into account especially when the property complex is sold, together with available lease contracts, servicing of these properties and obligations related to real estates, as well as property management and asset management contracts, etc.
There were cases of practice of the Polish tax authorities where the authorities classified real estate transactions as sales of enterprises or its organised part that are not subject to VAT. In such a case, sales are subject to tax on civil law transactions in the amount of 2% (in the case of goods, such as immovable and movable property) and 1% (in the case of other property rights) of the value of individual components included in this enterprise.
Bearing in mind the above, it is important to precisely analyse the subject of the transaction and consider all the available protections (such as individual tax rulings aimed at confirming the tax treatment of the transaction).
Additionally, the sale of property could be performed as a share deal. The sale of shares is subject to the tax on civil law transactions at a tax rate amounting to 1% of the market value of the shares.
It should also be noted that in regard to the possibility of applying tax exemptions, the general tax avoidance clause in force in the Polish tax system should always be taken into account (GAAR). Additionally, structuring transactions aimed at obtaining a tax benefit may be considered as a tax scheme subject to reporting obligations to tax authorities under the regulations of the Mandatory Disclosure Rules (MDR), which implement the EU DAC 6 Directive.
The real property tax is payable on land, buildings or parts thereof and non-building structures or parts thereof used to conduct economic activity. Taxpayers obliged to pay this tax are owners of real properties, autonomous possessors of immovable properties or perpetual usufructuaries of land.
The tax rates applicable to properties connected to business activities are higher and are determined by the municipal governments of each community. However, the annual rates cannot exceed:
Due to the introduced COVID-19 regulations, particular municipalities may introduce exemptions from property tax and at the same time prolong the deadlines for payment of their instalments.
Income obtained from real estate located in Poland is taxable in Poland on general principles. The revenue could be decreased by tax-deductible costs. The tax rate is 19%.
An entity receiving income from the rental of real estate is obliged to settle the tax. This means that a foreign investor should register for the purposes of income tax in Poland and settle the tax on income obtained from real estate. If the foreign investor operates through a Polish special-purpose vehicle, such SPV is considered a taxpayer with respect to the income from the real estate.
The Polish provisions regulating income tax provide some tax exemptions, especially for certain entities, such as governmental entities, international institutions, collective investment institutions or pension funds. However, in the case of investment institutions and pension funds, meeting the conditions allowing the application of the exemption must be subject to detailed analysis in each case, due to the restrictive conditions and the approach of the Polish tax authorities. Also, according to the changes made in the tax law a few years ago, income derived by investment funds from real estate located in Poland does not benefit from the tax exemption.
In addition, the regulations provide for a special tax on revenues obtained from buildings constituting property of the taxpayer, located within the territory of Poland, that have been released for use in full or in part on the basis of a contract of lease, rent or another contract of a similar nature (a so-called minimum income tax on commercial properties). The tax rate is 0.035% of the taxable base for each month. The taxable base is the initial value of the buildings indicated in the books of the taxpayer. The taxable base is decreased by PLN10 million (in total, for all buildings of the given taxpayer).
The amount of tax on the revenue from buildings could be deducted from the income tax during the year or calculated on a yearly basis. If the amount of tax on the revenue from buildings is higher than due income tax, such tax could be refunded.
The COVID-19 regulations introduced an exemption from income tax on the revenue from commercial properties for the period from 1 March 2020 to the end of the month in which the state of the epidemic declared due to COVID-19 was recalled.
Disposition of real property is subject to taxation in Poland. Generally, revenue income from the sale of real property could be decreased by acquisition costs (excluding tax depreciation write-offs). The income is taxed at a 19% tax rate.
Buildings related to business operations that are the property (or joint ownership) of the taxpayer, acquired or manufactured in-house, complete and serviceable, are subject to depreciation charges. The depreciation rate is, in principle, 2.5% per year. Depreciation write-offs are tax-deductible costs. The regulations indicate that in some circumstances, after meeting the statutory conditions, the depreciation rate may be higher (this applies, among others, to buildings used in deteriorated or bad conditions). The undepreciated part of the acquisition price can be deducted upon the sale of the building.
