The Principle of Prior Effect Discriminates, Damaging Property Owners and Favoring State Companies

The problematic principle of prior effect vividly illustrates how injustice is legalized against property owners whom a local government unit (JLS) or the state wishes to expropriate, as well as private companies investing in land purchases. Although it is possible to seize land for higher interests, owners should be compensated not only at market value but also with fair compensation (which we will explain), yet the aforementioned principle prevents fairness.

Lawyer Radmila Bonifačić contacted me and shared several stories related to this situation. Specifically, it concerns a provision of the Law on Property Valuation introduced in 2015, which established the principle of prior effect whereby compensation for expropriation is determined and paid based on the value of the property at the time the expropriation decision is made (valuation date). This is not disputed, but the following is: the value of the property is determined based on its purpose before expropriation (the so-called quality date), not based on the purpose it will have after.

For example, my interlocutor explains, if agricultural land is expropriated for the construction of a road or industrial facility (which means it will become building land), its market value in the expropriation process will be determined according to the purpose it had before the expropriation decision. Simply put, the owner will be compensated according to the principle of prior effect for agricultural land, not for building land (which will be its purpose), which is ultimately unfair, despite the apparent justice that the owner has received the market price (for agricultural land).

What would you do?

Imagine you have agricultural land and a company wants to buy it to invest in building a production facility. This could be a large investor of state interest, which is why the state can expropriate you and, due to what has been written, damage you. Now let’s imagine a different situation: the investor is not of state interest, so the state will not expropriate you. In that case, the investor will approach you and ask if you would sell the agricultural land so that he can build a production facility on it. Since its purpose will be such that it will have to be reclassified as building land, you will ask for a higher price regardless of the fact that it is still agricultural, considering that it still needs to be reclassified, which is expensive. Thus, in cases where there is no expropriation and the legal obligation to apply the principle of prior effect, the owner of agricultural land will still have the opportunity to achieve fair compensation, unlike the one whose land expropriation has been declared a higher interest.

Let’s return to the situation when an investor important to the state appears, and the state (or JLS) decides to expropriate someone to build something. Who are, in fact, these investors most often? Mostly state companies. Very rarely will a private investor be so important to the state that the state expropriates land at agricultural prices for him. Thus, in almost all such situations, state companies invest, and that is why the state expropriates owners insisting on the principle of prior effect. This means that the state actually favors its companies over private (both foreign and domestic) because the latter are forced to pay the price of land as future building land, not former agricultural land, at market price.

And we laypeople understand this

The principle of prior effect was invented to favor the state over all other actors in real estate transactions – private companies and landowners. The latter are thus deprived of the opportunity to be paid the actual value of the property. Bonifačić, along with colleagues and property valuation experts, has been warning about this problem for years. She even addressed the Constitutional Court, but so far without results. It is truly unclear how the authorities do not understand this when even we laypeople, when we delve a little, realize that this is not fair to the owners, nor to private investors who do not have the luxury of determining how the price of the land they wish to buy will be calculated.

POST SCRIPTUM

Lawyer Radmila Bonifačić believes that ‘the application of the method of prior effect in property valuation in expropriation procedures will cause expropriation, which is in accordance with the Constitution of the Republic of Croatia a last resort after the inability to agree on a market price with the owner, to become a regular measure, which is contrary to the essence and purpose of expropriation.’