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Proposed amendments to the Developers Act

Poland’s consumer protection authority has drawn up guidelines for amending the Act on Protection of Rights of Buyers of Residential Units and Single-Family Houses of 16 September 2011, popularly known as the Developers Act. Real estate developers are not pleased.

One of the proposals by the Office of Competition and Consumer Protection is to expand the application of the Developers Act to cover residential units that have already been built, even if the developer has already obtained an occupancy permit for the building or separate title to the units has already been established. The act would also apply to utility units, e.g. garages with multiple parking spaces, or commercial premises, where the purchase of such units is often tied to the purchase of a residential unit. The procedure for delivery of possession and curing of defects would apply to businesses which are not real estate developers but whose enterprise involves the sale of completed residential units.

The most important proposal, which also provokes the strongest objections from developers, is to eliminate open escrow accounts without additional security in the form of an insurance guarantee or bank guarantee. It is argued that the open escrow accounts used most often in practice do not provide effective protection for buyers if the developer goes bankrupt. It is hard to disagree with this claim, and we discussed this risk in an article a couple of years ago (“The Developers Act and New Mortgages”). But developers predict that this change would have a negative impact on the country’s residential market and lead to a decline in housing construction in smaller cities. The effect could be to drive small real estate developers from the market, add to the operating costs of the remaining developers, and thus raise the cost of residential units (by an estimated PLN 500 per square meter, developers claim). The developers also claim that there is not sufficient capital in the banking market to maintain even 50% of the value of the current construction of homes.

The guidelines for the amendment also specify the grounds for the bank to terminate an escrow account agreement, as well as the information that the buyer may demand from the bank maintaining the escrow account, and would introduce a requirement to maintain a separate account for the purposes of the development if it is conducted separately within the developer’s enterprise. The scope of the bank’s oversight would also be clarified. The bank would have to conduct a detailed legal analysis, for example to confirm that the prospectus and the specimen development agreement with buyers are correct and up to date, and also confirm the validity and finality of the building permit, check that funds paid out previously have been applied properly, and confirm that the developer is not in arrears in taxes and other public obligations. If the developer did not pass these tests, the bank could refuse to pay out the funds. But banks may not be prepared to conduct such detailed legal and financial analysis of construction projects which lawmakers seek to impose on them. The consequence could be that banks will not be eager to offer such escrow accounts.

Another new idea is to regulate reservation agreements within the Developers Act. A reservation agreement would have to be in writing and would require the developer to remove the selected unit from its offer in exchange for payment of a reservation fee of no greater than 1% of the price of the home. The reservation fee would be refunded if the buyer failed to receive a loan commitment from the bank, if the contract with the developer did not go through due to the developer’s fault, or if there were a change in the information included in the prospectus for the project. This solution generally appears advantageous from the perspective of developers, who would obtain an instrument for demonstrating to the banks that they have customers committed to buying the future units, and also for buyers, who would obtain increased protection and the ability to recoup funds they had paid in.

Another positive proposal is to establish a fixed catalogue of documents serving as the source of information in the prospectus about other projects planned within a radius of 1 km of the property, to include zoning plans and studies, decisions on siting of public-use projects, decisions on environmental conditions for projects, decisions on areas of restricted use in local construction plans, and maps of flood zones.

Buyers would also be assured the right to refuse to accept delivery of a unit because of material defects. If material defects were found, they would be noted in the protocol and delivery would be postponed until the defects were cured. The consequences of failure to cure the defects on a timely basis would be specified, awarding the buyer the right to withdraw from the development agreement.

The proposal from the Office of Competition and Consumer Protection would impose criminal sanctions on developers who failed to provide the protections required in the act, in the form of a fine, probation or imprisonment of up to 2 years.

The goal of the proposed amendment is to increase the protection of buyers of residential units. But it should be considered whether the proposed solutions would cause a decline in the number of units built and drive up the price of the units that are built.

Sylwia Moreu-Żak, legal adviser, Real Estate & Construction Practice, Wardyński & Partners