As announced last week, today we will discuss the new institution of the Developer Guarantee Fund, which is provided for in the Act of 20 May 2021 on the protection of the rights of purchasers of residential premises or single-family houses and the Developer Guarantee Fund ("New Developer Act").
First of all, we would like to inform you that the New Development Act has been signed by the President of the Republic of Poland, but it has not yet been published in the Journal of Laws.
Last week ( #55 ), we pointed out that the legislature retained two buyer protection measures: an open housing escrow account and a closed housing escrow account. However, it introduced the Developer Guarantee Fund ("DFG"), to which developers will be obligated to pay contributions, regardless of the account type chosen. Pursuant to Article 46 of the New Development Act, the DFG will constitute a separate account within the Insurance Guarantee Fund (also known as the "UFG").
Let us start with the source of funds for the DFG, because apart from the amounts from payments from developers, they will come from: (i) interest on funds accumulated in a separate bank account of the Insurance Guarantee Fund and income from deposits of DFG funds, (ii) claims related to the judge-commissioner’s failure to issue a decision regarding the continuation of a development project within 3 months from the date of declaration of bankruptcy, (iii) proceeds from satisfaction of claims from the bankruptcy estate in the event of the developer’s bankruptcy, (iv) funds obtained by the UFG from loans and credits to the DFG, (v) proceeds from satisfaction of claims from the bankruptcy estate in the event of the developer’s or bank’s bankruptcy, (vi) funds obtained from loans and credits to the DFG, and (vii) other funds.
Additionally, the legislature has secured the proper functioning of the Insurance Guarantee Fund (DFG), including the refund of buyers' payments made to the open housing escrow account through the possibility of repayable financing from the Insurance Guarantee Fund (UFG). In the event of a shortage of funds in the DFG, the Insurance Guarantee Fund may provide the DFG with repayable financing on terms corresponding to the interest rate on deposits received by the UFG during a given period, taking into account the security and liquidity of UFG funds. However, the amount of the above-mentioned repayable financing cannot exceed 5% of the value of the UFG statutory fund's deposits over a financing period of up to one year.
The basis for triggering the DFG guarantee, in the case of funds accumulating in an open residential escrow account pursuant to Article 48 of the New Development Act, will be, among others: (i) issuance by the judge-commissioner of a decision dismissing the trustee's application for consent to conduct the investment of a development project (ii) issuance or becoming final by the judge-commissioner of a decision granting consent to withdraw from further conduct of the development project, (iii) withdrawal from the development agreement by the buyer and failure of the buyer to receive a refund of the funds paid for the implementation of the agreement from the developer within 30 days from the date of receipt by the developer of the declaration of withdrawal (iv) failure by the judge-commissioner to issue a decision regarding the further conduct of the development project within 3 months from the date of declaration of bankruptcy.
DFG funds are also used to repay credits and loans along with interest and other costs of servicing credits and loans, cover costs related to making payments from DFG, as well as cover the costs of servicing DFG and expenses related to the acquisition of tangible and intangible assets that will be used in the implementation of DFG’s tasks.
It is important that the DFG payment guarantee covers all agreements included in the New Development Act concluded between the developer and the buyer, based on which the obligation to pay contributions to the housing escrow account arises .
Above all, however, the New Development Act specifies the basis for calculating the DFG contribution , which is, in the case of implementation of one of the agreements indicated in the Act, the value of the payment made by the buyer to the residential escrow account or, in the situation where the developer transfers a reservation fee under the concluded reservation agreement – the value of the payment made by the developer.
As stated in paragraph 2 of Article 49 of the New Development Act, the premium will be the product of the percentage rate (applicable on the date of commencement of the sale of residential premises or single-family houses as part of a given development project or investment task) and the value of the payment made by the buyer to the housing escrow account or the value of the payment made by the developer constituting the reservation fee .
The legislator also set the maximum percentage rate constituting the basis for calculating the DFG contribution, which cannot exceed :
a) 1% – in the case of an open trust account and
b) 0.1% – in the case of a closed trust account ,
the final percentage rate will be determined by way of a regulation of the minister responsible for construction, spatial planning and development and housing in consultation with the minister responsible for financial institutions, after consulting the Insurance Guarantee Fund and the President of the Office of Competition and Consumer Protection.
The developer's obligation to calculate and pay the DFG contribution arises on the date the purchaser makes the payment to the residential escrow account or, in the case of the developer's reservation fee, the developer . This payment must be made by the developer within 7 days of the date the aforementioned payments are made (by the purchaser or developer), but no later than before the funds are disbursed to the developer. The contribution is then paid by the Bank within the next 7 days from the date the developer makes the payment, but no later than before the funds are disbursed to the developer.
Importantly, the developer's contribution to the Development Fund is non-refundable . This means that if, for any reason, the development agreement or another agreement under the New Development Act is terminated and the same premises are covered by another agreement, the developer will be obligated to pay the contributions from scratch.
According to the "Assessment of the Impact of the Regulations Contained in the Government Draft Act on the Protection of the Rights of Purchasers of Residential Units or Single-Family Homes and on the Developer Guarantee Fund" prepared by the Sejm Chancellery's Office of Research, the drafters adopted two extreme scenarios regarding the entity that will ultimately bear the costs associated with developers' obligation to make contributions to the Developer Guarantee Fund: either transferring the entire cost to the consumer or bearing it themselves. According to the Office of Research, if developers transfer the costs of the Developer Guarantee Fund to consumers, the cost of completed units will increase, depending on the use of an open or closed residential escrow account, by 0.3%-0.6% (based on 2017 data). There will be no increase in apartment prices if developers retain the costs of contributions to the Developer Guarantee Fund. However, if developers assume these costs, the profitability of the investment will be reduced.
In our opinion, the introduction of mandatory contributions to the DFG will be one of the factors influencing the further increase in the prices of residential premises and single-family homes. It is important to consider that the regulation introduced by the legislature, intended to protect buyers against the potential bankruptcy of developers, may ultimately result in an increase in the purchase price.
The provisions of the Act introducing the institution of the Developer Guarantee Fund will come into force 30 days after the date of announcement of the New Developer Act.
However, the obligation to pay contributions will only arise with the entry into force of the New Development Act, and in the upcoming alert we will discuss its transitional provisions for you.
This week, we're also publishing our final thank-you notes to the co-creators of our series. We extend our heartfelt thanks to Patrycja Zalewska, Jakub Wierzejski, and Karolina Nałęcz, who, although no longer working with us, contributed greatly to the content of the articles presented.
