During the decade after the current Developers Act entered into force in Poland, it was repeatedly argued that its provisions were vague or diverged from the market reality, so that the act did not live up to the hopes placed in it. As a result, in the last few years, work was undertaken to introduce a new law to fill the existing gaps and, above all, provide greater protection for buyers of residential units and single-family houses.
On 20 May 2021, this work resulted in adoption of the Act on Protection of Rights of Acquirers of Residential Units or Single-Family Houses and the Developers Guarantee Fund, commonly referred to as the “new Developers Act.” The changes introduced in certain areas are far-reaching, but at this point it is hard to say whether they will actually produce the intended effect.
Scope of the new Developers Act
One of the commonly cited shortcomings of the “old” Developers Act, which is still in force, is its greatly limited scope of application. In practice, the current regulations apply only to agreements concluded by a developer before the project is completed, i.e. before obtaining an occupancy permit or notifying completion of construction. The reality is that developers often sell residential units to consumers after construction has been completed and separate title to units has been created.
According to the explanatory memorandum to the new Developers Act, the current act was also supposed to cover all binding agreements concluded by a developer in connection with the sale of residential premises or single-family houses, and thus also agreements concluded after completion of construction. According to the drafters of the new act, the practice of limiting application of the current act to sales pre-completion resulted from an incorrect interpretation of the current provisions.
The new Developers Act introduces a broad catalogue of agreements that will be subject to this regime. Pursuant to Art. 2 of the act, it will apply to:
- Agreements for construction and establishment and transfer of separate title to residential units together with the associated rights
- Agreements for establishment and transfer of separate title to residential units together with the associated rights
- Agreements for transfer of separate title to residential units together with the associated rights.
The new act also extends to agreements concluded in connection with the sale by a developer of single-family houses.
Additionally, the new Developers Act will apply to sale agreements with binding and dispositive effect concluded by a developer with a buyer in connection with the sale of a residential unit or single-family house, i.e. agreements concluded after completion of the project. For obvious reasons, application of the act to such agreements will be narrower and will include, among other things, the obligation to apply the provisions concerning the reservation agreement (if entered into), the developer’s precontractual obligations, and obligations related to handover of the property.
Sale by business entity other than a developer
A new feature is that the act also covers contracts for acquisition of a residential unit or single-family house from a business other than a developer. According to the explanatory memorandum to the bill, this is supposed to equalise the protection of buyers entering into contracts with investors conducting real estate transactions which are not real estate developers—but rather, for example, “flippers.” In practice, this means that the act will also apply in a situation when a developer transfers title to a unit or a house to a special-purpose vehicle and, as a consequence, the sale agreement is concluded with the buyer by that vehicle.
Garages and storage units
The provisions of the Developers Act still in force do not apply to the sale of garage units, storage units or bicycle boxes which constitute separate premises and are sold together with a residential unit or single-family house.
It is common practice to enter into preliminary agreements between the developer and the buyer for acquisition of such utility units. Such preliminary agreements are governed by the Civil Code, and thus the protection measures in the current Developers Act (e.g. the obligation to pay the sale price into an escrow account) do not apply to them.
The new Developers Act will also apply to the sale of utility units together with an agreement on sale of a residential unit or single-family house, where the utility unit will constitute part of the same development project.
However, the act should not cover the acquisition of utility units in connection with business activity, e.g. utility units located in a given development project.
Another new feature is the regulation concerning reservation agreements, which in practice are commonly concluded by developers and buyers prior to concluding a development agreement, for example to ensure the buyer time to obtain a mortgage decision. The act introduces a legal definition of a reservation agreement (“an agreement under which the developer or a business other than a developer undertakes to temporarily exclude from the sales offer a residential unit or single-family house selected by the reserving party”) and specifies basic requirements that such an agreement should contain.
Among other things, the new provisions regulate the form in which a reservation agreement is concluded, the minimum content of the agreement, the maximum amount of the reservation fee, and the rules for refund of the fee in the event of termination of the reservation agreement.
We describe these issues in the article Reservation agreement: What shape will it take under the new Developers Act?
Handover of a residential unit or single-family house and material defects
Another of the indicated shortcomings of the “old” Developers Act still in force is the rather vague provision on identification of defects in the property at the stage of handover. To avoid doubts as to their legal situation, some developers propose a more detailed specification of the rights and obligations of the parties in this respect in their own development agreements.
In principle, the new Developers Act carries forward the existing regulations, but supplements them with new rights granted to buyers. Thus, the developer is still obliged to respond within 14 days to defects identified in the handover protocol (stating whether it recognises a given defect or not), but if it does not respond within that period, it is deemed that the developer has tacitly acknowledged the existence of the defect.
If the developer fails to cure the acknowledged defect within 30 days after signing of the handover protocol, it must set an additional reasonable time for curing the defect. If it does not cure the defect within that additional time or does not indicate an additional time at all, then the buyer will be able to set a time for the developer to cure the defect, and if that time limit is not met, to cure the defect at the developer’s expense.
Also, the new Developers Act gives the buyer the right to refuse the handover if “material defects” are found. However, the concept of material defects does not have its own legal definition. It is also unclear how this entitlement affects the application of the rules on warranty for defects of goods sold, which also do not use the concept of material defects. Although the drafters’ intention is understandable, it may cause numerous interpretation problems in practice.
We write more on this topic, and in particular on the right to withdraw from the contract in case of finding material defects, in the article New rules for handover of residential units and single-family houses.
Developers Guarantee Fund
One of the most widely discussed changes introduced by the new Developers Act is the creation of the Developers Guarantee Fund, i.e. a separate bank account where funds will be deposited from contributions payable by developers.
The funds paid into the Developers Guarantee Fund will be used to refund buyers’ payments in case of, among other events, withdrawal from the agreement by the buyer, bankruptcy of the developer, or bankruptcy of the bank maintaining the escrow account to which the buyer paid funds towards the sale price.
The basis for calculating the contribution to the Developers Guarantee Fund is the value of the payment made by the buyer to the housing escrow account in connection with implementation of the development agreement.
Undoubtedly, the introduction of mechanisms increasing the security of recovery of funds by buyers is justified. However, given that in recent years bankruptcies of developers or banks have been extremely rare, the question arises whether the proposed mechanism is the best that could be proposed—especially as an undoubted and direct effect will be an increase in the costs of planned projects, which, in consequence, may translate into a further increase in the prices of units sold by developers.
Prospectus for development projects
Finally, the new Developers Act imposes additional obligations on developers related to the preparation of a prospectus for the project. First of all, developers will be obliged to prepare a prospectus at the stage of concluding reservation agreements (if they decide to conclude them) and not, as currently, before concluding a development agreement.
The prospectus will always have to be delivered to the buyer, and not only upon request as is currently the rule. The act indicates the scope of information to be indicated in the prospectus. This includes not only the purchase price of the property and the date of transfer of title, but also very detailed data on the planned or permitted development of neighbouring properties.
It seems that preparing a detailed prospectus at such an early stage of project implementation as the stage of concluding reservation agreements may make it necessary to revise the prospectus more frequently later on, at the stage of the development agreements, especially in the case of multi-stage projects.
Entry into force of the new Developers Act
Although the new Developers Act has already been adopted, its entry into force has been deferred. In general, the act is to enter into force on 1 July 2022. But there are several exceptions, concerning both earlier entry into force of certain provisions and the postponement of entry into force of provisions with respect to development projects commenced in the period between adoption of the act and 1 July 2022. We write about this in more detail in the article Date of entry into force of the new Developers Act and transitional provisions.
Dr Jakub Baranowski, attorney-at-law, Real Estate practice, Wardyński & Partners