Will the Housing for Land Act increase the number of housing developments? | In Principle

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Will the Housing for Land Act increase the number of housing developments?

The new Act on Settlement of the Price of Housing Units or Buildings in the Price of Property Sold from Communal Property Resources, commonly known as the “Housing for Land Act,” entered into force on 1 April 2021. It is supposed to implement one of the priorities of the National Housing Programme, increasing the number of housing developments. Is this goal likely to be achieved?

In Poland, the number of housing units and square metres per 1,000 inhabitants remain below the EU average. This is a source of undiminished demand for units among both individual and institutional buyers (interested in long-term rentals).

The barriers to construction of new housing include the decreasing supply of land available for development, depletion of land banks available to developers, and the increase in land prices. Meanwhile, according to Statistics Poland, in 2019 there were about 28,000 hectares of land in commune-owned resources that could be used for housing construction. Approximately 45% of this pool consisted of land developed with technical infrastructure. The Housing for Land Act is intended to make it easier for communes and developers to implement housing projects in these areas.

Some units for sale, some for communal housing stock

Local communes (gminy) are to offer for sale land dedicated for housing projects (based on the local zoning plan or an individual zoning decision (decision on construction conditions)), in return for a sale price payable partly in money and party in the form of transfer of housing units or buildings to the commune (intended for communal housing or created using the social building company approach).

Developers are to acquire the land through a tender and develop residential projects on it, retaining at least a portion of the units or buildings and transferring the rest to the commune as part of the payment for the land.

For land to be offered for sale, it must be designated for residential purposes in the local zoning plan or an individual zoning decision. Then, an appraisal must be prepared to determine its value. A resolution on the sale of real estate must be also adopted, specifying, among other things, the sale price, the minimum and maximum number of units to be transferred to the commune, their location, purpose, area, standard, price per square metre (for the purpose of settling the total sale price), as well as the date of handover of the premises.

When a developer submits a bid and wins a tender, an agreement will be concluded for sale of the land to the developer by the commune, imposing on the developer an obligation to implement the project.

A problem with individual zoning decisions

While the requirements concerning the local zoning plan do not cause much controversy, the obligation to obtain an individual zoning decision for the sold property may prove more problematic.

When applying for an individual zoning decision, the commune will undoubtedly be assisted by a designer to correctly define the project, its purpose and technical parameters. And as individual zoning decisions are issued by the executive body of the commune (i.e. the wójt or mayor), the commune’s application for an individual zoning decision will have to be decided by another body.

A similar problem will arise if an individual zoning decision is to be transferred to the developer after acquiring the real estate. At the request of the new investor, an individual zoning decision is transferred with the consent of the current investor, which request is also examined by the executive body of the commune. As a consequence, in the case of proceedings for transfer of an individual zoning decision, a conflict of interest will also arise, and the application for transfer of the decision will have to be examined by another public administrative body (and therefore the commune’s obligation to transfer the decision will relate to bringing about the transfer rather than making the transfer itself).

At this point, we should recall the obvious fact that an individual zoning decision is not the only decision required to implement a project. Other decisions and arrangements include a decision on environmental conditions, technical conditions and connection agreements, a decision to exclude land from agricultural or forestry production, a building permit, a decision permitting tree culling, etc. The act is silent on these decisions and agreements, and yet, decisions on environmental conditions, technical conditions and connection agreements, if obtained by the commune as an investor, should also be transferred. However, the developer must take into account the remaining decisions and agreements at the stage of assessing the feasibility, profitability and timely implementation of the project before submitting a bid and concluding the land purchase agreement.

Housing units for the commune: how many and for how much?

When adopting a resolution on the disposal of real estate, the commune must specify the purpose, quantity and area of premises to be transferred to the commune. To perform this exercise correctly, the commune will have to rely on the designer’s specialist knowledge, as only the designers, using their knowledge and experience, will be able to estimate the project absorption capacity.

