Reprivatization draft law could be a nightmare for investors
During and after World War II, private property in Poland was expropriated pursuant to numerous nationalization laws. In many cases, private owners were even deprived of their property in violation of those nationalization laws.
Following the country's transformation to a market economy and as a prelude to the privatization process, state legal entities were granted title to the property in their possession as of Dec. 5, 1990. About the same time, the process of drafting legislation to address the issue of reprivatization claims began and has to date resulted in more than a dozen drafts being submitted to Parliament for consideration.
If reprivatization claims are not addressed, the issue of titles to Polish property is nightmarish. All investors need to think about how the property in which they are planning to invest or have invested has changed hands over the last 60 years without there being any clear guidance as to how the wrongs that occurred will be redressed.
The most recent proposal on tackling reprivatization is the "Act on Reprivatization of Real Property and Certain Movable Property of Individuals, Expropriated by the State or the Commune of Warsaw and on Compensation Therefore" (the Draft). The draft was prepared by the Polish government and submitted to Parliament in September 1999.
One of the major international criticisms of the draft is the limitation on who may bring a claim. According to the draft, to bring a reprivatization claim you must be:
a Polish citizen (or have been deprived of Polish citizenship on the basis of a resolution of the Cabinet of Sept. 6, 1946);
a person who lost property in the east in connection with World War II;
a person who lost ownership of a property as a result of laws on property held by foreigners, but later gained Polish citizenship based on the decrees of 1946 and 1947.
Further, the draft distinguishes three categories of property that may be subject to reprivatization claims. Into the first group falls property that had been taken over by the state or the Commune of Warsaw on the basis of 16 different laws enacted from 1944-1962 and listed in the draft. With respect to this first category, a claim may be made regardless of whether the expropriation took place in accordance with those 16 laws. The second category consists of property expropriated by the state from 1944-1962 without a legal basis or in gross violation of laws other than those 16 laws listed in the draft. In the third group is property that had been occupied by the Germans during World War II and was subsequently expropriated by the state or the Commune of Warsaw.
The compensation for expropriated property included in one of these three categories is 50% of the value of the property and may be in the form of either restitution of the property or reprivatization vouchers. In determining the value of the property, both the physical and legal status of the property as of the date of the expropriation and the market prices on the date the draft would come into force must be taken into account.
The draft both recognizes and limits the right to restitution. Property may be returned to a former owner only if, on the date the draft comes into force, the property is owned by the treasury; self-governmental entities that acquired the property from the state on a royalty-free basis; or a legal entity (a company) that consents to the restitution.
The draft specifically lists nine situations when restitution is not possible. Four of these nine are worth particular note. According to the draft, property may not be returned to an otherwise entitled former owner if:
it is in the possession of another individual pursuant to an agreement granting the individual a right of perpetual usufruct (99 years) of the property;
it cannot be separated without a loss of the current function of the property;
the property is held by a legal entity pursuant to an agreement granting a right of perpetual usufruct of the property and this entity does not consent to the restitution.
Finally, with respect to a part of a property subject to a reprivatization claim on which buildings have been constructed that are worth more than the part, that part is not subject to restitution, but the remainder of the property may be returned provided that it is possible to separate the remainder from the part.
As proposed in the draft, there would be a three-month window to make a reprivatization claim to the local voivodship, after which reprivatization claims expire. The draft also provides that reprivatization claims may be brought only on the basis of the draft unless administrative proceedings on restitution of the property have already been initiated and not completed. In this case, entitled individuals may decide (during the same three-month period) whether to bring claims pursuant to the draft or continue with the prior proceedings.
One of the major problems with the draft is an inconsistency in its treatment of perpetual usufruct rights of state-owned entities. According to a literal reading of the draft, legal entities that lawfully acquired the right of perpetual usufruct (99 years) of property they possessed/managed on Dec. 5, 1990 may be exposed to a risk of restitution. Ownership of a property held in perpetual usufruct remains with the state while legal entities (such as state-owned enterprises or some privatized or commercialized entities) enjoy "only" the right of perpetual usufruct. However, this literal reading of the draft stands in contrast to the government's justification of the draft, in which the government expressed its intention to protect the rights of current holders, including the rights of current and former state-owned enterprises.
At present, the draft is being considered by an extraordinary commission that will hopefully notice the danger in the inconsistency between the stated intention behind the draft and its actual wording. Should the draft be adopted in its current form, numerous Polish companies that were formerly state-owned enterprises but are now privatized would be exposed to the risk of restitution of their real property. This scenario, if it occurs, would not only be a bad dream, but a potential horror story for investors in Poland.
This article was prepared by Lejb Fogelman, the managing partner of Hunton & Williams Poland, with the assistance of Katarzyna Kwiatkowska, an associate attorney.
