“Rent to Own” in Poland – Institutional lease agreement with ownership

Publication date: March 06, 2024

“Rent to Own ” – general information

Projects related to the PRS sector (Private Rental Sector) are becoming more and more popular. PRS is an organized form of leasing run by specialized entities for which apartment rental is the main area of business activity.

These companies rent, among others: to a person or persons interested in purchasing real estate, after paying a specified percentage of the real estate value. Depending on the company offering such solutions, the lease length ranges from 2 to 5 years, during which interested entities rent the apartment, for example for 70% of the market rental rate (with an own payment of 30% of the property amount). So, with an own payment of 50% of the property value, the monthly rent of PLN 4,000 will theoretically be reduced to only PLN 2,000 per month.

An example offer, according to the information available on the website of the entity offering it, is addressed to people who own 20% of the value of the property and expect a large cash injection in the near future, or who do not have creditworthiness and want to obtain it, or who already have a mortgage loan, whose installments are too high (possibility of converting the loan into a lease), or in the event of a property appearing on the market that the interested person really wants, but at the same time does not have the financial ability to purchase it. The “rent to own ” solution is still presented on the Polish real estate market as an alternative to the common forms of obtaining one’s own real property.

The solutions discussed above are something new in Poland, at least that is what the companies citing them claim. However, similar institutions were available on the real estate market several years ago. However, it was mainly the recent increase in the popularity of “rent to own” that resulted in the reaction of the Polish legislator, who in 2018 introduced another type of lease into the Polish legal system – institutional lease with ownership. As indicated in the justification of the government draft act on facilitating the preparation and implementation of housing investments and accompanying investments (hereinafter referred to as: Housing investments act), the purpose of introducing a new type of lease was to standardize the rules for renting residential premises with the option of transferring ownership after paying the price for the premises in installments during the lease period. The idea behind the project is that institutional lease with ownership is to be one of the instruments enabling the satisfaction of housing needs of people who do not meet the income criterion entitling them to apply for the so-called municipal lease of premises and those who do not have creditworthiness enabling the purchase of an apartment. Therefore, it can be noted that the legislator was guided by similar criteria as the above-mentioned companies that currently use this type of lease agreement.

Legal regulations in Poland – institutional lease agreement with ownership – basic information

The provisions regulating this type of lease were added to Chapter 2b of the Act of June 21, 2001 on the protection of tenants’ rights, municipal housing resources and amending the Civil Code (uniform text: Journal of Laws of 2023, item 725) (hereinafter referred to as: Protection of tenants’ rights act). This regulation is based on existing regulations on institutional leases and duplicates some of them. Therefore, it can be concluded that institutional lease with ownership is a subtype of institutional lease. The main difference between a standard institutional lease (defined in Articles 19f-19j of the Act) and an institutional lease with ownership is that an institutional lease with ownership obliges both the tenant and the landlord to conclude an agreement transferring ownership of the premises to the tenant after settlement of the purchase price. In this way, it is a new way to acquire ownership of an apartment. Moreover, institutional lease with ownership and institutional lease provide that premises may be rented only by entities professionally engaged in renting premises, i.e. natural persons, legal persons or organizational units without legal personality, conducting business activity in the field of renting premises.

In an institutional lease agreement with acquisition of ownership, there is a strong connection between issues related to the lease and aspects related to the payment of the price in installments and the planned transfer of ownership of the premises to the tenant. In the part relating to the owner’s obligation to transfer ownership of the premises to the tenant and the tenant’s obligation to purchase the premises and settle the price, an institutional lease agreement with acquisition of ownership has certain features of an installment sale agreement. However, there is an important difference, because an installment sales agreement in the context of the Act of April 23, 1964, Civil Code (uniform text: Journal of Laws of 2023, item 1610, as amended) (hereinafter referred to as the Civil Code) usually applies only to movable property, while an institutional lease with ownership always covers real estate. In the case of installment sales, the buyer becomes the owner of the subject of the contract at the time of its conclusion (it is therefore a binding and dispositive contract), while in the case of institutional lease with ownership, the tenant becomes the owner of the premises only after paying the entire price for the premises, at the time of concluding an agreement transferring ownership of the premises in connection with the obligations arising from the lease agreement. Therefore, institutional lease with acquisition of ownership can be described as an agreement combining the elements of renting the premises and selling in installments, with these installments being settled before acquiring the ownership rights and counting them towards the future purchase. The combination of these two elements is reflected in the content of the institutional lease agreement with acquisition of ownership, which includes two main groups of provisions: regarding the lease relationship and regarding the obligation to conclude an agreement transferring ownership of the premises to the tenant for a specified price. It is important to emphasize that an institutional lease agreement with acquisition of ownership is not a preliminary agreement, but a full-fledged agreement obliging to transfer ownership of the real estate, with excluded substantive effect. Therefore, the provisions relating to contracts obliging to conclude an agreement transferring ownership of real estate apply to it, in accordance with Art. 157 § 2 and art. 158 of the Civil Code.