Land and perpetual usufruct right to land cannot be subject to tax depreciation. However, the purchase price for the land and perpetual usufruct right can be deducted upon the sale thereof.
Real Estate Company
On 1 January 2021, a new type of a company, the real estate company, was introduced into the tax provisions.
A real estate company is an entity that is continuing its business activity if it meets all the following conditions:
Entities that are just starting their business activity gain the status of a real estate company as soon as the first two prerequisites are met.
The most significant change related to real estate companies is the imposition of payer obligations on them. In the case of sale of more than 5% of shares (or other rights) of a real estate company by a foreign entity, the real estate company is required to account for advance income tax on the realised income from the sale on behalf of the seller.
Real estate companies will also be obliged, in particular, to:
Before the outbreak of the COVID-19 pandemic, the commercial real estate market in Poland had been breaking records in terms of its investment value year after year. 2019 closed with transactions involving commercial real estate reaching a total value of EUR7.8 billion. Even though real estate prices had risen due to the fact that the availability of undeveloped land was shrinking and construction costs were rising, investors were still eager to invest. Poland continues to be one of Europe’s most attractive markets for foreign investors in the usual commercial real estate sectors (ie, office, retail, hospitality and industrial) as well as in housing developments.
Despite the outbreak of the COVID-19 pandemic and its enormous impact on the global economy, 2020 ended with a positive result on the investment market exceeding EUR5.3 billion. Although the volume of transactions dropped by 30% compared to the record-breaking 2019, the investment market in Poland is still perceived as stable and the volume of closed transactions has been maintained above the average over the past ten years.
Real estate has always been identified as one of the few investment asset classes to generate stable returns at a time of historically low interest rates of bank deposits. However, due to the pandemic and lockdowns, millions have been forced to work from home, retail stores have been closed and hotels have largely ceased to operate, all of which has accelerated the structural changes impacting the real estate sector, particularly the segment of commercial real estate.
Current Market Structure and COVID-19 Implications
The office market has always been the largest commercial real estate sector in Poland as typically more than half of the transaction volume on the commercial real estate market involved office space. However, in 2020, the demand for this type of premises dropped by approximately 30% compared to 2019, with the market hitting its lowest point since 2010. The final numbers revealed that the share of office space in the commercial real estate sector shrank from more than 50% of the overall investment market before the pandemic to 38% in 2020, which still exceeded expectations.
The developers and owners of office buildings are more reassured that building assets of this kind will see a market upturn and are currently implementing a number of new technical solutions complying with the new sanitary regulations to allow the reinstatement of safe office work. At the same time, market leaders are predicting that a hybrid working mode, combining working at the office with working from home, is expected to remain in place.
Forecasts suggest that the office leasing and investment market will grow rapidly again as demand is slowly returning. The new trend in this segment is the need for flex space, allowing tenants to adjust to the new hybrid way of working. These expectations will naturally force some changes in the way that office premises are currently set up, as well as in the way that lease agreements are drafted and the landlords’ obligations are laid down. Another visible change is that tenants are subleasing parts of the premises they are not using at the moment because of flexible office work and keeping part of their staff working remotely. All these changes are allowing the office market to grow steadily, despite the impact of the pandemic.
A less predictable situation is facing the retail and hospitality sectors, as the effects of the government’s restrictions and lockdowns are still very severe and ongoing. Investors have shown a reluctance to invest in retail or hotel properties, which is perhaps understandable given the continuous lockdowns and general uncertainty about the government’s decisions going forward. Most have decided to adopt a "wait and see" strategy that might lead to an increase in transactions when the situation stabilises. Altogether, the volume of transactions in the commercial sector reached 12% of the total Polish investment market in commercial real estate in 2020.
The retail sector experienced a massive upheaval whereby leases in large-scale commercial facilities (with a retail area larger than 2,000 m²) were renegotiated, having suffered from the direct impact of government ordinances and lockdowns keeping them closed (with the exception of stores selling food, pharmacies, drugstores, etc). These tenants extended their lease terms in exchange for a rent reduction. Retail facilities in the form of convenience centres and retail parks offering separate entries to the stores have an advantage and benefited from the situation, as they are better able to operate without such stringent limitations in their operations, unlike the typical large-format shopping centres. The market leaders are predicting that retail business will now focus on retail parks and smaller shopping malls in smaller cities.
