On 1 July 2022, the new developers act will enter into force, introducing far-reaching changes to secure the position of buyers of residential premises or single-family houses. The new regulations will replace the currently applicable law.
On 20 May 2021, the Sejm passed the Act on the Protection of Rights of Buyers of Residential Units and Single-Family Houses and the Developers Guarantee Fund, known as the new developers act. The new regulation means big changes to the real estate development sector. Below we present the most important of them.
Firstly, the new regulation will apply much more widely, as its provisions will not only apply to residential premises, as so far, but also to any other premises built as part of a given development project sold together with residential premises, such as garages or storage rooms. The new regulations require that such premises be also sold on the terms specified in the new developers act.
As a consequence, the documentation for this type of premises will be significantly more complicated and the buyers’ costs of acquisition will increase (as notary’s fees on developer agreement will be added). From the developer’s perspective, another negative effect will be the need for the buyer to pay the purchase price to an escrow account, and not directly to developer, as previously. In addition, developers will be required to pay a contribution to the Developers Guarantee Fund on such agreements.
Yet there will be no obligation to apply the provisions of the new developer agreement to the sale of commercial premises built as part of a development project, provided, however, that such sale will not be related to sale of residential unit. If such sale is an independent sale of commercial premises, it will proceed according to the general principles of civil law.
Moreover, the provisions of the new developers act will also apply to premises that are already occupied. So far, it has been widely considered that after obtaining an occupancy permit, the sale of the premises was not subject to the provisions of the developers act.
The obligation to apply the new act was also extended to the premises created as a result of alteration, and not only built from scratch, as now. Therefore, the new developers act will have to apply to adaptations of the existing buildings, such as hotels or post-factory buildings, as a result of which residential premises will be built.
A completely novelty is the introduction of an obligation to apply the new developers act also in a situation where a residential unit is to be bought from a business entity, even if it is not a developer. The regulation in this respect is quite broad and, consequently, from July 2022, in any case where the seller of a flat is a business entity that purchased it directly from developer, some of the obligations under the new developers act will apply. For example, when a business entity sells a residential unit used by it as an office.
Also regulations concerning reservation agreements were introduced to the new developers act. These provisions define the requirements that such agreement should meet, and in particular, that it must be in writing under pain of nullity, and it must specify the area, location and room layout of the premises.
From the buyer’s perspective, a very important change is the introduction of a reservation fee limit. Until now, a developer was able to freely determine the amount of reservation fee, which often reached 10% of the premises value. When the new regulations enter into force, a maximum reservation fee will be 1% of the premises price specified in the prospectus. At the same time, the developer will have additional obligation to transfer this amount to an escrow account within 7 days from concluding the developer agreement, what has not been expressly regulated so far.
Additionally, the act explicitly provides in which cases the reservation fee must be refunded. In order to secure the buyers’ interests, the law makers decided that the developer will have such obligation if the buyer does not obtain a positive credit decision.
These changes were made in response to the current practice of developers who conclude reservation agreements with people interested in purchasing residential premises, even before signing the developer agreement. This practice was developed on the basis of the currently applicable developers act, and the conclusion of this type of agreement was used to withdraw the premises from the offer. Its effectiveness was dependent on the payment to the developer of the reservation fee, which was then credited towards the price. It also gave buyers time to obtain a credit decision if they wanted to finance the purchase from a loan.
When introducing the provisions on the reservation agreement, the law makers also introduced changes to the provisions relating to prospectus. First, the date by which the prospectus will have to be drawn up has been postponed. If developer concludes reservation agreements with buyers, the prospectus will have to be presented to the buyer before concluding such an agreement.
Importantly, an absolute obligation to deliver the prospectus to the buyer was introduced before concluding the first agreement with the developer (i.e. a reservation agreement or a developer agreement if the reservation agreement is not provided for), resigning from the current regulation: delivering the prospectus only at the express request of the client.
At the same time, the scope of information that the prospectus must specify was extended. Namely, the prospectus must specify the planned investments within a radius of 1 km from the area covered by the development project.
Moreover, this information must have a specific basis and result, for example, from the already issued planning permits, decision on the environmental conditions, the consent for the implementation of the project, or flood hazards or flood risk maps. In consequence of these changes, developers will have to significantly increase the expenditures on obtaining and updating information about the planned investments, which will increase the overall costs of development projects.
The now binding developers act contained a minimum regulation relating to the rules for acceptance of premises and the procedure for reporting defects. As a consequence, the practice of using overly complex contractual clauses, not always favourable to buyers, has been in place.
Having noticed this problem, the lawmakers decided to change the existing state of affairs and extended the respective provisions on acceptance of premises and reporting defects. For example, new buyers’ rights were introduced, such as the possibility to remedy a defect at the developer’s expense if the developer has failed to remedy it within the set deadline as well as a fairly severe sanction for failure to respond to the reported defects within 14 days. In such a case, a delay will mean that all buyer’s claims are accepted as valid, and all defects indicated by the buyer will have to be removed.
The novelty is the introduction of a concept of a material defect and linking it with the buyer’s right to renew the acceptance of the premises in a situation where developer refuses to recognize the existence of such a defect. Unfortunately, the new act does not contain a definition of a material defect, what will surely result in numerous disputes between buyers and developers. Moreover, in the event of reporting a material defect and the developer’s inaction, the buyer will be entitled to withdraw from the agreement.
However, the most heated debate in the developers community, including the votes predicting a collapse of small and medium-sized developers due to increased operating costs, was provoked by the proposals to introduce the Developers Guarantee Fund. Eventually, it was created, and the new developers act includes regulations in this respect.
In principle, the Fund is to be financed from developers’ contributions and operate similarly to that of tour operators. Its objective is to secure the return of funds to buyers if a developer or a bank operating an escrow account enters bankruptcy.
Importantly, the amount of contribution that a developer will have to pay to the Fund has been significantly differentiated. It will depend on the type of escrow account selected for a given development project. In the case of open accounts, the contribution may not exceed 1% of the premises price, and in the case of closed accounts – only 0.1%.
The final amount of the contribution will be determined by regulation, but a tenfold difference in these values openly indicates that law makers want to encourage developers to use more secure, from the buyers’ perspective, closed escrow accounts, from which funds are paid to developers on a one-off basis, only once the ownership of the premises has been transferred to the buyer.
The new act will enter into force on 1 July 2022 and will apply to new development projects. The number of introduced amendments makes it worthwhile to adjust the existing procedures and documentation to the new regulations.
Director of the Commercial Law and Property Department, Advocate
TGC Corporate Lawyers
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