The Developers Act and its impact on the real estate market in Poland | In Principle

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The Developers Act and its impact on the real estate market in Poland

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”—went into effect recently. The act is designed to improve legal protections for residential customers of real estate developers.

Under the Developers Act, a preliminary agreement to acquire residential property from a developer must always be made in the form of a notarial deed, and the buyer’s claims must be entered in the land and mortgage register. This approach will entitle the customer to apply to the court for transfer of title to the unit if the developer seeks to withdraw from the contract. The judgment of the court will then take the place of the seller’s declaration of sale. This option is not available in the case of agreements made in ordinary form, under which the prospective buyer may at most seek damages, and these are typically capped by relatively modest liquidated damages clauses.

Additionally, the act imposes a duty on developers to use customer trust accounts, which may be either “closed” (under which the purchase price is released to the developer only after completion of construction) or “open” (under which the customer’s payments are released to the developer in stages, as each phase of construction is completed). In the case of an open account, the customers’ rights may be reinforced by a bank guarantee or an insurance policy, enabling the customer to obtain reimbursement if the developer enters bankruptcy or the customer renounces the development agreement.

Under the new rules, the developer is required to prepare a prospectus for each project, to be provided to potential buyers upon request. The prospectus will include information about the land where the building is to be constructed, such as its legal status and any encumbrances on the land, as well as information about other projects planned within a radius of one kilometre. The prospectus must also disclose the legal and financial condition of the developer and the project, as well as information about the specific residential unit or single-family house in question (e.g. the price per square metre, the surface area, the location of the building, existing servitudes, the number of floors, the construction technology and so on).

Under the act, if the developer enters bankruptcy, the construction project will be continued by the bankruptcy trustee or judicial administrator who receives the amount necessary to complete the project. The funds collected in residential trust accounts, and the freehold or right of perpetual usufruct to the land on which the project is being developed will then constitute a separate bankruptcy estate applied as a first priority to satisfying the buyers of residential units or single-family houses in the given project.

The Polish Developers Association claims that the Developers Act is likely to drive small and medium-sized developers out of the market, resulting in an oligopoly in this sector of the economy. The experts say that only large, strong developers—particularly those supported by foreign capital—will be in a position to meet the requirements for establishing bank guarantees and other forms of security for residential buyers. Nonetheless, over the long term the act is expected to improve significantly the market standards in the residential real estate development industry, which would certainly be a great benefit of the act.

Przemysław Szymczyk, Real Estate & Construction practice, Wardyński & Partners