Deposit in a preliminary agreement for the purchase of real estate in Poland by a foreigner

Foreigners who intend to conclude a contract for the purchase of real estate in Poland are in many cases required to obtain a permit for the purchase of real estate, issued by the Polish Minister of Internal Affairs and Administration on the basis of the Polish Act on the Purchase of Real Estate by Foreigners.

The question of who is a foreigner within the meaning of the aforementioned Polish Act has been discussed in detail in a separate publication. The procedure for submitting an application for a permit for the purchase of real estate by a foreigner and the list of documents required by the Polish Ministry of Internal Affairs and Administration are described in another article.

In this study, we focus on the practical and important issue of regulating the deposit in a preliminary agreement preceding the conclusion of an agreement transferring ownership of real estate to a foreigner.

What is a deposit and what is its function in the case of real estate acquisition by a foreigner?

According to the provisions of the Polish Civil Code, a deposit is a security for the performance of a contract in the event of its non-performance by one of the parties. In real estate transactions, especially in situations where the conclusion of a final contract is subject to obtaining a permit from the Polish Ministry of Internal Affairs and Administration, the institution of a deposit is almost always used.

Pursuant to Article 394 § 1 of the Polish Civil Code, unless otherwise stipulated in the contract or custom, a deposit paid upon conclusion of the contract means that:

• in the event of non-performance of the contract by one of the parties, the other party may, without setting an additional deadline, withdraw from the contract and retain the deposit received, and
• if it has given the deposit itself, it may demand twice the amount.

Does the deposit have to be actually transferred to be effective?

Yes. The effective establishment of a deposit depends on its actual ‘giving’, i.e. the transfer of a specified amount of money – in cash or non-cash (i.e. in the form of a bank transfer). In order for the seller to effectively secure their interests and for a foreigner purchasing real estate in Poland to benefit from the protection provided for in Article 394 of the Polish Civil Code, the deposit must be actually transferred within the time limit and in the form agreed in the preliminary agreement. This means that the mere commitment in the agreement to pay a deposit does not yet create an effective deposit institution; only its actual transfer has the legal effects provided for in Article 394 of the Polish Civil Code.

A practical example from Polish case law:

“The delivery of the deposit is an essential element for the effective establishment of this legal institution and, consequently, the legal effects associated with it. The deposit is effectively established not at the time of making the declarations themselves, but at the time of delivery of the deposit. Until it is delivered, the parties’ declarations in this regard have no effect. If the reserved deposit is not handed over within the agreed time limit, it shall be deemed not to have been effectively reserved. This excludes the possibility of enforcing the promise to give a deposit by coercive means. In order for the deposit to fulfil its function, it must therefore be ‘given’, and its reservation cannot be treated as an independent source of obligation to perform” (judgment of the Polish Regional Court in Toruń of 29 June 2021, 8th Civil Appeals Division, file ref. no. VIII Ca 369/21).

What should be the amount of the deposit in the case of a preliminary agreement for the purchase of real estate by a foreigner?

The provisions of the Polish Civil Code do not specify a minimum or maximum deposit amount, and in practice, the parties agree on different deposit amounts. In the case of real estate purchases by foreigners, the deposit amount may be slightly higher than the commonly accepted 10% due to the uncertainty of obtaining a positive decision by the foreigner and the lengthy procedure before the Polish Ministry of the Interior and Administration. Compared to transactions with Polish citizens, the seller remains uncertain for a longer period of time as to whether the transaction with a foreigner will ultimately take place.

On the one hand, it is assumed that the deposit constitutes only a fraction of the main consideration (i.e. the price of the property) and therefore should not correspond to the total consideration or its full monetary equivalent. On the other hand, however, the courts point to the contractual freedom of the parties in determining the amount of the deposit.

A practical example from Polish case law:

“Usually, it is a small part of the monetary performance to be fulfilled by the obligated party; however, it is permissible and depends solely on the will of the parties to set this amount at a different level, including stipulating a deposit whose value is much higher, for example, exceeding half of the value of the entire performance.” (judgment of the Polish Supreme Court of 31 May 2019, ref. no. IV CSK 163/18)

Deposit and permission from the Polish Ministry of Internal Affairs and Administration – conflicting interests of the parties

In preliminary agreements concerning the purchase of real estate by a foreigner, there are generally two conflicting interests:

1.    The buyer (foreigner)

A foreigner can never be absolutely certain that they will obtain a positive decision on the purchase of real estate from the Polish Ministry of Internal Affairs and Administration. Even in situations where the foreigner meets all the statutory requirements under the Polish Act on the Acquisition of Real Estate by Foreigners, the Ministry of Internal Affairs and Administration may refuse to grant permission. This often happens when foreigners submit a faulty application or there are other formal reasons.

For this reason, it is in the buyer’s interest to set the lowest possible deposit and to secure its return.

