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Real estate and construction

New residential investments act will make life harder for developers

By Grzegorz Witczak, advocate, director of the Commercial and Real Property Law Department at TGC Corporate Lawyers
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After less than a decade of existence of the act governing the rules of implementation of residential investments, popularly known as the Developers Act, the Polish lawmakers decided to change the regulations in force and passed a new law in this regard. Discussions and works on the new act have continued for a couple of years with an aim to improve legal protection of buyers of residential units and single-family houses.

Finally, on 20 May 2021, the Polish parliament passed the Act on the Protection of Rights of Buyers of Residential Units and Single-Family Houses and the Developers Guarantee Fund, known as the new Developers Act. It will enter into force on 1 July 2022 and introduce far-reaching changes in several areas, which we will discuss below.

Broader application of the new regulations

Firstly, the new regulations will cover a much wider scope of cases as the drawbacks of limited application of the current law have been widely discussed. Some have claimed that this resulted from a misinterpretation of the existing regulations. Nevertheless, the existing regulations were generally applied only to investments in progress (that is, until the investor obtained an occupancy permit). After a formal and legal completion of a residential investment, it was considered there were no grounds to apply the provisions of the existing Developers Act. This translated into the rights of buyers that were not secured to the extent required by this act.

Also, the provisions of the Developers Act have not applied to premises other than residential units, in particular garages, storage rooms, etc. Under the new regulations such premises should also be sold under the Developers Act, and not on the basis of a preliminary civil law sale agreement or ordinary sale agreement as before. The consequence of this state of affairs will be that the money paid by the buyers on account of the price will also have to be deposited on escrow accounts, and developers will pay contribution on these contracts to the Developers Guarantee Fund.

In the case of reconstruction, or repurposing, such as factory buildings, warehouses, hotels being converted to residential use, the current regulations did not apply; this will change under the new Developers Act.

Some of the new regulations will also apply to residential units bought from business entities other than a developer. The regulation in this respect is quite broad. After the new regulations come into force, whenever the seller of a residential unit is a business entity which bought it directly from the developer (even if it used the premises for its own business purposes, for example as an office) some of the obligations resulting from the new regulations will have to be fulfilled.

There will be no obligation to apply the provisions of the new Developers Act to the sale of commercial premises built as part of a development project. The sale of this type of premises will be carried out under the general principles of civil law.

Developers Guarantee Fund

The greatest number of disputes in the developers’ community were caused by the proposal to create a Developers Guarantee Fund, financed mainly from developers’ contributions. The fund is to operate similarly to that of tour operators and to secure the return of funds to buyers, in particular when a developer (or a bank operating an escrow account) enters bankruptcy. Developers argued that this, on the one hand, would lead to bankruptcy of smaller developers and, thereby, to a distortion of competition in the market, and, on the other hand, to an increase in prices of flats. These arguments are not entirely unfounded, especially considering the fact that in recent times developers and banks have rarely entered bankruptcy.

Nevertheless, regardless of the severe criticism of this proposal, the Polish lawmakers decided to implement these proposals and create the Developers Guarantee Fund.

The amount of contribution that a developer will have to pay will depend on the type of escrow account it uses for a given development project. In the case of open accounts, the contribution may not exceed 1% of the unit price, and in the case of restricted (closed) accounts – 0.1%. The final amounts of contribution will be determined by way of regulation, but the difference in these values shows a clear tendency to encourage developers to use a more restrictive type of escrow account, one from which funds are released to developer only once – when title to the unit has been transferred to the buyer.

Legitimising the reservation agreement

In accordance with the practice established under the current Developers Act, before concluding a developer agreement, a person interested in buying a residential unit would usually sign a reservation agreement and paid a part of the price as reservation fee. This was to take the apartment from offer for the time necessary to prepare a developer agreement for signature, obtain an individual escrow account number for the buyer, or prepare a prospectus. This time was also used by the buyer to obtain a positive credit decision.

Having noticed such a practice, the lawmakers decided to introduce into the new Developers Act provisions governing the reservation agreement, which define the requirements that such agreement should meet. In particular, the reservation agreement must be in writing, otherwise null and void, it must specify the area, location and layout of the rooms in the unit. Importantly, the amount of the reservation fee required by developers, which often reached 10% of the unit price, will be reduced. After the amendments come into force, the fee may not be higher than 1% of the unit price specified in the prospectus. Moreover, the developer has been explicitly obliged to transfer this amount to a housing escrow account within seven days from the conclusion of the developer agreement, which until now was not required and allowed the developer to freely dispose of this amount.
Other provisions improving the protection of buyers were those that specify cases when the reservation fee must be returned. For example, such an obligation rests with developer if the buyer fails to obtain a positive credit decision.

Amendments affecting the prospectus

Amendments to the provisions on the reservation agreement resulted in the changes relating to a prospectus for the property. More specifically, the prospectus for a given residential unit will have to be ready and delivered to the buyer always before signing the reservation agreement (and not only upon the buyer’s request as it is now).  

In addition, the prospectus should include information on other projects planned in the vicinity of 1 km of the residential development, resulting from the local planning permit, decision on the environmental conditions of the consent for the implementation of the project, or flood hazards or flood risk maps. Obtaining all the information required for the prospectus will require much more work from developers, as well as more time to gain access to all necessary information.

Detailed rules for accepting the premises and reporting defects

The practice of applying the current Developers Act with regard to the acceptance of the premises and reporting defects has developed highly extensive clauses in this respect, which due to a limited statutory regulation were not always favourable to buyers.

Having noticed this problem, the lawmakers extended the respective provisions and introduced new rights of buyers to the new Developers Act, such as the possibility for the buyer to remedy a defect at the developer's expense if the developer has failed to remedy defects within the set deadline. Developers should also be careful not to miss a 14-day deadline for responding to the reported defects, because silence will be deemed an acceptance of defects.

The concept of material defects and related rights was also introduced, in particular the right to refuse to accept the premises by the buyer if developer has not recognised the reported material defect, what must be included in the acceptance protocol. Unfortunately, the new act does not contain a definition of a material defect, creating a field for dispute between developers and buyers in this respect. Moreover, in the event of a material defect and the developer's failure to act, the buyer will be entitled to renounce the agreement. In addition, a failure to remove a material defect must be confirmed by the opinion of a construction expert, and its costs, if the defect is confirmed, will have to be borne by the developer.

Entry into force of new regulations

The new act comes into force on 1 July 2022. In principle, it will apply to new development projects. The number of amendments introduced makes it worthwhile to prepare in advance for the new regulations.

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