Property law: Foreign currencies - new, liberal rules for contracts are expected

Under Polish law, considerations provided for in contracts - including real estate sale agreements and other agreements related to real properties entered into by Polish residents within their commercial activity - must be expressed in Polish złoty. Any breach of this rule may lead to the voidance of a contract.

The interested parties are, however, entitled to apply to the president of the National Bank of Poland for an individual foreign exchange permit to express their considerations in a foreign currency. The permit must be obtained prior to entering into the contract  and, although it is not difficult to obtain, it is usually only granted for a limited period of time and it is not uncommon for the parties involved to need an additional decision due to normal business delays.

Why it matters

It would at first seem that this rule is of little significance for foreign investors, as there are various contractual means of dealing with currencies (such as valorization clauses). However, the fact that the rule must be preserved in all contracts entered into between companies seated in Poland - as well as those which are part of large international capital groups - makes it much more complicated. Foreign exchange regulations are of great importance, especially for entities which hold their Polish real estate in pools of assets and wish to move the assets between companies, settling the payments in, most commonly, euro.

For many, if not all, foreign investors, making internal calculations in euro, for example, would greatly facilitate their daily operations and allow their Polish subsidiaries to avoid the risks of a floating currency exchange rate. This could be  especially significant in short-term transactions or non-cash operations, which are very common in internal transactions.

Looking at this from a business perspective, a foreign investor must see this rule as an unnecessary restriction in an EU country which aims to fully integrate itself with the euro zone. It is also standard market practice that valuation experts of international repute report in euro; while such reports are made prior to a transaction, the risk of a change of exchange rate is often present. Equally, such matters as insurance policies or remuneration for various real estate agencies, brokers' fees and managers' fees are often standardized in euro and have to float only because payments must often be made in Polish złoty.

New provisions

On April 18, 2008 the Polish cabinet approved a draft amendment of the Polish Civil Code and the 2002 Foreign Exchange Act, which aims to abolish strict regulations and introduce a general rule under which residents conducting business activity will be entitled to express their considerations in a foreign currency (subject to statutory provisions). Interestingly, the new provisions of the Civil Code bring us back to Poland's 1933 Act on Obligations, in which a similar freedom in formulating contractual provisions was granted.

More specifically, the new provisions allow a debtor to free himself from a debt expressed in a foreign currency by paying the debt in the Polish złoty equivalent calculated according to the average exchange rate published by the National Bank of Poland on the date on which a given debt becomes payable or, in the event of a delay, on the date on which a given debt is paid (this would also cover late payment interest).

The proposed provisions finally provide for a distinction between the expression of a debt in foreign currency and the method in which a debt is paid. The payment will be regulated by the Civil Code as described above, unless otherwise regulated in a contract, court order or statutory provisions. The parties will therefore enjoy a good deal of freedom in determining the exchange rate of their choice (if necessary).

Since the existing restrictions substantially and unnecessarily complicate calculations of debts in all sorts of business transactions, the proposed amendment should be considered an instrument which will remove another formalistic barrier to business.

It is not yet clear however, if and when the proposed law will enter into force, as it must pass through the entire formal legislative procedure in both chambers of Parliament.

Jakub Kutzman is an associate with Linklaters law firm.
e-mail: jakub.kutzmann@linklaters.com