CMS Expert Guide on Private Rented Sector leases in Poland

We consider forward-funding asset deals as the most common transaction structure for PRS projects. Usually, a preliminary agreement is executed at the initial phase of the development (after the land or building permit is secured) and subsequently the purchaser finances it in instalments paid depending on the progress of work and in accordance with the construction schedule indicating milestones. The fulfilment of milestones is signed-off by the purchaser’s technical representative. Nevertheless, other transaction structures, such as share deals, joint ventures, acquisitions of land and the completion of PRS projects secured under development management agreements, are also possible from the legal point of view.

As far as asset deals are concerned, the subject of the transaction may constitute either an entire project consisting of one or more buildings (currently the most typical), a portfolio of separate apartments together with shares in the common areas, or a part of a mixed-use project.

The completion of the project, understood as obtaining the occupancy permit and sometimes also the execution of fit outs, is the most common condition precedent under preliminary agreements concerning PRS projects. Other commonly encountered CPs in these projects include the legal separation of apartments, the transformation of the right of perpetual usufruct (RPU) into the right of ownership (for residential projects), and the execution of co-ownership agreements.

Financing for a PRS project can be secured in a way similar to financing for investments in other real estate sectors. Frequently, a mortgage is established over the property that is the subject of the transaction, shares in a seller are pledged or a parent company guarantee (suretyship) is granted by an entity from the seller’s group. Alternatively, it is possible to reflect a breach under the agreement in the transaction price or entitle the purchaser to take over the project in the event of default. Potentially, the assignment of rights under future leases or rights under other contracts related to the project might also be applicable.

The same rules apply to PRS projects as to the other real estate developments. Generally, before commencing construction works on a PRS project, it is necessary to obtain a building permit that outlines the development in detail, including the architectural design. Actual construction works may commence based on a final, non-appealable building permit. After the works are completed, an occupancy permit must be obtained to allow the development to operate. In addition, depending on the parameters of the project and whether a zoning plan has been adopted, environmental conditions permits and a zoning permit may be required. 

If not otherwise provided in the zoning plan, PRS projects resembling typical multi-family residential housing based on long-term leases should be located on areas designated for multi-family residential housing, whereas areas designated for service or tourism purposes are more appropriate for PRS projects resembling tourist facilities (such as hotels or aparthotels). In addition, a mixed-use residential multi-housing/services designation are generally considered a safe option for all types of PRS projects.

As indicated in point 4 above, generally the same rules apply to PRS projects as to the other real estate developments. 

Nevertheless, regarding PRS projects located on service areas we observe a common practice of structuring such projects as tourist objects or hotels. This means that, starting from the terminology used in a building design (premises called “rooms” instead of apartments and users called “guests” not “inhabitants” etc.), through the architectural design, the layout of rooms, their functionality, related services offered in the facility (such as a reception desk) and lease terms (short-term rentals up to one year), the object resembles a tourist object rather than a residential building. Such actions aim to convince the authority when issuing a building permit that a building complies with a service designation under a zoning plan. There is no such practice (or need, in our view) concerning PRS projects located on residential or mixed-service residential areas. 

Quality guarantee and statutory warranty periods in PRS projects are mostly in line with the periods in other commercial real estate sectors. 

The statutory quality/warrantee periods are: (i) five years in the development from ground up; and (ii) two years for other construction works. These periods can be extended and typically are for commercial real estate construction contracts.

PRS projects are usually delivered turnkey, therefore the contractor is responsible for the delivery of all fit-out works. In the other real estate sectors, such as industrial and commercial, the contractor is liable for the delivery of shell & core and basic fit-out, but more specific fit-outs are usually performed by the tenants. 

Under Polish law, residential leases are subject to a special regulation called the Act on Tenant Protection, which stipulates two types of lease agreements applicable to apartments owned by institutional investors: standard residential lease and institutional lease. An institutional lease can be concluded only by institutional landlords and can be perceived as tailored for PRS projects as it significantly reduces the number of limitations on the landlord’s rights applicable under a standard residential lease.

It is also disputable whether PRS projects structured as hotels or tourist objects are subject to the Act on Tenant Protection (which applies only to residential leases). However, in our view it safer for investors, in case courts took different approach, to implement institutional leases in all PRS projects.