Institutional lease with ownership, similarly to standard institutional lease, is mainly subject to the provisions of the Civil Code regarding lease (Article 659 et seq.), and not to the provisions of the Protection of tenants’ rights act. Only the provisions of the Act on the Protection of Tenants’ Rights that are listed in detail in Article 19s of the Act, i.e. Art. 2, art. 6 section 3, art. 10 section 1–3, art. 18 section 1 and 2, art. 19h sec. 2, art. 19i, art. 19k – 19s and art. 25d point 5 of the Act apply to institutional lease with ownership. Therefore, a significant part of the provisions of the Act do not apply to both institutional lease with ownership and standard institutional lease, including in particular those regarding increasing the rent, terminating the lease agreement, entitlement to social rent and temporary accommodation. This makes this type of lease attractive to landlords. For the same reason, an institutional lease with an option to acquire ownership carries the risk of losing protection against homelessness in the event of eviction from a premises rented under an institutional lease with ownership agreement.

The subject of an institutional lease agreement with ownership

Pursuant to Article 19k(1) 1 of the Act on tenants’ rights, the subject of an institutional lease agreement with acquisition of ownership may only be a residential premises for which a land and mortgage register has been established. Therefore, this only applies to an independent residential premises as defined in Art. 2 section 2 of the Act of June 24, 1994 on the ownership of premises (uniform text: Journal of Laws of 2021, item 1048), which has a separate land and mortgage register. From the analysis of the justification for the Housing investments act it follows that the land and mortgage register for a given premises should already be established at the time of concluding the institutional lease agreement with obtaining ownership. This means that it is impossible to conclude such an agreement before submitting an application for entry of separate ownership of the premises in the land and mortgage register, or even after submitting such an application, while waiting for this entry. For this reason, it should be assumed that, in accordance with the legislator’s intention, institutional lease agreements with ownership can only be concluded in relation to premises that have already been separated, and do not apply to future premises, which in the current legal context are not yet considered separate real estate.

Institutional lease agreement with acquisition of ownership – requirements regarding the form and content of the agreement

An institutional lease agreement with acquisition of ownership must be drawn up in the form of a notarial deed, in accordance with the provisions of Art. 19k section 3 of Tenants’ rights act. This is necessary because this contract is intended to transfer ownership of the property. Failure to comply with the form of a notarial deed results in the invalidity of the contract, in accordance with Art. 73 § 2 sentence 1 of the Civil Code, however, it is possible to recognize the partial invalidity of such an agreement if the form of a notarial deed is not observed. Then the contract may be considered invalid to the extent that it binds the parties to conclude an agreement transferring ownership of the property after payment of the price, but it remains valid as far as pure lease is concerned, because the lease agreement does not require any special form for its validity.

A natural person, a legal person or an organizational unit without legal personality may act as the lessor of the premises under an institutional lease agreement with ownership. It is required to meet two essential criteria set out in Article 19k(1) 1 of Tenants’ rights act. Firstly, the lessor must run a business related to renting premises. Secondly, the lessor must be the actual owner of the residential premises that will be the subject of an institutional lease agreement with ownership. It is worth noting that “owner” in this context refers to a technical legal status meaning a person having the ownership right to the premises, in accordance with Article 140 of the Civil Code. This is due to the fact that this type of lease agreement must include the lessor’s obligation to transfer to the tenant ownership rights to the premises. However, there is a rule that you cannot transfer to another person a right that you do not have yourself (“Nemo plus iuris in alium transferre potest quam ipse habet”). However, only a natural person can be a tenant, similarly to a standard institutional lease. Institutional lease agreements with ownership may be concluded both between a consumer (tenant) and an entrepreneur (owner) and between two entrepreneurs.

