Today's alert is dedicated to the changes that the legislator plans to introduce in the near future, at the initiative of the Office of Competition and Consumer Protection (hereinafter " UOKiK "), to the provisions of the so-called Developer Act. These long-announced changes have a chance of being implemented soon, as the draft of the new Act on the Protection of the Rights of Purchasers of Residential Units or Single-Family Homes and on the Developer Guarantee Fund (hereinafter "Draft Developer Act") was adopted by the Council of Ministers on February 18, 2021, and can already be found on the Sejm's website (it was submitted to the Legislative Office on February 23, 2021; it does not yet have a draft number). Below, we highlight several important elements that are to be introduced.
Generally, the new Development Act will enter into force 12 months after its publication in the Journal of Laws. One exception is the establishment of the Developer Guarantee Fund, whose provisions are to enter into force 30 days after its publication.
Developer Guarantee Fund
The establishment of a Developer Guarantee Fund, operated by the Insurance Guarantee Fund, seems inevitable. The aim of this change is to increase the level of security and protection for buyers of apartments and single-family homes. According to the Office of Competition and Consumer Protection (UOKiK), the current system for protecting funds deposited by buyers of residential premises does not provide an adequate level of security. The open residential escrow account most often used by developers – without additional security in the form of an insurance or bank guarantee – does not (according to UOKiK) provide buyers with effective protection in the event of the developer's bankruptcy. The Developer Guarantee Fund would be tasked with securing individual clients' payments in the event of bankruptcy by the developer or the bank maintaining the residential escrow account. It is worth remembering that the Act of 28 February 2003 – Bankruptcy Law – also contains additional instruments to protect buyers in such cases.
Pursuant to Article 6, Sections 1 and 2 of the draft Development Act, developers will be required to provide buyers with one of two payment protection measures: an open housing escrow account or a closed housing escrow account. At the same time, however, regardless of the type of housing escrow account chosen, developers will be required to make timely, non-refundable contributions to the Developer Guarantee Fund in an amount calculated according to the chosen protection measure.
For an open escrow account, the maximum contribution is to be 2% of the deposit value, while for a closed escrow account, it is to be 0.2%. According to the draft development act, the actual rate will be determined by regulation, taking into account the differentiation of the rate depending on the type of residential escrow account, the need to ensure adequate protection of buyers' deposits, and the financial needs of the Fund related to the implementation of the tasks specified in the act. This statutory delegation to the minister is intended to ensure flexibility and the ability to appropriately respond to changing market conditions. However, in the current version of the bill, the contribution is to be fixed and determined on the date of commencement of sales.
Information prospectus
The draft Development Act also stipulates that the developer will be obligated to provide an information prospectus to any person interested in entering into an agreement . Currently, Article 21, Section 1 of the Development Act stipulates that the developer shall only provide the buyer with an information prospectus upon request of the interested party. However, under the proposed amendment to the regulations, providing the buyer with the information prospectus will be the investor's obligation. This means that the prospectus, along with any attachments, will have to be provided before the reservation agreement is concluded.
Reservation agreement
The proposed new development act also aims to regulate the rules for concluding reservation agreements. The current regulations lack such regulations, and the draft contains an entire Chapter 5 devoted to this institution. A reservation agreement would be concluded in writing, otherwise being null and void, for a fixed term, and would include the elements listed in Article 29, Section 2 of the draft development act. Furthermore, because such agreements often involve the collection of so-called reservation fees, the draft proposes detailed regulations for their payment and refund.
The draft development law stipulates that the reservation fee cannot exceed 1% of the price of a residential unit or single-family home specified in the prospectus. Furthermore, the developer will be required to immediately refund the reservation fee to the person making the reservation if the prospective buyer does not receive a positive credit decision or a commitment to grant a loan (regardless of the reason for such a negative decision).
Moreover, if the developer fails to fulfill its obligations under the reservation agreement, the reservation fee is to be refunded in double the amount . In practice, this can be considered a refund of the reservation fee and a contractual penalty in the amount of the reservation fee. However, the law does not specify what constitutes the developer's failure to fulfill its obligations.
Acceptance of a residential premises or single-family home
In its proposed draft development act, the Office of Competition and Consumer Protection (UOKiK) has also clarified the residential property acceptance procedure, specifying the consequences of the developer's failure to remedy defects within the timeframe set by the consumer . Draft Article 40, Section 3, stipulates that the buyer has the right not only to report defects in the residential property or single-family home, but also to refuse to accept the property if a significant defect is identified. In such a case, the acceptance report will record the refusal to accept the property due to a significant defect. In the event of such refusal, the parties agree on a new acceptance deadline, allowing the developer to remedy the defect before a repeat acceptance. Refusal to accept the property due to a significant defect during the repeat acceptance requires the buyer to submit an opinion from a construction expert (who does not have to be a registered court expert).
The draft of the new development act also introduces an expanded list of options for withdrawing from a development agreement. Pursuant to Article 42, Section 1, Points 10) and 11) of the aforementioned draft, the buyer will be able to withdraw from the development agreement, among other things, if the developer recognizes but fails to remedy a significant defect in the apartment or single-family home, or if an expert opinion indicates that such a significant defect exists. Such an opinion would be prepared by a private appraiser, and the developer could only challenge it in court (however, after the buyer withdraws and the developer is obligated to return the funds within 30 days of receiving the withdrawal notice). The assessment of what constitutes a significant defect will undoubtedly be problematic, and depending on the perspective, significant discrepancies may arise.
Moreover, if the developer fails to remedy the defects within the time period specified in the Act, the buyer will have the right to have them removed at the developer's expense. In this case, there will be no need, or even obligation, to obtain authorization for substitute performance from a court.
The scope of application of the new development act
Finally, according to the draft, the new development act is to apply not only to development agreements in the current meaning , i.e. in relation to agreements (i) for the construction of a building and the establishment of separate ownership of a residential premises and the transfer of ownership of such premises, but also in relation to already constructed or even separated premises , i.e. in relation to agreements (ii) for the establishment of separate ownership of a residential premises and the transfer of ownership of such premises and (ii) the transfer of ownership of a residential premises to the buyer (in each case together with the rights necessary to use such premises).
Furthermore, a development agreement would be applicable to sales agreements for occupied premises , in practice meaning parking spaces, storage units, or cubicles, if they are concluded in conjunction with a development agreement covering residential premises. Doubts arise regarding situations where, for example, a contract for the purchase of a parking space is concluded later – it seems that in such a case, it should be a standard preliminary agreement.
In summary, the draft of the new Development Act currently underway introduces numerous changes, intended to benefit buyers. Developers will also face additional obligations towards consumers, the validity of which may not always be based on the problems that arise in actual developer-buyer relationships.
We will keep you updated on further legislative developments related to the draft development act. We will also continue to analyze the draft and any potential amendments.
At the same time, we apologize to those of you who were waiting for today's alert, which was supposed to concern the land acquisition procedure under the "premises for land" law. We will return to this topic next week.
This alert is for informational purposes only and does not constitute legal advice.
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