Another change in the rules of trading in agricultural properties

The Agrarian System Structuring Act (abbreviated as "the ASSA") has recently seen another amendment. The new regulations which went into effect on 5 October 2023 may not revolutionize the rules for trading in agricultural properties, yet the amendment contains several changes that could significantly affect transactions.

It is worth mentioning by way of introduction that the ASSA, at least in the wording that resulted from the 2016 amendment, is not usually viewed favourably by market participants, due to the lack of transparency and the severe sanctions it entails for failure to comply with any of the restrictions provided by it. And no doubt the act contains all too many of these restrictions. To ensure the protection of family farms, the proper management of agricultural land, and the prevention of excessive concentration of land, the ASSA introduced restrictions on trading and vested the National Agricultural Support Centre (hereinafter "NASC") with a number of rights. The act is also intended to protect against another "threat" to Polish farmers – the buying up of agricultural land by foreigners. The 12-year moratorium on the sale of Polish land to foreigners, negotiated prior to Poland's accession to the European Union, expired in 2016 when the ASSA underwent a major overhaul. The ASSA was supposed to provide legislative framework to protect Polish agricultural land from being snatched by foreign entities.

Unclear regulations

What gives rise to mixed feelings about the protection provided by the ASSA is the way in which it is implemented. Namely, the NASC has a number of rights under the act (from the approval of transactions to the right of first refusal, and the right to purchase property) that severely restrict market participants, and not just when the transaction is of agricultural character.

There are many aspects of the act that raise interpretive doubts, starting with the very definition of agricultural property to which it applies. After all, what is property? Is it a single parcel of land, parcels of land recorded in one land and mortgage register, or do these differentiations not matter? Prior to the amendment in question, the act did not apply to agricultural properties smaller than 0.3 hectares. But what if within a single parcel only a fragment is agricultural?

Is the whole property to be recognised as such? Representatives of the Ministry of Agriculture, the NASC, and the National Board of Public Notaries have attempted to provide answers to these and many other questions with the publication of a joint position paper on the interpretation of the provisions of the ASSA in 2020. Unfortunately (from the point of view of market participants), this position presented a mostly cautious and rigorous approach. Similarly, the NASC in practice usually assumes that situations in which the application of the act is mandatory are to be understood broadly.

Therefore, the amendment introduced by the act under discussion can be assessed positively. Since 5 October 2023, the ASSA applies to properties with an area used for agricultural purpose measuring no less than 0.3 ha. Thus, the NASC will no longer have the right of first refusal to purchase a multi-hectare property with a factory behind which there is 1,000 m2 patch of agricultural land which has not been reclassified to non-agricultural land. Hence, the most important consideration is whether the property can realistically be put to agricultural use.

The local zoning plan change repeals the prohibition

Another change introduced by the amendment relates to the prohibition on the sale of agricultural land within 5 years from its acquisition. The previous regulations allowed for an interpretation (supported by the NASC) according to which subsequent reclassification of land to non-agricultural use did not affect the existing prohibition. Thus, it did not matter that the property lost its agricultural character because its intended use in the local zoning plan was changed to a non-agricultural use. A prohibition was a prohibition, and it did not matter that it was possible to stop using the land for agricultural purposes or to develop it. It is true that the NASC could have authorised the early disposal of the property, but persuading the NASC to do so was not always straightforward. This has changed. From now on, a change in the intended use of a property in the local zoning plan will free it up for disposal. Unfortunately, the amendment has not introduced a similar solution for cases where the area of a given property is reduced to less than 0.3 hectares. Here, however, the Supreme Court has come to the owners' rescue with its position expressed in the resolution of 17 October 2023 (case no. III CZP 113/22), according to which, the provisions of the said act do not apply to the part of the agricultural property with an area of less than 0.3 hectares, carved out because of division.

New complications

A change that may significantly complicate transactions is the extension of the NASC's right in the case of transactions in volving shares or other equity interests in companies. The NASC's right of first refusal to purchase shares or other equity interests in a company that owns or is a perpetual usufructuary of agricultural property with a total area of at least 5 ha has been extended. The principle has been introduced that the right of first refusal may be exercised not only where the company whose shares or other equity interests are traded owns agricultural property, but also where such property is owned by its subsidiaries in which the company holds shares or other equity interests (so-called "daughter" companies). This can significantly lengthen the process of preparing for a transaction, as it is necessary to verify not only whether the company that will be the subject of the transaction owns agricultural property, but also whether it owns shares in subsidiaries, and then whether these subsidiaries own agricultural property.

Similarly to the above, the NASC's right to acquire shares has been expanded for transactions other than a sale agreement that lead to their acquisition (including a share capital increase).

The interpretation of the new regulations is puzzling. The literal wording im plies that only direct subsidiaries of the company involved in the transaction should be examined. A situation in which such a company is the parent of a company that owns an agricultural property, but at the same time does not hold shares in it, should not give the NASC the right of first refusal or acquisition. The explanatory memorandum accompanying the amendment does not clarify whether the lawmaker's intention was really to limit this extension only to the first degree of dependency, and to extend the new regulations only to transactions involving companies whose "daughter" company owns agricultural property, excluding "grandchild" companies, etc.

In addition to this doubt, another one arises: what if the transaction involves a foreign company. If such company holds shares in a company that owns 5 hectares of agricultural property in Poland, will the NASC have a right of first refusal of the shares in such a foreign company? It seems unjustified to consider that the NASC has powers that would de facto affect the effectiveness of trading in companies regulated by laws of another country. However, until either the NASC expresses its position on the matter or the case law on the matter becomes firmly established, the situation will continue to be uncertain. And the sanction for violating the NASC's right of first refusal is the voiding of the transaction.

Patching up legal loopholes

The amendment also introduced an additional condition to be met to purchase agricultural property. Until now, if a potential buyer of agricultural property was not a farmer (or one of the exceptions described in the ASSA did not apply to him, such as having a close degree of relationship with the seller), the regulations required that he should obtain the consent of the Director General of the NASC for such a transaction. The conditions for obtaining such consent are a commitment by the buyer to carry out agricultural activities on the acquired agricultural property, the absence of an excessive concentration of agricultural land, and a demonstration by the seller that it was not possible to sell the agricultural property to an individual farmer. The new condition relates to this last element. Namely, the price of the proposed sale must not be less than 95% of the price stated in the advertisement for the agricultural property based on which the seller has demonstrated that he has not found a farmer willing to acquire the land. This is to prevent a situation in which the price in the advertisement is several times higher than the real price and therefore there would be a different interest in the acquisition of the property by individual farmers.

While the very idea behind the Agrarian System Structuring Act may be considered a good one – it protects the existence of family farms and is intended to prevent

the creation of latifundia – the way it is applied is often questionable. This is because it affects transactions that often, in their essence, do not pose any threat to the agricultural system, while at the same time having a significant impact on those transactions. The chaos associated with the difficulty of interpreting the regulations and the sanction of the nullity of a legal transaction often being the consequence of their non- application, force a cautious approach even when it is not justified. For years, there have been calls for the standards to be made more realistic, e.g. by excluding their application to properties located within city limits. But any changes made are unfortunately minor, fraught with the legislature's fear of significantly loosening the restrictions.

Author: Kamil Matyśkiewicz, Senior Associate, Baker McKenzie Krzyżowski i Wspólnicy sp.k.

This article comes from magazine:
FOCUS ON Business #14 January-February (1/2024)