2.   The seller

During the period of waiting for the decision of the Polish Ministry of Internal Affairs and Administration (usually from 2 to 4 months, and in more complex cases even up to 5 months), the seller is de facto ‘blocked’ from selling the property to another entity. For this reason, they seek to secure their interests by setting the highest possible deposit amount, which can compensate for the time the sale is ‘blocked’ in the event of a refusal by the Ministry of Internal Affairs and Administration.

How to regulate the deposit in a preliminary agreement concerning the purchase of real estate by foreigners?

In practice, it will be crucial to clearly define the consequences of a foreigner not obtaining a permit from the Polish Ministry of Internal Affairs and Administration. Provisions in this regard (like any other contractual provisions) are subject to negotiation, with the parties taking into account their divergent interests, as mentioned above.

Option 1 – application of general rules

The parties may agree that in the event of non-performance of the preliminary agreement, and thus failure to obtain a final permit from the Polish Ministry of Internal Affairs and Administration to purchase the property within a given time limit, the provisions of the Polish Civil Code, in particular Article 394 of the Polish Civil Code, shall apply. In such a case, a negative decision by the Polish Ministry of Internal Affairs and Administration may result in the loss of the deposit by the foreigner.

Option 2 – separate regulation of the deposit

Alternatively, the parties may agree that if the foreigner does not obtain the final permission from the Polish Ministry of Internal Affairs and Administration to purchase the property, the seller undertakes to return the deposit to the buyer immediately, but no later than within (for example) 7 days from the date of receipt of a written request for a refund. The parties therefore agree that failure to obtain a permit is a circumstance beyond the buyer’s control and should not be treated as a breach of contract by the foreigner.

Additionally, when accepting this option, in order to increase the buyer’s security, sellers may submit a declaration of submission to enforcement pursuant to Article 777 § 1(4) of the Polish Code of Civil Procedure, including the obligation to return the deposit if the condition of obtaining a permit from the Polish Ministry of Internal Affairs and Administration is not met. This declaration has the practical effect that in the event of:

• the buyer not obtaining final permission from the Ministry of Internal Affairs and Administration to purchase the property, and
• the seller fails to fulfil the obligation to return the deposit within the time limit specified in the agreement,

the buyer may, without the need to bring an action and conduct proceedings, refer the case directly to enforcement after the court has granted an enforcement clause to this statement.

Loss of the deposit if the buyer fails to apply for the consent of the Polish Minister of Internal Affairs for the purchase of the property or submits the application after the deadline

As indicated above, while waiting for the Polish Ministry of Internal Affairs and Administration to decide on the administrative proceedings, the seller is effectively ‘blocked’ from freely disposing of the property, which in practice means that it cannot be sold to another entity for a period of several months.

Practice therefore shows that it is in the seller’s interest to additionally specify situations where a foreigner:

• does not apply to the Polish Ministry of Internal Affairs for consent to purchase at all,
• applies to the Polish Ministry of Internal Affairs for consent to purchase after the deadline specified in the preliminary agreement.

The seller should therefore specify the deadline by which the buyer should submit an application to the Polish Ministry of Internal Affairs and Administration for the purchase of the property, as well as the consequences of failure to submit the application or late submission.

A practical example from Polish case law:

“In § 5(2) of the preliminary agreement, the parties provided that the deposit would be forfeited to the seller if, among other things, the claimant did not apply for such consent [from the Ministry of Internal Affairs and Administration] (…) It is undisputed that the claimant did not take any action in this regard. It is irrelevant whether obtaining consent was necessary to conclude the agreement. The Regional Court correctly noted that the purpose of the application was to remove the uncertainty as to whether it was necessary to obtain a permit to purchase the property by obtaining an unambiguous decision from the competent authority on this issue. (…) Since the claimant did not apply for such consent, the conditions for the defendant to retain the deposit provided for in the agreement were met.” (judgment of the Polish Court of Appeal in Warsaw of 19 October 2017, ref. no. I ACa 1160/16)

Summary

The deposit in a preliminary agreement concerning the purchase of real estate in Poland by a foreigner plays a particularly important role in securing the interests of both parties to the transaction. On the one hand, it protects the seller against a long-term ‘freeze’ on the possibility of selling the property, and on the other hand (with appropriate contractual provisions), it can protect the foreigner against the loss of funds in the event of failure to obtain a permit from the Polish Ministry of Internal Affairs and Administration for reasons beyond their control.

Market practice and case law clearly show that it is crucial to specify precisely and unambiguously in the preliminary agreement:

• the consequences of not obtaining a permit from the Polish Ministry of Internal Affairs and Administration,
• the deadlines for submitting an application to the Polish Ministry of Internal Affairs and Administration,
• the consequences of not submitting an application or submitting it after the deadline,
• the rules for the return or forfeiture of the deposit.

The absence of such provisions or their imprecise wording may lead to serious disputes and adverse financial consequences, in particular for the foreigner. Therefore, it is always recommended to individually adapt the structure of the deposit to the specifics of a given transaction and the realities of administrative proceedings before the Polish Ministry of Internal Affairs and Administration.