New rules regulating agricultural property dealing also restrict the possibility of establishing security for financing entities.

The Act on Suspending the Sale of Properties of the Agricultural Property Stock of the State Treasury and on Amending Some Other Acts of 14 April 2016 introduced many restrictions as of 30 April. They concern: purchasing properties from the Agricultural Property Stock of the State Treasury (the “Stock”), concluding agreements to purchase agricultural properties by persons who are not farmers, and selling holdings (shares) in companies which are owners of agricultural properties. However, it is worth pointing out that this act of parliament, apart from suspending the sale of properties or parts of properties forming part of the Stock for a period of five years, also updated the Act on Land and Mortgage Registers and Mortgages of 6 July 1982, the Act on Managing Agricultural Properties of the State Treasury of 19 October 1991, and the Act on Shaping the Agricultural System of 11 April 2003. The updated provisions of these acts introduce, among other things, new principles of establishing mortgages on agricultural properties and restrictions in acquiring agricultural properties according to a non-contractual procedure (for example, in enforcement proceedings).

Exclusions

The amendments have primarily excluded or considerably restricted the possibility of establishing some kinds of security for commercial financing entities (e.g. banks, creditors and lessors). Also, the new regulations, from the creditor’s perspective, reduce the economic value of establishing security on agricultural properties, on account of considerably greater difficulties for the creditor to be satisfied in the event of a lack of performance by the debtor. One can therefore consider whether, in connection with the amendments made, financing entities will be at all interested in establishing such security if they have no guarantee of relatively rapid and effective satisfaction. And the lack of other forms of security which a debtor could establish might ultimately take effect in a restriction of financing, because financing entities would be unable to obtain satisfactory security.

New principles of establishing a mortgage

The most recent amendment of the Act on Land and Mortgage Registers and Mortgages introduced crucial changes to the practice of setting up a mortgage on an agricultural property. Under the added Article 68 par. 2a, the amount of the mortgage on an agricultural property (within the meaning of the Act on Shaping the Agricultural System) must not exceed the market value of that property determined as on the day of setting up the mortgage. An applicant is obliged to enclose estimation data with the application for a mortgage to be entered in the land and mortgage register, prepared by a property surveyor in accordance with the regulations on property management. The above restriction means that a debtor will be unable to set up a mortgage for financing entities (e.g. banks) in an amount exceeding 100 per cent of the value of the property, which was and is a frequent practice in legal dealings, not only with regard to agricultural properties. In the case of financing exceeding the value of an agricultural property, a debtor can therefore be obliged to establish for the creditor another, additional security in a form agreed with the creditor. Moreover, as a result of “freezing” the amount of the mortgage to the value from the date of its establishment, a creditor will be unable to derive benefits in the event of satisfaction if the property gains in value (for example, as a result of financing provided by that creditor). What is crucial is that the restriction arising from Article 68 par. 2a of the Act on Land and Mortgage Registers and Mortgages only applies in relation to mortgages entered in land and mortgage registers as of the day on which the new regulations enter into force. The previous regulations, which do not foresee any restrictions in this respect, will apply to mortgages entered in land and mortgage registers before 30 April 2016. As for the issue of enforcement itself from an agricultural property and the restrictions connected with this, the restrictions regarding the circle of permissible purchasers of an agricultural property will apply, which entered into force on 30 April 2016, regardless of when the mortgage was established. This therefore means that any restrictions in purchasing an agricultural property according to the enforcement procedure will also apply to mortgages established before 30 April 2016.

Mortgages on properties acquired from the Stock

An added Article 29a to the Act on Managing Agricultural Properties of the State Treasury introduces restrictions in setting up mortgages on properties acquired from the Stock. Under the new regulation, in the event of concluding a property sale agreement, the purchaser must, among other things, undertake in the sale agreement not to transfer ownership of a property acquired from the Stock for 15 years from purchase. In addition, in that agreement the purchaser must undertake, firstly, not to set up a mortgage on the property purchased, within a period of 15 years from purchase, in favour of entities other than the Agricultural Property Agency, and secondly, to pay an amount of 40 per cent of the sale price if in that period he would set up a mortgage on such a property in favour of entities other than the APA. Breaching the ban on establishing a mortgage on such a property will not therefore have the effect of such security being invalid, but it will cause the obligation for the purchaser to pay 40 per cent of the sale price for the property. The regulations concerning the purchaser’s payment of 40 per cent of the price will not apply if the APA gives its written consent for the mortgage to be established. However, the act of parliament indicates only a small catalogue of situations in which the APA can give such consent. These cases include setting up a mortgage to secure the repayment of credit taken out to, among other things, purchase an agricultural property to increase a family’s farm, buy livestock or machines and equipment used in running a family farm, or construct, extend or modernise buildings used in carrying out agricultural production. What is crucial is that the above restrictions, in accordance with the clear instruction contained in Article 29a of that act, only concern the content of an agreement to sell property being sold according to rules specified in:

• Article 29 par. 1, which regulates purchase in the performance of the right of first refusal in purchasing a property from the Stock,
• Article 29 par. 3b, which regulates the purchase of a property under a participant-restricted tender organised by the APA, or
• Article 31 par. 2, which regulates the purchase of a property from the APA, with the price of the property being paid in instalments. With regard to a situation of purchasing a property on principles other than those stated above, it would be necessary a contrario to maintain that setting up a mortgage is permissible in principle.

