Sejm passes “Developers Act”

On 31 August 2011 the lower house of the Polish Parliament adopted the Act on Protection of the Rights of a Purchaser of a Residential Unit or Single-Family House, which is intended to improve the legal standing of customers of real estate developers.

Under the new rules, a preliminary agreement to buy a unit which is to be built by a real estate developer would always be made in the form of a notarial deed, and the buyer’s claims would have to be entered in the land and mortgage register. Then if the developer wanted to back out of the sale, the customer would be able to apply to the court for specific performance—an order conveying title to the property. The court order would take the place of the seller’s declaration of its intention to sell the property. There is no such option when a preliminary agreement is not made in notarial form, in which case the prospective buyer may only assert a claim for damages, and even then the claims are typically limited by a fairly modest liquidated damages clause in the agreement.

The bill would require builders to use escrow accounts, which would be either closed (in which the buyer’s payments would be released to the developer only upon completion) or open (in which payments would be released to the developer upon completion of each stage of construction). In the latter instance, the customers’ rights would have to be additionally secured by a bank guarantee or insurance policy that would enable buyers to get their money back in the event of the developer’s bankruptcy, or 60 days after completion of the project.

Under the new rules, no later than 7 days before the developer enters into a contract with the customer, the developer would be required to provide the customer with a prospectus, containing information about the property where the building will be constructed, its legal status and any encumbrances, as well as information about other projects planned within a radius of one kilometre. The prospectus must also disclose the developer’s legal and financial condition and the venture it is undertaking, as well as information concerning the specific apartment or house that will be covered by the contract (e.g. the surface area, the price per square metre, the location of the building, the number of floors, the construction technology, easements recorded against the property and the like).

In the event of the developer’s bankruptcy, the construction project will be carried forward by the bankruptcy trustee or judicial supervisor, who will receive funds necessary to complete the project (up to 80% of the necessary funds). After completion of construction, the trustee or supervisor would then transfer title to the unit (or the developed site in the case of a single-family house) to the developer’s customers, which would automatically remove the properties from the bankruptcy estate.

Lobbyists from the Polish Union of Real Estate Developers argue that the bill could eliminate small and medium-sized developers from the market, causing the market to be dominated by an oligopoly of major players. Experts claim that only large, strong developers, primarily those backed by foreign capital, will be able to meet the requirements to post bank guarantees and other security for buyers of residential units.

The bill is now being considered by the Senate. The Senate will probably adopt a revision requested by the government under which the developer itself would select the type of escrow account to be used in its dealings with customers: open, combined with a guarantee or insurance, or closed, i.e. without additional security for customers’ payments.

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