Property law: Clearing up the status of the right of perpetual usufruct

Simply speaking, it's neither of them. However, let me give you a short summary of what a perpetual usufruct is and how it differs from ownership.

Entering the unknown

The right of perpetual usufruct (RPU) is a so-called limited property right. The RPU also exists in a number of other jurisdictions (e.g. Germany), but it is unknown to UK or US investors.

The RPU applies only to real property and is something different to ownership. It is granted by the owner (which must be the State Treasury or local authorities) in favor of third parties. In consequence, the RPU is established for the benefit of a third party, a private individual or a company, but the ownership will remain with the State Treasury or with the local authority establishing the RPU. Nevertheless, the holder for the RPU title may use the land in the same manner as it would be used by the owner and enjoys the same protection of its title as the owner.

Time pressures

One of the differences between ownership and the RPU is that the RPU is limited in time and may be prematurely terminated. In general, the RPU is established for a term of 99 years, but in very special circumstances this term may be shortened, although never by less than 40 years. The term of the RPU may be extended if the usufructuary applies for an extension within the last five years of the RPU's term. The owner may not refuse an extension unless it is contrary to a matter of "important public interest," which is very uncommon.

The RPU may only be terminated by the owner upon application to the court. The owner may claim for the termination of the RPU only in cases where the usufructuary uses the real property in a manner that is not compliant with the property's designation, as stipulated in the agreement establishing the RPU, in particular, if the usufructuary fails to erect the buildings or other facilities provided for in such agreement.

For example, if a company is granted an RPU to the land, and the agreement stipulated that this company should erect a residential building within a specific term and the company does not meet the deadline, the owner may apply to the court for the RPU to be terminated. An RPU will also expire if the land being subject to the RPU is sold to the usufructuary, or where the owner and the usufructuary decide to terminate it contractually.

Annual payments

Another difference between the RPU and ownership is that the RPU is subject to annual payments (similar to rent under lease or tenancy). The so-called annual fees for the RPU are charged throughout its term and amount to up to three percent of the real property value. However, this amount may be lower depending on the property's designation - e.g. two percent of the value if the property is designated for tourist purposes or 0.3 percent of the value if it is designated for cultural or educational purposes.

This value may be adjusted from time to time (but not more than once a year) and the relevant amount of the RPU fee will increase accordingly. Also, when the RPU is newly established, the usufructuary is obliged to pay an initial fee in an amount corresponding to 15 to 25 percent of the real property's value.

The next column will look at this topic in more detail.

Janusz Dzianachowski is an associate at Linklaters law firm E-mail: janusz.dzianachowski@linklaters.com