Generally, lease agreements can be concluded for a definite term of up to ten years or an indefinite term. Leases that are subject to the Act on Tenant Protection expire only after the lapse of the definite lease term or in other cases stipulated in it. The limitation on a definite lease term of ten years does not apply to institutional leases, in which the length of the lease term can be freely regulated by the parties. 

In case of PRS projects structured as hotels, only short-term leasing (understood by some courts as up to one year) is recommended due to the legal definition of hotel services.

A collateral deposit is the most common instrument securing the tenant’s obligations under residential leases. This can be up to 12 months’ rent (calculated based on the rent when the lease is executed) under a standard residential lease and up to six months’ rent (calculated based on the rent when the lease is executed) under an institutional lease.

Under an institutional lease, the tenant must deliver a statement on submission to enforcement made in the form of a notarial deed, in which the tenant obliges itself to return the subject of the lease by a specified deadline and acknowledges that in such case it is not entitled to social housing or temporary premises. Such statement should be attached to the institutional lease agreement.

In addition, the tenant’s arrears in payments under the lease up to one year are secured by the landlord’s statutory right of pledge over the tenant’s movables in the apartment.
Other contractual forms of securing the landlord’s claims under the lease (such as a bank guarantee) are not prohibited by law, however to our knowledge they are not practiced in the residential market.

There is a simplified and accelerated eviction procedure applicable to institutional leases, which makes it possible to evict tenants within a few weeks. In addition, regarding institutional leases there are no special categories of tenants whose possibility of eviction is limited or excluded.

The eviction of tenants under a standard residential lease is much longer due to requiring regular court proceedings. Moreover, during such proceedings the court needs to decide whether the tenant is entitled to premises in social housing. If so, then eviction is not possible until the relevant municipality offers such tenant a social apartment (which can take a long time).

Most significantly regarding PRS leases, limitations are imposed on the landlord’s termination rights. The landlord is entitled to terminate the contract in particular only if the tenant uses the premises in a manner inconsistent with the contract or its manner of use, is in arrears with payments under the lease for at least three payment periods, sublets the premises or allows a third party to occupy them free of charge without the landlord’s written consent. 

In addition, under standard residential leases if the landlord increases the rent (including only by indexation), the tenant is entitled to terminate the lease. Such limitation does not apply to institutional leases, but all rent increases need to be stipulated in the contract.

Teneants’ rights are protected by the limitation of the landlord’s termination rights, making eviction possible only if the entitled tenant is offered a social apartment and putting a limitation on rent increases. These do not apply to institutional leases.

Unlike institutional leases, under standard residential leases tenants have certain special rights, such as the right to request from the landlord substitute premises if the subject of the lease is unsuitable for use. However, in our view they are not relevant to institutional investors. 

Under an institutional lease agreement, the parties can agree that apart from rent and the costs of utilities, other fees, such as service charges, will be collected by the landlord. Under a standard residential lease, only rent and the cost of utilities can be paid to the landlord. This does not exclude the possibility of including operational costs regarding the building and its common areas (such as maintenance costs, utility costs, property management costs, insurance) in the rent, but it fobids reconciliation.

PRS projects do not require legal separation of the premises in a building. The leasing of premises occurs independently of whether they are legally separated provided the landlord has a sufficient legal title to lease the units, such as ownership of the land on which the building is located. Legal separation of premises may be useful or necessary to exit the project, such as on the disposal of individual residential units to third parties or by selling them as apartment/condo-hotel units.

If there are at least two separate premises in a PRS project that are owned by different entities, then a housing community is formed by virtue of law. There are two types of housing communities: “small housing communities” applicable to projects with up to three separate premises, and “large housing communities” applicable if there are at least four separate premises. 

Rules regarding the management of large communities are more formal: a management board must be appointed and a general meeting held at least once a year. No special bodies need to be appointed for small communities and as a rule management activities require the consent of a majority of co-owners, although “extraordinary management activities” need a unanimous decision.

To secure an investor’s control over the housing community, a co-owners agreement made in a the form of a notarial deed can be concluded. This should be disclosed in the relevant land and mortgage register and can stipulate, e.g. voting rights, rules of the property’s management and the distribution of costs. The consent of all co-owners is required to conclude and amend the co-ownership agreement.