An institutional lease agreement with ownership is concluded for a fixed period of time. However, it is not limited to a period of 10 years as in the case of occasional lease. We also do not apply in this case the provisions of Art. 661 § 1 of the Civil Code, according to which a lease concluded for a period longer than ten years is deemed, after the expiry of this period, to be concluded for an indefinite period.

In art. 19m of the Act on Tenants’ rights there are specified the elements of the content of an institutional lease agreement with acquisition of ownership. Most of them are essential elements of an institutional lease agreement with ownership (essentialia negotii). Therefore, in order to be classified as such, an institutional lease with ownership agreement should contain all of the following elements:

1. designation of the subject of the contract;
2. rent;
3. sales price of a residential premises;
4. a decision on payment of the sales price in installments;
5. the owner’s obligation to transfer the ownership of the residential premises together with the rights necessary to use the premises after payment of the entire price and the tenant’s obligation to acquire ownership of the premises;
6. the tenant’s obligation to pay the entire price for the residential premises in the manner specified in the contract;
7. the owner’s declaration on establishing a mortgage in the first position to secure the tenant’s claim for reimbursement of the price paid in the event of non-performance of the contract, together with an application for entry of this mortgage in the land and mortgage register kept for the residential premises;
8. a statement from the tenant in which the tenant submitted to enforcement and agreed to vacate and hand over the premises used under an institutional lease agreement with obtaining ownership within the time specified in the request referred to in Art. 19i section 2 of the Act on Tenants’ rights, and acknowledged that if it is necessary to fulfill the above obligation, there is no right to social housing or temporary accommodation.

Pursuant to Art. 19m point 8 of Tenants’ rights act, an institutional lease agreement with acquisition of ownership should also specify the deadline for concluding the agreement on transfer of ownership of the residential premises along with the rights necessary to use the premises, but this deadline will not be necessary in every case.

Security deposit

The provisions regarding deposits in institutional lease agreements with ownership are regulated separately from the general principles set out in Art. 6 of Tenants’ rights act. Only the issue of the method of indexation of the housing deposit was regulated in the same way as in the case of other lease relationships covered by the Act – the value of the deposit cannot exceed six times the monthly rent for a given premises. However, the regulations regarding the deposit in an institutional lease with ownership agreement do not differ from those applicable in the case of a standard institutional lease. However, in the case of institutional lease with ownership, an additional issue arises which is not clearly resolved by the literal wording of the Act, namely: are the installments of the sales price of the premises also covered by the security deposit? Pursuant to Art. 19k section 4 of the Act, the deposit secures “receivables under the institutional lease agreement with acquisition of ownership due to the lessor and possible costs of enforcing the obligation to vacate the premises”. Therefore, sales price installments are also considered “receivables under an institutional tenancy with ownership agreement” because they constitute an element of this agreement, according to which the tenant undertakes to pay the sales price of the premises in accordance with the payment schedule. However, it should be assumed that the deposit in the case of an institutional lease with acquisition of ownership secures exactly the same receivables as in the case of a standard institutional lease, and therefore does not serve to secure the lessor’s receivables in respect of the sales price of the premises. During the lease period, the lessor cannot deduct sales price installments from the deposit in the event of the tenant’s delay in payment, unless the parties have expressly provided for it in the contract. If the landlord satisfies the due receivable from all or part of the deposit amount, the tenant is obliged to top up the deposit to the full amount specified in the lease agreement.

Rent and other fees

Determining the amount of rent is an important element of an institutional lease agreement with ownership. The Act does not specify any guidelines regarding the amount of rent under a lease agreement. The decision on this matter therefore remains entirely at the discretion of the parties to the contract. In the absence of arrangements regarding the rent, the general provisions of the Civil Code regarding lease and the relevant provisions regarding the lease of premises apply. The parties may additionally decide that, in addition to the rent and fees beyond the control of the owner, the tenant will be obliged to pay other fees related to the use of the premises. However, for such an obligation on the tenant to arise, this provision must be expressly included in the contract.

