Liability of public authorities in the real estate development process

The real estate development business relies on decisions issued by administrative authorities for architectural and construction matters. The development process follows a number of successive phases, and only after positive completion of one phase can the process move on to the next phase.

If there is no zoning plan in force for a given site, commencement of the construction process requires a decision on construction conditions to be issued by the commune authorities, as well as a building permit issued by the head of the county (starosta). If there is a zoning plan in force, a building permit will suffice. But obtaining a building permit may require the investor to first obtain a number of other permits, approvals and opinions from other authorities. Completion of construction and commencement of occupancy of the building in turn requires notification of completion of construction or obtaining an occupancy permit.

The role of the architectural and construction administration and construction supervision inspectors is to oversee the construction process and ensure that the process is conducted in compliance with legal regulations. Administrative authorities have legal instruments at their disposal enabling them to fulfil these tasks, such as the possibility of issuing an order to halt construction work, cure irregularities in the structure, or dismantle the structure.

Carrying out the construction process obviously requires the investor to make significant financial outlays, conclude a number of agreements, and incur obligations. The costs include acquisition of the site, geodetic and architectural services, construction materials and equipment, labour and security. Before beginning a project, the investor will prepare a business plan including the timeframe for the project, the costs, the projected profit, and the sources of financing. The business plan is also the basis for raising financing, for example in the form of a bank loan.

Defective functioning of the architectural and construction administration and improper exercise of the instruments at its disposal can directly impact the development process, interrupting or even ending construction against the investor’s will—causing the investor to suffer a loss.

Wrongful acts or omissions by public authorities in the development process may involve overlengthy conduct of administrative proceedings, unjustified refusal to issue a decision on construction conditions or a building permit, or issuance of defective decisions which are subsequently vacated, potentially even leading to an order to tear down the building.

Errors by architectural and construction administrative authorities are not isolated incidents, as demonstrated by the findings of a report by the Supreme Audit Office of 9 March 2016 from its audit of issuance of building permits and occupancy permits for multifamily residential construction and related infrastructure (available at the website of the Supreme Audit Office). The report found a number of violations in the actions of administrative bodies, such as errors in conducting procedures, reaching differing results in similar cases, and difficulties in interpreting provisions of construction law.

The injury to the investor can take various forms, depending on the phase at which the injury occurs, the current market conditions, and the factual and financial situation in which the investor ultimately finds itself. Under the case law from the courts, injury is understood to mean the difference between the actual asset position of the injured party and what its asset position would have been if the event causing the injury had not occurred. Under Civil Code Art. 361, injury may include both immediate losses (damnum emergens) and the benefits which the investor failed to obtain (lucrum cessans).

The injury may include additional costs incurred by the investor connected with the need to interrupt the project (such as the costs of securing the building site, costs of failure to comply with obligations to subcontractors or suppliers of construction materials, or costs connected with redressing the loss to buyers of units for failure to make timely delivery of the structure for occupancy), as well as the reduced profit from the project compared to the hypothetical profit that the investor would have achieved if the administrative authorities had acted properly and the project could be commercialised earlier. The injury may also include additional costs the investor had to incur in order to service its financing.

The amount of the investor’s injury is also inextricably tied to the changing market situation and property prices. An injury will arise if property prices were higher at the time when the sale hypothetically could have been made than at the time when the delayed project could actually be sold. The difference in price will be an element of the loss.

Depending on the nature of the unlawful actions by the administrative authorities, claims for damages by the investor in a construction project may be based on Civil Code Art. 417, or Art. 4171 §2 or §3.

The liability of the public authority in the instances described above is based more specifically on Art. 4171 §2 or §3 of the Civil Code because of issuance of a defective final administrative decision or failure to issue the decision. But this requires obtaining a preliminary finding (prejudykat) in a separate proceeding holding that the final decision was issued in violation of law or the decision was not issued when there was a legal obligation to issue it. Such a preliminary finding could be a judgment of the administrative court issued under Art. 145 or 145a of the Law on Procedure before the Administrative Courts, or for example a decision under Art. 156 of the Administrative Procedure Code confirming the invalidity of another administrative decision which is the grounds for the liability of the public authority. A ruling by the administrative court finding delay in the administrative proceeding could also serve as a preliminary finding.

If the investor obtains in the relevant proceeding, for example, a ruling setting aside an erroneous order to halt construction, the investor may seek redress of the loss caused by the actual stoppage on the construction site. But it should be borne in mind that merely obtaining a preliminary finding does not automatically result in a finding of liability on the part of the public authority. It is also necessary to prove the other conditions for liability, such as injury and a causal connection between the injury and the wrongful act or omission of the public authority.

The case law from the Supreme Court of Poland indicates, however, that Civil Code Art. 417 can be the basis for liability only with respect to non-final administrative decisions. In the event of pursuing redress of injury under this procedure, it is necessary to demonstrate all of the conditions for liability, that is, also to prove that the act or omission by the public authority was unlawful.

Judicial proceedings seeking damages for wrongful actions by public administrative authorities during the real estate development process are quite complicated, as the plaintiff must prove a number of hypothetical circumstances that would have existed if the authorities had acted properly. The plaintiff must demonstrate that it had sufficient funds to carry out the project, it was highly likely to have to completed construction on schedule, and it would have found buyers willing to pay the expected price. The proceedings require participation by court-appointed experts in various specialisations, such as valuation of real estate, architecture, urban planning, construction, accounting, and corporate finance.

Despite the difficulties presented by pursing claims for damages related to construction projects, such actions can not only enable the investor to recoup its losses, but can also serve as a valuable lesson for the public administration. The threat of heavy damages can encourage administrative bodies to implement remedial measures within their own organisations to eliminate improprieties in the future.

Leszek Zatyka, Reprivatisation Practice, Wardyński & Partners