The Act on Shaping the Agricultural System

The amendments to the Act on Shaping the Agricultural System do not introduce direct restrictions in establishing a mortgage on agricultural property. However, attention should be drawn to the fact that the new regulations introduce restrictions in purchasing agricultural properties in the event of a compulsory enforcement of receivables to which a financing entity is entitled, in a situation of no voluntary repayment by the debtor. In connection with this, the question arises of the economic justification and feasibility of such security, since the creditor will in actual fact have satisfaction from such security made more difficult.

Right of first refusal of the APA also in enforcement

The new regulations provide for the APA’s extensive right to exercise the right of first refusal of an agricultural property in its sale on the basis of a sale agreement (if the agricultural property is being leased, the APA’s right of first refusal depends on whether the lessee exercises the right of first refusal). However, under the amended Article 4 of the Act on Shaping the Agricultural System, the APA is also entitled to the right of first refusal if an agricultural property is purchased on a different basis than a sale agreement. According to that regulation, if an agricultural property is purchased as a result of:

• concluding an agreement other than a sale agreement,
• a unilateral act in law,
• a decision by a court or public administration authority, or a decision by a court or enforcement authority issued on the basis of enforcement procedure regulations,
• another act in law or another legal occurrence (in particular, acquisitive prescription, inheriting and a specific bequest or division, transformation or merger of commercial companies),

– the APA, acting for the State Treasury, can file a declaration on the purchase of that property against payment of the monetary equivalent of its market value. The amended act provides that, in the event of purchasing an agricultural property on the basis of a decision by a court or public administration authority, or a decision by a court or enforcement authority issued on the basis of enforcement procedure regulations, the APA will be notified by a court, public administration authority or enforcement authority. The new regulations therefore mean that the APA can also file a declaration on purchasing an agricultural property if it is being disposed of according to an enforcement procedure.

Under reorganisation proceedings

From the perspective of the restrictions in purchasing agricultural properties, imposed by the new regulations, it is essential to exclude the application of the Act on Shaping the Agricultural System when purchasing an agricultural property under reorganisation proceedings conducted on the basis of the Restructuring Law of 15 May 2015. As of 30 April 2016, in accordance with the newly added Article 2a of the Act on Shaping the Agricultural System, it is a rule that the purchaser of an agricultural property can only be a private farmer, unless the act states otherwise. In the further part of this regulation, the legislator enumerates cases in which an agricultural property can be purchased by an entity which is not a private farmer. The list includes purchasing an agricultural property in the course of restructuring proceedings under reorganisation proceedings. It is worth noting that reorganisation proceedings cannot be conducted in relation to each entity. Under Article 4 par. 1 of the Restructuring Law, a so-called “restructuring capacity” is held by an entrepreneur within the meaning of the Civil Code, a limited liability company and a joint stock company not conducting economic activity, personal partners of commercial companies who are liable for a company’s obligations without limitation to the full extent of their assets, and partners of a professional partnership. Therefore, for it to be possible to purchase an agricultural property under reorganisation proceedings, it is necessary to first open and conduct reorganisation proceedings with regard to one of the aforementioned entities having “restructuring capacity”, which is the owner of the agricultural property being disposed of under such restructuring. In that event, on the basis of the Act on Shaping the Agricultural System, the APA is not entitled to the right of first refusal. Obviously, entities financing a debtor can also make use of the aforementioned possibility. In contrast to the above, the amended wording of the Act on Shaping the Agricultural System does not provide for an exception in applying the act to purchase agricultural properties according to the procedure of the Bankruptcy Law of 28 February 2003.

AUTHOR’S COMMENTARY

Aleksandra Pokropek Ph.D., attorney-at-law at FKA Furtek Komosa Aleksandrowicz

Introducing restrictions in establishing security could cause financing entities to seek alternative forms of securing their receivables. The possibility of a financing entity demanding additional security will usually depend on the content of, for example, a credit agreement, loan agreement or leasing agreement, including the content of general terms and conditions of agreements or regulations (often constituting an attachment to such agreements). This is because it is frequently in the GTC that general principles are found concerning security established for a financing entity. In principle, the GTC thus formulated can be fairly broad and entitle financing entities to demand the establishment of “appropriate” security for the duration of the agreement, or such security which the financing entities consider proper, which opens up a wide field of interpretation. However, if the GTC were to be formulated in such a way that they only refer to security established at the stage of concluding the agreement, the demand for additional security for the duration of the agreement can be excluded.