Limited rights in rem, part 3: the cooperative ownership right to premises versus ownership of premises

We are continuing the series on limited rights in rem. This time we look at a right that very many people in Poland come across, though they do not always realise that the flat they bought, are selling or inherited is not in fact fully theirs. It is the cooperative ownership right to premises. This is still one of the most common ways of holding a flat in Poland, particularly in blocks built in the 1970s, 1980s and 1990s, and at the same time a source of considerable confusion when it comes to selling.

What the cooperative ownership right to premises is

The cooperative ownership right to premises is a limited right in rem governed by the Act on Housing Cooperatives. In practice it means that the land and the building containing the premises formally belong to the housing cooperative, while the person entitled has the right to use a specific flat, to sell it, let it and pass it on by inheritance — but is not its owner in the full sense of the word.

The right dates back to the communist era, as something between a tenancy and full ownership, and although cooperative flats have been convertible into separate ownership since the 1990s, a great many units still operate under the old rules. Many owners simply never carried out the conversion, because there was no pressing reason to — until it came to selling.

How it differs from separate ownership of premises

The owner of premises held in separate ownership has full title to the flat plus a share in the co-ownership of the land and of the common parts of the building, such as the stairwell, the roof or the cellar. A person holding a cooperative ownership right to premises has no such share, because the land and the building remain the property of the cooperative. Slightly different rules therefore apply to a cooperative flat than to a conventional property.

In practice this right to premises is transferable, can be inherited and can be encumbered with a mortgage, so at first glance it works very much like ownership. The differences appear in the detail, however: changing the way the premises are used may require the cooperative’s consent, a personal easement cannot be established over them and, above all, unlike separate ownership, a cooperative right to premises does not always have a land and mortgage register. And that is the issue that complicates a sale the most.

No land and mortgage register, and the problem with financing

For separate ownership of premises a land and mortgage register is compulsory. For a cooperative ownership right to premises it is not. The right may have a register opened for it, but need not, and many owners who inherited a flat from parents or grandparents never dealt with the matter, because formally they did not have to.

The problem arises the moment a buyer wants to finance the purchase with a mortgage loan — and most people buying flats in Poland are counting on exactly that. To secure its money, the bank has to enter a mortgage, and a mortgage can only be entered in a land and mortgage register. No register means no mortgage, and no mortgage means the bank will not lend. If a cooperative flat has no register, one has to be opened first, which means additional formalities, certificates from the cooperative, a visit to the land and mortgage register court and, most importantly, time. Not uncommonly this adds weeks, sometimes months, before the transaction can go ahead at all.

For a seller who wants to sell quickly this is a serious obstacle. Cash buyers have little difficulty with it, but those buying on credit — the overwhelming majority of the market — either withdraw, or demand time for the formalities, or negotiate a lower price straight away, because they see additional risk and trouble in it.

Why this reduces value and narrows the pool of buyers

All these factors together mean that cooperative ownership flats, especially those without a land and mortgage register, are valued lower than comparable units held in separate ownership. This is not a matter of the flat being in poorer condition, but of poorer legal liquidity. The fewer people able to finance the purchase, the lower the demand — and lower demand means a lower price and a longer wait for a buyer.

Owners of such flats often find this out only when they want to sell, in connection with an inheritance, a divorce or a need for cash quickly. Instead of a standard transaction, which on the open market takes a few weeks, they may face the prospect of several months of formalities before a buyer prepared to go through the whole process turns up.

What about selling a share in such a right

It also happens that a cooperative ownership right to premises belongs not to one person but to several — for instance siblings who inherited a flat from their parents, or former spouses after a divorce. In such a situation each of the co-entitled persons may in principle sell their share, just as with ordinary co-ownership of property, which we wrote about in the previous post in this series.

In practice this is even harder than selling a whole flat without a land and mortgage register. First, the buyer is then acquiring not the whole flat but a share in the right to it, which in itself deters most buyers on the secondary market. Second, the remaining co-entitled persons usually have priority in buying out such a share, which further lengthens and complicates the transaction. Third, if the absence of a land and mortgage register is added to that, the circle of problems closes: banks are reluctant to finance the purchase of a share as it is, let alone a share with an unresolved register position.

As a result, people wanting to liquidate their share in a cooperative flat realistically have a very narrow pool of potential buyers: mainly the other co-entitled persons and entities specialising in buying such shares, who pay cash and take on all the remaining formalities themselves.

What is worth taking away from this

Day to day, the cooperative ownership right to premises works almost like ownership: it can be sold, let, inherited or mortgaged. The difference only reveals itself at the moment of a transaction, particularly where there is no land and mortgage register. That is when it turns out that the pool of interested buyers is narrower, the process longer and the price usually lower than for a comparable flat held in separate ownership. It shows even more clearly when selling a share in such a right, where all the above difficulties are compounded by a limited pool of buyers and the priority of the other co-entitled persons.

Do you have a cooperative flat with no land and mortgage register, or a share in such a right, and are wondering whether it can be sold at all without waiting months for a mortgage buyer? Write to us. At Remedy we handle exactly these cases: we buy regardless of the legal status of the premises, pay cash and deal with the formalities on our side ourselves.