The digitalisation of retail is another visible process, as the share of online sales in retail sales in 2020 jumped to 11–12% compared to 5–6% achieved before the pandemic. As a result, there has been a significant increase in the number of tenants of shopping centres that are developing an omnichannel sales strategy.
The hospitality business, which has suffered equally from lockdowns, has experienced an enormous drop due to the shutdown of operations by the MICE industry (meeting, incentive, conference, exhibition) and limited business travel. The marked slowdown was also reflected in the hotel room occupancy rate, which in 2020 slumped to an average of 29.6%, down from a relatively stable 52.3% from 2016–19. The 2020 average was only reached thanks to hotels in the biggest Polish cities, as well as increased interests of the Polish nationals who swarmed to hotel facilities at the sea, lakes and mountain resorts in the summer period, being reluctant to travel abroad.
The interest in Polish tourism facilities resulted in an increase of investments in aparthotel or condo hotel formats, allowing private investors to use such facilities for a period of time during the year for their personal use, but also to benefit from rentals to tourists bringing a guaranteed rent. Although some of those types of investments are currently being verified by the Polish Competition and Consumer Protection Authority, particularly with respect to the accuracy of the information given to private investors, it does mean that the market is still growing. In fact, the situation looks promising, given the fact that the majority of apart and condo hotel developers and operators are experienced hotel market leaders, which goes a long way to reassuring investors that the investment is safe. The apart or condo unit has started to become an important real estate investment asset.
The largest beneficiary of the global situation since the outbreak of COVID-19 has been the warehouse market. Record demand for new space for several years has led to a revival on the part of developers, but also attracted remarkable attention from investors. The transaction volume in 2020 reached a record level of 5.2 million m², an increase of 28% year on year, and as much as 139% up on the annual average in 2015–19. This result is due to a decrease in stationary sales and a rise of internet sales and e-commerce, which requires fast supply (stimulating the effect known as "nearshoring").
The warehouse market growth is largely driven by logistic operators for the retail and e-commerce industry, but also the manufacturing industry, which also requires locations. The warehouse market reached 50% of the total investment volume in commercial real estate in Poland in 2020 (with a value of approximately EUR2.6 billion). Consequently, we can assume further growth in this area in the upcoming years.
It is worth mentioning that warehouse investments are frequently being located in Polish special economic zones. In 2020, despite the pandemic, more than 360 investment decisions were issued allowing for investment projects to be developed on preferential conditions. The trend visible in this market is growth of green buildings and sustainable developments, verified through the certification process (usually the Building Research Establishment Environmental Assessment Method, or BREEAM), which is attracting more and more international corporations to Poland, seeing an advantage in locating logistics facilities in the country. From the legal side, on existing production properties there has been a large increase in sale and leaseback transactions that allow the owners of such production facilities to limit the costs of using the real estate asset while at the same time moving maintenance responsibilities to a more competent asset manager.
The residential market, being separate to the commercial real estate market, also actually benefited from the pandemic. Although construction processes were stopped for some time due to lockdown, it has been assessed that the outbreak of the pandemic actually helped to increase the volume of transactions and interest, presumably because of the rising needs for new living space and to adjust to the requirements of working remotely. On the other hand, many who did not invest in the residential market for their own use invested their savings in residences for rent. At the moment, the interest rates on deposits have reached historic lows, which have driven private individuals towards investing in residential properties. This has all helped the number of new apartments in Poland in 2020 to increase by almost 10% despite the pandemic.
New Growing Markets
The outbreak of the pandemic has changed the preferences of investors. Decreased interest in typical commercial assets – such as offices, retail facilities or hotels – has resulted in the growth of alternative assets, which are still at an early stage of development. An example of this is the private rented sector (PRS). For the past 30 years, most Poles have aspired to own an apartment.
However, the evolution of both the housing market and social trends means that the growing rental market is attracting increasing attention from institutional investors. Currently, there are almost 30 housing investments in Poland, offering a total of over 4,500 apartments for rent, owned by institutional entities. In addition, around 3,700 apartments are already under construction, most of which are scheduled for completion in 2021 and 2022.