When assessing the maximum permissible useable and residential area, it is not enough to directly rely on the project parameters indicated in the individual zoning decision, as in reality this area may be much smaller, for example due to the ban of overshadowing the neighbouring properties.

As mentioned, the sale price will consist of a part payable in money and a part payable in the form of transferred housing units or buildings. The total amount is to be limited by the value of the real estate as assessed by an appraiser prior to announcement of the tender. Here, several observations come to mind.

First, it seems that developers will prefer to pay as much as possible in cash, as this will allow them to reduce the risk of not completing the project on time. Second, developers will compete with each other mainly on the level of the total price and the monetary part, as the part payable in units or buildings will be fixed and unchangeable, and the price per square metre of useable floor area of a residential unit will be determined on the basis of the published average conversion index.

This solution has some drawbacks. It should be assumed that this index will quickly become outdated, as it will be indicated at the time the contract is signed, while the project will last no less than two years (counting only the typical time of project development from obtaining a building permit), at which time one should expect a further increase in prices of construction materials and labour. As a consequence, the price indicated this way most likely will not compensate the developers for the costs of building the units or buildings which the developer has to transfer to the commune.

What about delays?

At this point, it should be pointed out that the developer bears the risk of not completing the project on time, which is difficult to estimate. According to the act, the contract must indicate the price and the method of payment, purpose, quantity, standard, and date of handover of the premises. Failure to hand over the premises to the commune on time is to be sanctioned by the developer’s obligation to pay the community cash consideration amounting to 150% of the price of the units or buildings which the developer has undertaken to deliver to the commune as part of the payment. This obligation is to be secured by the establishment of a mortgage or pledge. In addition, the sale contract for the real estate may provide for additional sanctions in the form of contractual penalties.

The real estate sale contract providing for these obligations and security will be entered into at a time when the developer has not yet obtained an individual zoning decision (or the decision is yet to be transferred to the developer), and the building permit is yet to be obtained. As in the case of almost any decision, the issuance of a building permit is uncertain as to outcome and timing. Meanwhile, the act does not indicate whether the developer will still be sanctioned if a building permit is not issued or is delayed. Also, it seems that the drafters deliberately avoided any reference to a contractual penalty, which by its very nature would prevent the developer from defending against the obligation to pay by asserting the lack of fault in the failure to perform the obligation, and would also exclude the possibility of mitigating the amount claimed.

Practical problems

Commentators also point out that it will most likely not be applied in practice to land in Warsaw, as most Warsaw land is subject to claims by former owners or their heirs, which pursuant to Art. 34 of the Real Estate Management Act precludes its sale. The act is likely to apply to land in regional cities, especially where the replacement value per square metre of residential units or buildings is close to the average conversion index referred to in the Housing for Land Act.

Furthermore, the explanatory memorandum to the bill indicates that it is intended to counteract the “ghettoisation” of cities through mixing of the population from different social strata. Therefore, the commune may require the developer to include commune-owned and developer-owned premises in the same building.

This will generate another problem on the developer’s side: how to promote the housing project? Should potential buyers be informed that communal units will be located in the same building? If the developer discloses this, it may affect the sales performance of private units in the development. If it does not mention it, it could face not only reputational damage, but also claims from the buyers for defects in the property.

A sound concept, but the details should be refined

To sum up, the objectives outlined by the proponents of the Housing for Land Act should be regarded as appropriate and desirable. The act provides an opportunity to release significant land resources for residential development, at a time when there is a clear housing shortage. It also provides an opportunity to revitalise sites that have already been developed but have fallen into neglect, for which there is no redevelopment concept or project funds.

Nevertheless, the act raises many questions that are hard to answer today. One can spot numerous teething troubles that should be eliminated as soon as possible. Otherwise, the regulation will become a dead letter and of no practical use.

Michał Gliński, attorney-at-law, Marta Kacprowska, attorney-at-law, Real Estate practice, Wardyński & Partners