The sale price of the premises and the tenant’s obligation to pay it

In an institutional lease agreement with acquisition of ownership, the tenant is obliged to pay the purchase price of the residential premises at the stage of concluding the lease agreement. Even though the formal transfer of ownership of the property will take place only after the entire price has been paid, determining this price is essentialia negotii of the institutional lease agreement with access to ownership. It is a financial benefit that the tenant undertakes to provide to the owner in exchange for transferring the rights to the residential premises along with the appurtenances to him. The parties may agree in the contract that the price for the premises will be subject to indexation. In such a case, the parties should precisely define the principles of indexation in a way that refers to objective criteria, independent of their will. For example, if the contract does not agree on a price change due to a change in the VAT rate, neither party will be able to later demand a price change for this reason. In such a situation, a price change will only be possible by concluding a new contract, with the mutual consent of the parties.

In an institutional lease agreement with acquisition of ownership, the sales price of the residential premises is divided into installments, which the tenant undertakes to pay before transferring ownership. The installment payment schedule must be clearly defined in the contract, including the amount and payment dates. Any delay in payment of installments is subject to the provisions of the Civil Code.

Splitting the sales price into installments does not mean that the tenant provides many monetary benefits to the owner in respect of the sales price: it is one payment (sales price) divided into parts. Moreover, the Act does not leave the parties a choice as to the frequency of installment payments – Art. 19l section 4 point 4 of the Act states that these are to be monthly installments. In the event of a delay in payment of the installment by the tenant, Art. 19l section 6 of Tenants’ rights act stipulates that the owner must first send him a written request to settle the payment, giving him at least 14 business days. After the expiry of the specified period, the lessor obtains a due claim for payment of the installment and may seek payment from the tenant in court. He may also exercise the right to terminate the lease relationship, however, Art. 19o section 1 point 2 of the Act grants this right to the owner only when the tenant is in default with the payment of three installments of the sales price.

The provisions on institutional lease with ownership do not contain a regulation allowing the tenant to pay installments before the payment deadline specified in the schedule, so there applies the general provision of Art. 457 of the Civil Code, according to which the deadline for performance specified by a legal act is, in case of doubt, deemed reserved for the benefit of the debtor.

There are also no legal obstacles for the parties to agree that the first payment of installment will be treated as a deposit in accordance with Art. 394 of the Civil Code. Additionally, the parties may agree on other provisions regarding the manner of dealing with the amount constituting a down payment in the event of non-performance of the contract, other than those provided for in Art. 394 of the Civil Code.

If the parties to the contract agree on the purchase price of the residential premises and the method of repaying it in installments, but do not specify the exact payment dates and the amounts of individual installments, the contract will still be treated as an institutional lease with ownership, and the detailed installment repayment plan will be determined in accordance with the Civil Code.

Obligation to transfer ownership of the premises

An important aspect of an institutional lease agreement with acquisition of ownership is the obligation of the owner of the residential premises to transfer ownership to the tenant after the tenant has paid the entire sales price of the premises. The deadline for concluding the agreement to transfer ownership of the premises is specified by the parties in the lease agreement, but it must take place no later than on the date of termination of the agreement.

This obligation not only covers the transfer of ownership of the residential premises itself, but also a possible share in co-ownership of the common property related to the ownership right to this premises. Additionally, the owner may undertake to transfer other rights to the tenant, such as the right to use specific parts of the common property. However, the presence of this element in the contract is not obligatory and depends on the will of the parties and the specificity of a given case. The provision in Art. 19m point 6 of Tenants’ rights act could suggest that only the owner undertakes to conclude an agreement transferring ownership of the residential premises. However, as stated in Art. 19k section 1 of the Act, which contains the basic assumptions regarding an institutional lease agreement with ownership, in such an agreement the tenant also undertakes to purchase a residential premises. Therefore, both parties to the contract undertake to conclude an agreement transferring ownership of the residential premises after the tenant has paid the entire sales price of the premises. On the date of conclusion of the agreement transferring ownership, the premises must be free from mortgages and other claims disclosed in the land and mortgage register of the premises, with the exception of the tenant’s claim.