Importantly, investors have announced further plots of land secured for housing investments, on which, by the end of 2025, there are plans to have about 15,000 new apartments for rent. These estimates are based only on entities already participating in the market, but they will be joined by other newcomers seeking to invest. The problem visible on the PRS market is that so far there are no large portfolios to be invested, and thus investors are investing in the sector through typical M&A deals such as joint ventures, forward purchases or simple financings.
Another trend forced by the pandemic is the growth of data centres as a new type of asset. These are being developed largely by the warehouse developers. The speeding digitalisation and global larger use of data requires support from IT infrastructure and its safe location. The resources of the Polish data centres market are predicted to double by 2025.
There is no doubt that the main factor currently driving the domestic data centre market is the fact that the largest public cloud providers in the world have announced investment plans for Poland. In September 2019, a decision was announced by Google Cloud, and in May 2020, Microsoft officially reported its investment plans. The fact that the two largest providers in the world are building their own facilities and locating space at the data centres of external companies has gone some way to stimulating growth in this new segment.
Recent Legal Developments
Sadly, the rapid growth of the Polish real estate market, both commercial and residential, has not been accompanied by fast-moving changes to complicated law regulations that could allow for a better understanding of investments and the development process, and would better meet investors’ needs.
The introduction of REITs to the Polish legal system has been delayed for many years. A REIT is an entity that allows individual investors to invest funds in real estate collectively. It is quite unusual for the Polish market that the majority of the capital invested in the real estate market is foreign capital and not domestic. From the beginning of 2021, many sources have been providing general information about upcoming consultations of the government with market representatives about the solutions that may be proposed on REITs in the form of legislation. The last draft legislation was discussed three years ago and was eventually abandoned as the government wanted to limit the benefits of REITs to the residential market. With this in mind, the author does not expect REIT legislation on the near horizon, though it may occur in the longer term, which would certainly make the Polish real estate market even more attractive to investors.
Meanwhile, since 1 January 2021, new limitations on the market have been imposed. The notion of a "real estate company" was implemented. In general, a real estate company is an entity with at least 50% of its assets in the form of real estate located in Poland (provided that their value exceeds PLN10 million) or a company receiving at least 60% of its taxable revenues from letting, subletting, lease, sublease, leasing and other similar contracts, from the transfer of ownership of real estate and from shares in other real estate companies.
If a foreign shareholder in such a real estate company sells any shares it holds in it, the company is obliged to settle corporate income tax or personal income tax advances on the income obtained by the shareholders from such sale. This means that if a foreign entity sells at least 5% of the shares in a real estate company, that real estate company will be obliged to pay (as a tax remitter) an advance tax on the income generated by the seller (and will be obliged to do so even if the foreign seller sells shares in a real estate company in one or more transactions totalling at least 5% of the shareholding during 12 consecutive months). The seller is then obliged to transfer the amount of the advance tax payment to the real estate company before the tax payment deadline. A seller’s omission to inform the company about the disposal of its shares triggers an obligation of paying the advance tax at the rate of 19% of the market value of the shares being sold.
Additionally, real estate companies will be obliged to publish the particulars of their shareholders, and some of them (in principle, real estate companies outside of the EU/EEA) will be obliged to appoint a tax representative in Poland. The Polish Ministry of Finance expects that this change in law will improve the collection and execution of taxes once an owner of real estate in Poland also becomes a remitter of taxes in Poland. Time will tell if this solution was worth introducing, or if it is just another burden imposed on real estate investors.
Perspectives for the Future
2021 is shaping up to be a year of concerns about the effects of a potential global economic slowdown on the real estate market. The most anticipated growth is likely to be seen in urban logistics, helping to cut delivery times within the e-commerce sector. The location of Poland at the heart of Europe between East and West is an important factor in investment decisions. A large focus will be placed on proptech and the sustainability of developments, as this is also a global trend. Polish commercial properties will continue to attract both investors and occupiers, as they constitute an attractive market for business development and still offer higher yields compared to Western Europe. Overseas investors remain crucial market players in Poland, with a visible increase of Asian and CEE investment funds.