Today's article in the Tuesday Mornings for Construction series is devoted to further changes 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 Developers' Guarantee Fund ("New Developers' Act"), namely new obligations on the part of banks.
Let us recall that the previous regulations provided for four measures to protect buyers: (i) a closed housing escrow account, (ii) an open housing escrow account and an insurance guarantee, (iii) an open housing escrow account and a bank guarantee, and (iv) an open housing escrow account.
In accordance with the introduced changes, the legislator abolished the security in the form of a bank and insurance guarantee, leaving the existing one:
a) an open housing escrow account from which the bank gradually pays the developer the accumulated funds in proportion to the work carried out in accordance with the investment schedule, and
b) a closed housing escrow account from which the payment of the deposited funds to the developer takes place only after the rights specified in the New Development Act have been transferred to the buyer.
However, the provisions themselves have not changed regarding both the bank's exclusive right to terminate the agreement for maintaining an open or closed residential escrow account and the bank's obligation to pay to the buyer's account the funds accumulated in the escrow account maintained before the termination if the developer fails to submit such an instruction.
The principles for disbursing funds from an open escrow account are regulated in Article 16 of the New Development Act. First, a deadline is set for the bank to pay the developer, no earlier than 30 days from the date of conclusion of the development agreement or preliminary agreement under the Development Act regarding the commercial premises (or an interest therein), and after confirming completion of a given stage of the development project or investment task , an amount that is the product of the percentage of the costs of the given stage specified in the development project or investment task schedule and (i) the price of the residential unit or single-family home, or (ii) the price of the residential unit and commercial premises, or the single-family home and commercial premises (hereinafter referred to as the "product of the percentage of the costs of the last stage and the price of the premises").
After completing the last stage, the remaining funds deposited by the buyer into the open escrow account only after receiving a copy of the notarial deed of the agreement transferring to the buyer the rights arising from the agreement specified in the New Development Act, including the development agreement.
In the case of preliminary agreements under the Development Act concerning a flat or single-family home (we wrote about these contract categories in section #51 ), the bank also pays the developer the funds deposited into an open trust account by the buyer no earlier than 30 days from the date of the agreement transferring the rights to the flat/single-family home to the buyer , with the exception of the amount representing the above-mentioned percentage product of the costs of the final stage and the price of the flat/single-family home, which should be paid according to the schedule. In this case, the bank is also obligated to withhold payment of the amount due for the completion of the final stage until it receives a copy of the notarial deed transferring the rights under one of the aforementioned agreements .
The legislator , in addition to the bank's current obligation to inspect the completion of each investment stage before disbursing funds, has now clarified in Article 17 of the New Development Act the scope and subject of the inspection that the bank should conduct with respect to the developer and the completed stages or the entire development project . Consequently, the bank's inspection will concern the developer's legal title to the property on which the project is being conducted, whether it holds a building permit or has filed a construction notification with no objections from the authority, and the developer's financial situation , including whether restructuring or bankruptcy proceedings have been initiated against it, as well as whether the developer is not in arrears with taxes, social security and health insurance contributions , and has settled any outstanding and undisputed monetary obligations to contractors or subcontractors .
Another issue that the bank will be obliged to examine concerns the verification of the completion of the implementation stage specified in the schedule by a person appointed by the bank with appropriate construction qualifications, by checking (i) the construction manager’s entry in the construction log, (ii) documenting the actual progress of construction works at the level required for the controlled stage, (iii) obtaining a decision on the occupancy permit or submitting a notification of completion of construction – in the case of completion of construction works.
Before paying out the funds for the completion of the last stage of the project, the bank will additionally verify whether the developer has a decision on the occupancy permit or a notification of completion of construction to which the construction supervision authority has not raised any objections, or a certificate of independence of the premises.
The bank will be obligated to withhold funds if any of the elements subject to review are assessed negatively, including if restructuring or bankruptcy proceedings are initiated against the developer. Funds can be disbursed only after the identified irregularities are remedied. Undoubtedly, as was raised during the legislative process, the question of how the bank should verify the existence of restructuring or bankruptcy proceedings remains open. It seems that the developer should submit additional declarations in this regard stating that such proceedings are not ongoing, although Section 5 of Article 17 of the New Development Act does not explicitly mention this.
It's important to note that the New Development Act stipulates that, , a bank may grant itself broader authority to inspect the completion of each stage of a development project or investment project before disbursing funds . This could potentially lead banks to specify or introduce additional scopes of such inspections.
Finally, it's worth emphasizing that the costs of the inspections required by the New Development Act are borne entirely by the developer . It therefore appears that the total cost of maintaining escrow accounts and additional bank inspection services required by the New Development Act could increase significantly, which could also indirectly contribute to rising prices for apartments and single-family homes.
As for the status of the New Development Act, it has still not been signed by the President of the Republic of Poland and at this point we are unable to indicate the date of its publication, let alone its entry into force.
Next week we will discuss further changes introduced by the provisions of the Development Act, this time in terms of providing for the new institution of the Developer Guarantee Fund.
In today's alert, we'd like to thank the following individuals who have been working with us for a year on the substantive aspects of our alerts. We'd like to thank attorney Mateusz Brzęcki and intern Paweł Kopytowski for their time and sharing their knowledge.
