Compensation from a developer who despite a preliminary contract sells the property to another person
Residential real estate prices in Poland have been rising steadily for many years. A house or apartment promised to be built or sold just a few months earlier may now have a market price much higher than on the date of signing of the preliminary contract. This may tempt some developers to renege on the final contract and instead sell the unit to another purchaser at a higher price. In such a case, what relief can the frustrated buyer obtain against the developer?
An action to conclude the final contract
First of all, purchase of a residential property can be pursued in court. If the preliminary contract was made in the form of a notarial deed, either party can sue to force conclusion of the final contract under the terms stated in the preliminary contract. Such an action can be brought within one year after the deadline for conclusion of the promised contract.
But certain circumstances may defeat the purpose of pursuing such relief. If the unit has already been sold to another person, at least two questions would have to be answered before bringing an action in court to conclude the promised agreement.
First, will it be possible judicially, in a separate procedure, to set aside or invalidate the sale contract the developer entered into with the third party?
If the future buyer’s rights under the preliminary contract have been entered in section III of the land and mortgage register for the property where the home was to be built, this significantly increases the chances of undermining the agreement between the developer and the third party, because both of those parties were on notice that their contract would injure the prospective buyer disclosed in the register.
Conversely, if the would-be purchaser’s rights aren’t entered in the register, that will greatly reduce the chances of setting aside or invalidating the subsequent sale contract. In that case, the prospective buyer must prove that although the rights were not disclosed in the land and mortgage register, the third party was also aware that when the developer was selling the home to the third party, the developer was acting to the detriment of the would-be purchaser under the preliminary contract. Proving such awareness on the part of a third party can be very difficult. (We write more about the possibility of obtaining judicial protection of contract performance in the article “When the other party seeks to prevent performance of a contract.”)
If there is a high risk that the contract between the third party and the developer cannot be set aside or invalidated, it seems pointless to bring an action against the developer to force conclusion of the promised contract.
Second: even if it is possible to set aside or invalidate the contract between the developer and the third party, does the wronged prospective buyer have the strength, financial resources and time to pursue another court case against the third party, to surrender the home they bought from the developer? Especially in the case of a residential property, the likelihood of having to file such a claim is high. Once a third party buys the home, they may move in quickly (perhaps with an entire family), and the home becomes the centre of life interests of the people living there. The prospective buyer cannot expect that the actual inhabitants of the property will give up without a fight. Pursuing such a case may simply be more than the prospective buyer bargained for. In the meantime, the idea of buying that particular home may have lost some of its appeal, and the prospective buyer may have moved on to another investment.
Action for damages
Given the difficulty in obtaining equitable relief allowing the prospective buyer to acquire the actual property in question, it may prove more strategic to consider bringing an action for damages. It should be pointed out immediately that this will make sense only if the developer’s financial condition is sufficient to pay the damages (in particular if the developer owns assets which the litigant can attach to secure its claim for damages and, if successful on the merits, execute against). Before filing a claim for damages, the plaintiff should try any lawful means to verify the developer’s current economic situation.
If there is a realistic chance of locating assets to attach and ultimately move against to satisfy the judgment, it will be necessary to consider the method of determining the amount of damages to claim.
To start with, the compensable injury may include out-of-pocket losses (diminution of assets) of the would-be purchaser as well as lost benefits (failure to achieve an increase in the value of the claimant’s assets, which would have occurred if not for the harmful event).
Among other things, the out-of-pocket losses (diminution of assets) of the would-be buyer may include:
- Advances paid against the price of the property but not yet returned by the developer
- Costs incurred in concluding the preliminary contract
- Other reasonable expenses incurred solely in connection with the promised sale of the home to the claimant, assuming such expenses would not otherwise bring anything of value to the prospective purchaser.
A more complex issue is demonstrating lost benefits. Here, the most interesting issue is whether the would-be purchaser can claim damages from the developer corresponding to the positive difference between the current market price of the premises and the price agreed in the preliminary contract. As mentioned, real estate prices in Poland have steadily risen. Thus if a preliminary contract was concluded for example a year prior, but the promised final contract was not signed, the purchaser would have obtained property with a market value objectively higher than the price set in the preliminary contract. Is it right to demand that this upside be covered by compensation? The question is momentous, because if the would-be purchaser is still interested in acquiring a similar home, they can now expect to pay a much higher price than what they agreed in the preliminary contract a year earlier.
Courts sympathetic to frustrated buyers
In recent rulings (e.g. Supreme Court of Poland judgment of 3 November 2023, case no. II CSKP 1413/22, and Wrocław Court of Appeal judgment of 21 May 2021, case no. I ACa 311/21), the Polish courts have begun to recognise the need for broader protection of would-be purchasers of real estate—including benefits lost due to the developer’s breach of the preliminary contract.
It should be emphasised that in both of these judgments, the would-be purchaser had made down payments on the bulk of the sale price stipulated in the preliminary contract. This is common, as developers in Poland often build homes using funds paid in by the future purchasers, and if the developer breaches the preliminary contract and sells the home to someone else, this usually happens at the end of construction. This makes it particularly worthwhile to examine in detail the legal reasoning followed by the courts in these cases.
First, the courts rely on the notion that Art. 390 §1 of the Civil Code cannot be interpreted and applied in a way that would favour unscrupulous developers. That provision states: “If a party obliged to conclude a promised contract refuses to conclude the contract, the other party may demand redress of the loss it has suffered because it counted on conclusion of the promised contract.” A narrow interpretation of the negative contractual interest included in this provision could unjustly penalise the would-be purchaser.
Under this view, developers cannot be allowed to benefit from accepting substantial cash advances from prospective buyers complying with their promises in the preliminary contract, which the developer uses to build the units in question, when the developer then refuses to enter into the promised contract, instead selling the unit to someone else for a higher price.
Conversely, it is not acceptable for developers to perform the preliminary contract improperly, so that the would-be buyer does not go through with the final contract or demands a price reduction (which provides a pretext for the developer to refuse to sign the final contract on such terms).
Therefore, it was ultimately held in these cases that a would-be purchaser who has already paid advances for the bulk of the price agreed in the preliminary contract may also claim damages from the developer to the extent of the positive difference between the current price of the home and the price agreed in the preliminary contract.
The legal view presented in these cases carries great weight. In many cases it can determine the steps to be taken by a would-be buyer seeking to enforce its claims under the preliminary contract.
Adam Studziński, adwokat, Dispute Resolution & Arbitration practice, Wardyński & Partners