The tenant’s claim for the transfer of ownership of the residential premises and the rights necessary to use it is disclosed in the land and mortgage register kept for this premises. Obligatory (but not constitutive) entry of the tenant’s claim, in accordance with Art. 19l section 1 of the Act, constitutes an additional measure of protection for the tenant under an institutional lease agreement with access to ownership. This entry is intended to secure the performance of the contract by the lessor. This reduces the risk of the owner concluding an agreement with another entity that obliges him to transfer ownership of the same premises. By disclosure in the land and mortgage register, the tenant’s claim becomes effective against the rights acquired by a legal transaction after its disclosure. Entry of the tenant’s claim in the land and mortgage register also ensures greater durability of the legal relationship arising from an institutional lease agreement with ownership, because it is more difficult for the landlord to unilaterally terminate such an agreement. Thanks to the obligatory entry, a potential tenant can also check the land and mortgage register, or whether the landlord has not previously concluded such an agreement for the same residential premises.

The basis for entering the tenant’s claim in the land and mortgage register is in accordance with Art. 19l section 1 sentence 2 of Tenants’ rights act the institutional lease agreement with ownership transfer. A notary who prepares a notarial deed covering an institutional lease agreement with acquisition of ownership is obliged to submit an application to enter in the land and mortgage register the tenant’s claim to transfer ownership of the premises which is the subject of this agreement. The claim is deleted from the land and mortgage register when it expires, e.g. as a result of termination of the lease agreement by one of the parties or its dissolution by the parties, as well as in the event of execution of an institutional lease agreement with acquisition of ownership.

Declaration of the owner of the premises on establishing a mortgage to secure the tenant’s claim for reimbursement of the price paid

The possibility of concluding an institutional lease agreement with obtaining ownership of the residential premises only after entry in the land and mortgage register results from, among others, the need to establish security for the purchaser of such premises in the form of a mortgage. Pursuant to Art. 19l section 3 and art. 19m point 9 of Tenants’ rights act, the mortgage is intended to secure the tenant’s future receivables regarding the refund of the sales price paid for the premises in the event of failure to perform the contract. This mechanism is intended to guarantee the tenant’s financial security by securing the amounts paid towards the price of the premises in the event of the landlord’s financial problems. The time between establishing a mortgage and the execution of an institutional lease agreement with obtaining ownership is usually long, measured in years, therefore it is important to ensure the tenant’s protection against the risk of deterioration of the landlord’s financial situation during this time, especially in the event of his insolvency. Thanks to the mortgage established in his favor, the tenant has the opportunity to satisfy his claims regarding the refund of part of the price paid even in the event of the landlord’s bankruptcy.

At the time of establishing the mortgage, the receivable that is to be secured does not yet exist, and its creation depends on a future and uncertain event. The claim for the refund of amounts paid by the tenant as part of the sales price of the residential premises arises when any part of this price is paid and then the tenant’s claim for the transfer of ownership of the premises to him expires for reasons other than the mere fulfillment of this claim, i.e. the transfer of ownership to the tenant. The rules for determining the amount to be refunded to the tenant are described in detail in Art. 19q of Tenants’ rights act.

The Act does not specify what conditions a mortgage established in favor of a tenant should meet. The decision regarding the amount of the mortgage remains to be agreed between the parties to the lease agreement, as well as the choice of the currency in which the mortgage is to be established. The Act does not impose any restrictions in this respect.

As stipulated in Art. 19m point 9 of the Act, a mortgage established for the benefit of the tenant by the owner of the premises must be a mortgage in the first place (priority mortgage). Granting the tenant a mortgage in the first place significantly improves his position compared to a situation in which the mortgage would be established later. However, it may be difficult for the owner to implement this arrangement. For example, if the owner was a developer and used external financing, for example through a bank loan, the repayment of these funds would usually be secured by a mortgage on the real estate covered by the investment. In order to meet the requirement to establish a mortgage in favor of the tenant in the first place, which is already in force at the time of concluding an institutional lease agreement with acquisition of ownership, the owner must, before concluding the lease agreement, regulate the issue of the mortgage encumbering the premises or release the premises from this burden. However, the owner does not receive funds from potential buyers of the premises, which he could use to repay the liabilities incurred in order to obtain financing for the construction of the premises in such a way that the premises would be free of encumbrances at the time of concluding the institutional lease agreement with ownership. The owner receives both the rental income and the installments towards the sales price only after concluding the lease agreement. An owner who plans to conclude an institutional lease agreement with ownership of a specific premises in the future could secure priority for a future mortgage in favor of the tenant at the time of establishing a mortgage in favor of the creditor providing him with financing for the investment, in accordance with Art. 13 section 1 of the Act of July 6, 1982 on land and mortgage registers and mortgages (uniform text: Journal of Laws of 2023, item 1984). However, in such a case, the owner would have to determine at this stage at least the amount of the mortgage that he or she plans in the future to establish for the benefit of the tenant, and find a financial institution willing to provide him with financing despite having a mortgage in another place.

