Does the bank have to re-audit the development venture when a buyer makes a late payment? | In Principle

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Does the bank have to re-audit the development venture when a buyer makes a late payment?

Effective as of 1 July 2022, the new Developers Act expands the scope of bank oversight of development ventures before paying out to the developer the funds due for a given phase of the project. But the regulations are imprecise, and it is unclear whether the bank must redo the audit when the buyer has made a late payment of funds into an open housing escrow account.

The overriding goal of the current Developers Act (Act on Protection of Rights of Acquirers of Residential Units or Single-Family Houses and the Developers Guarantee Fund of 20 May 2021) was to extend the broadest possible protection to funds paid by buyers into an open housing escrow account, until the buyer obtains in rem rights to the property. Among other things, an expanded catalogue of bank inspections of development projects before paying out funds to the developer previously paid in by the buyer was intended to serve this purpose. We discussed the expansion of this catalogue on our portal last year.

Regardless of the assessment of whether it is reasonable to impose such an extensive obligation on banks, the lack of precise regulations generates uncertainty for banks as to whether they must redo the audit (and to what extent) in the event of any delay by the buyer in depositing funds into the open housing escrow account. The concerns of the banks stem from the requirement to inspect the project before disbursing the funds to the developer.

Expanded catalogue of controls

The expansion of the scope of controls consisted in adding to and clarifying the open-ended catalogue of mandatory elements subject to bank verification (Art. 17(4) of the new Developers Act). At the same time, the parliament explicitly allowed for a broader scope of control in agreements between banks and developers.

The new act conditions the disbursement of funds previously paid by the buyers to a developer on, among other things, the bank’s determination that a particular stage of the development project has been completed. Importantly, the act indicates the method for how the bank is to determine this (Art. 17(4)(2)). For this purpose, a person with a building licence is to verify, among other things, the entries in the construction log, documentation of the actual degree of construction progress or, if completed, holding of an occupancy permit or notification of completion.

This audit is not limited exclusively to technical and construction verification. The act includes in the new audit catalogue elements aimed at checking the developer’s broader legal and financial condition (Art. 17(4)(1)(a)–(j)).

Late payment by the buyer

In the new Developers Act, banks will not find a straightforward answer to the question of what to do in a case where a buyer is late with a payment of funds into an open housing escrow account. In this situation, do they have to conduct a full audit from scratch? Or can they release the funds to the developer based on the results of a prior audit, which allowed for payment to the developer of funds paid in a timely manner by the remaining buyers for a particular phase of the project?

In theory, three scenarios are possible here.

Scenario I: Without an additional audit, the bank pays out to the developer the funds paid late by a buyer for the stage already audited, but only after the developer pays the premium to the Developer Guarantee Fund and the bank pays it to the fund.

The phrase “completion of development stage” literally refers to the technical and construction verification of the advancement of the project. Such an interpretation is supported by the wording of the previous Developers Act (Act on Protection of Rights of Acquirers of Residential Units or Single-Family Houses of 16 September 2011).

However, it could be considered that such action by the bank would not meet the requirements of professional due care and would not be in line with the purpose of the legislative changes under discussion. Failure to verify the potential changes between the balance as of the date of the original audit and the balance as of the date of the late disbursement of the funds would deprive the funds paid with delay of extended and permanent protection. Such action by the bank could be associated with:

  • The risk of criminal liability of bank employees ordering the withdrawal of the buyers’ late-paid funds
  • The risk of the bank’s liability for damages to buyers in the event of their loss of funds from individual delayed payments.

Scenario II: The bank conducts a subsequent audit, after which it pays out to the developer the late-paid funds from buyers for the stage already audited.

The bank’s proposed course of action finds justification in a narrowly construed purposive interpretation of the new Developers Act. The main purpose of the legislative changes was to provide very broad protection for funds deposited by buyers. Therefore, the disbursement of (even delayed) buyer’s funds would require a fully redone audit of the project to confirm the validity of its positive results and ensure the continued protection of the buyer’s funds.

However, this interpretation of the provisions seems restrictive and difficult to implement in practice. This action by the bank could be considered irrational, as it could lead to a significant increase in costs on the part of the developer or even paralysis of the entire project due to the need to redo the audit with each buyer’s delay. Thus, it could involve the risk of the bank’s liability for damages to the developer in the event of significant delays by a large number of buyers and could even lead to the developer’s loss of liquidity and jeopardise the entire development project. In turn, in the longer term, this could result in high claims for damages by the developer against the bank, both for actual loss and, above all, for lost profits.

Scenario III: The bank conducts an additional but simplified audit, after which it pays out to the developer the delayed funds paid by the buyer for the stage already audited.

This scenario for the bank’s conduct is justified by a functional interpretation of the new Developers Act. According to this approach, it is necessary to select those control criteria which will meet the purpose of the legislative changes when paying out to the developer the delayed funds from the buyer.

With the simplified scope of the additional audit, there is no need to recheck the degree of construction, as it is a historical condition that occurred on the originally audited date and corresponded to the level required for the stage for which the late funds from the buyer are to be paid out to the developer. However, it would be necessary to re-examine the legal and financial area, as this is the sphere of control in which the new provisions were expanded compared to the previous Developers Act. Such an audit would allow the bank to update its knowledge of the developer’s legal situation and financial condition and, as a result, ensure broad and continuous protection of the buyer’s funds.

The simplified scope of the additional audit should not prove particularly burdensome or costly. Most elements of the legal and financial area consist in verification on the basis of the developer’s statement. In turn, some of these criteria are verified on the basis of a straightforward analysis of records and registers available to banks. More complex checks would be required to verify the reasonableness of the developer’s spending of funds already disbursed to it after the original audit, and whether the developer has obtained a building permit or filed a construction notification without an objection raised.

The actions by the bank under this approach take into account the purpose of the legislative changes, as well as the economic and legal conditions for implementation of development projects. This should minimise various risks on the part of banks, including both the risk of criminal liability and the risk of indemnity liability to buyers or developers.


The newly adopted provisions on bank control of a development project make sense only under the assumption that the project is implemented according to schedule and that all buyers make timely payments to open housing escrow accounts. But in the legislative process, the parliament did not take into account a host of market realities. Sometimes buyers make late payments, i.e. after the deadlines agreed with the developer, when the bank has already completed its audit of a particular stage of the development, or even has already paid out the other buyers’ funds to the developer for a stage of the development project that has already been completed and verified. In such cases, it is not easy to decipher an unambiguous course of action for the banks to follow.

All of the approaches which banks could follow discussed in this article have some normative justification. But when establishing procedures in the event of buyers’ late payments, banks should first and foremost be guided by an individualised assessment, taking into account principles of purpose and function, as well as weighing the risks of these operations.

Dr Radosław Wiśniewski, Real Estate practice, Wardyński & Partners