Pursuant to Art. 19m point 10 of the Act, if at the time of concluding an institutional lease agreement with acquisition of ownership of the premises, the premises are already mortgaged to another creditor, such an agreement must include the consent of this creditor to transfer the ownership of the residential premises together with the rights necessary to use it after the payment of the entire sales price by the tenant.

Termination of an institutional lease agreement with acquisition of ownership – termination, expiration.

The institutional lease agreement with ownership is agreed for a fixed period. Therefore, the provision of Article 673 § 3 of the Civil Code applies, which states that when the duration of the contract is specified, both the landlord and the tenant may terminate the contract in the cases specified in the contract. Moreover, Art. 19 of the Act provides for a number of situations in which both the landlord and the tenant have the right to terminate the contract. At least one month in advance, at the end of the calendar month, the landlord may terminate the lease agreement if the tenant:

• despite a written warning, continues to use the premises in a manner inconsistent with the contract or in accordance with its intended purpose, causing damage, or destroys devices intended for common use by residents, or grossly or persistently violates domestic order, making the use of other premises burdensome;
• is in arrears with the payment of rent or other fees related to the use of the residential premises or part of the sales price in accordance with the schedule for at least three payment periods, despite being informed in writing of the intention to terminate the legal relationship and setting an additional, monthly deadline for payment of outstanding and current receivables;
• rents, sublets or gives free use of the premises or part thereof without the written consent of the owner.

The tenant, in turn, may terminate the contract if:

• the rented premises has defects that prevent it from being used for its intended purpose or pose a threat to the life or health of the tenant or his household members;
• the landlord prevents him from using the premises in accordance with its intended purpose.

In order for the above-mentioned termination to be effective, it must be preceded by a written request to the landlord to remove the defects or stop activities that prevent the use of the premises, setting a deadline of at least 30 days for a response, after which no response has occurred.

Another reason for terminating the contract by the tenant, as provided for in Art. 19p of Tenants’ rights act there may be significant changes in his life situation, such as a change in his family or financial situation. The notice period in such a case is six months.

Termination of an institutional lease agreement with acquisition of ownership should be made in writing, because it is concluded in the form of a notarial deed, which is regulated in Art. 77 of the Civil Code, the lack of this form does not lead to the invalidity of the contract, but is only important in the evidentiary context. This means that in a possible trial it will not be possible to provide evidence from witnesses or parties regarding the notice of termination.

If the tenant refuses to leave the premises after terminating the contract, the landlord must serve him with a notice to vacate the premises, with an officially certified signature. This request must specify the owner and the tenant, the lease agreement and the deadline, not shorter than 14 days from the date of delivery of the request, within which the premises must be vacated. Termination of the lease agreement requires settlement of the installments paid by the tenant towards the purchase price of the premises. The obligation to return the part of the sales price of the premises paid by the tenant, regulated in Art. 19q of Tenants rights act, arises when the institutional lease relationship ends with ownership, but without transfer of ownership of the premises to the tenant. The landlord is obliged to return to the tenant or his heirs the amount of the part of the sales price of the residential premises paid by the tenant, after deducting any outstanding amounts of rent and other fees arising from the contract. The refunded amount cannot be lower than the total amount of the installments actually paid, taking into account any deductions. Payment should be made within three months from the date of vacating the premises. The Act provides for an appropriate procedure for calculating the amount returned to the tenant.

Similar rules apply when the contract expires, but without transfer of ownership.