The perspective of the buyer is central to the “Act of 20 May 2021 on the protection of the rights of buyers of apartments and single-family houses and on the Developer Guarantee Fund,” commonly referred to as the New Developer Act (henceforth NDA), which is coming into effect on 1 July. In this second part of our series on NDA we look at several areas that illustrate this, including: the issue of construction defects; the reservation agreement and the information prospectus; and the buyer’s right to recompense for a contractual breach or failure to perform by the developer. For the sake of terminological clarity, we should point out that the term “contract” is used in NDA to mean, not just the developer agreement proper (i.e., an agreement to build and transfer the title to a home that does not yet exist), but also an agreement to establish and transfer the title to a completed home, and an agreement simply to transfer the title to a home.

I. Handover of premises: presumption of existence of defects reported by buyer, “material defects”, and consequences of defects for buyer’s legal position

During the official handover of premises, construction defects may be detected, which the buyer is entitled to point out in the handover protocol. NDA gives the developer 14 days to issue a statement acknowledging or refusing to acknowledge the reported defects. In case of no reaction from the developer, the presumption is in favour of the buyer, i.e. that the developer acknowledges the reported defects. Acknowledged defects must be cured by the developer within 30 days of the signing of the handover protocol. If, despite applying due diligence, the developer is unable to cure a defect within that timeframe, they must indicate another deadline, along with a justification for the delay. This additional deadline should not cause too much inconvenience for the buyer. If the developer fails to indicate an additional deadline, or if they fail to cure the defect within that time, the buyer sets their own deadline for the developer to cure the defect, which if not met entitles the buyer to cure the defect at the developer’s expense, an option that did not exist before.

Where the defect in question is a material one, the same procedure as above applies, except that failure on the part of the developer to cure the defect on time entitles the buyer to withdraw from the contract. However, if the buyer refuses to accept handover on the grounds of a material defect for a second time, deciding to withdraw from the contract, they must produce an expert opinion stating that the defect is a material one for their withdrawal to be effective. They have to request such an opinion within a month of the refusal. The developer will be charged for the costs of an expert opinion that concludes that the defect is a material one.

Importantly, the buyer retains the right to have a defect cured (in the case of “ordinary” or non-material defects) or to withdraw from the contract (in the case of material defects) even after the signing of the handover protocol, if the defect is detected after handover, but before the conclusion of an agreement transferring the title. The distinction between material and non-material defects thus remains crucial. However, it is not defined in NDA.

It should also be noted that the buyer cannot be required to pay any fee for withdrawing from the contract on these grounds. The buyer bears no costs of the withdrawal, and the contract is deemed unmade. The developer has to return any escrow funds deposited by the buyer within 30 days of receiving notice of withdrawal from the contract.

II.  Reservation agreement and information prospectus

A reservation agreement (henceforth Reservation) is an optional agreement that can be concluded between a property developer or another entrepreneur[1] (henceforth Seller) and a person interested in buying a residential property that Seller has on offer (henceforth Reserving Party). Reservation obliges Seller to temporarily remove the property in question from its sales offer. It is concluded in writing for a definite period. Its purpose is to allow Reserving Party time e.g. to obtain financing for the purchase. NDA lays down minimum requirements regarding the contents of Reservation. Thus, Reservation has to specify the location of the property, its area and layout; the price of the property; or the period for which the property is to be removed from the sales offer, among other information. NDA also permits Seller to charge a reservation fee, capped at 1% of the property’s price, which is counted towards the purchase price. Seller has to immediately return the reservation fee in case e.g. Reserving Party fails to obtain financing.

NDA also lays down requirements regarding the contents of the information prospectus that the developer has to provide as an integral part of both the contract and Reservation. An appendix to NDA contains a model form of the prospectus. The prospectus has to provide detailed information about the legal and financial situation of the developer and about the housing project, including the property in question. The developer also is required to inform the buyer about any changes in their legal and financial situation. What is not clear, however, is whether this obligation also applies to sellers other than developers, e.g. flippers. We will examine this issue in the third part of our series.

III. Buyer’s claim for recompense

An intent of NDA is to prevent a gross disparity between the level of financial redress that can be claimed by the developer on the one hand and by the home buyer on the other hand, for a breach of contract or failure to perform by the other party, i.e. disparity between the penalty interest to which the developer is entitled on overdue payments by the buyer, and the damages to which the buyer is entitled, e.g. for delayed handover of the property by the developer. To this end, NDA stipulates, in Article 39, that where the contract specifies the penalty interest that the developer can claim against the buyer and the damages that the buyer can claim against the developer, the penalty interest may not be higher than the damages; and that where the contract does not contain such provisions, the developer is obliged to pay the buyer so-called recompense for a breach of contract or failure to perform. The exact amount of the recompense is not given, however, nor is any transparent formula provided for its calculation. NDA says merely that the recompense is equal to the statutory penalty interest on the outstanding amount from the buyer. This raises interpretive issues. What is the outstanding amount from the buyer? Is it the amount that the developer would have received, in accordance with the project’s timetable, had the project been completed? If so, what about projects that are already finished? And what about improper performance, as opposed to non-performance? The recompense should be proportionate to the breach. Can the parties agree on a clause in the contract that ensures such proportionality, e.g. in the form of a tariff of recompense?

We have now looked at the developer’s perspective and the buyer’s perspective. In the third and last part of our series, we will focus on what NDA means for banks, notably on the new powers and obligations that NDA imposes on banks, and the relationship between the Bank Guarantee Fund and the Developer Guarantee Fund. We will also present final conclusions.

By Jan Akimenkow, trainee attorney-at-law

Originally published in PMR Construction Insight: Poland, No. 5 (254), May 2022

[1] Cf. Article 4 for NDA’s definition of the entrepreneur.

Almost exactly a year ago, on 20 May 2021, the Sejm passed legislation commonly referred to as the New Developer Act (henceforth NDA). Formally titled the “Act of 20 May 2021 on the protection of the rights of buyers of apartments and single-family houses and on the Developer Guarantee Fund,” the stated objectives of NDA include ensuring more effective protection of home buyers, improving the security of legal transactions, and increasing the level of acceptance of regulations among business. NDA is coming into force on 1 July 2022. This article is the first of a three-part series on NDA. I begin by looking at the following: the Developer Guarantee Fund; new information requirements for developers; the scope of NDA (the entities and matters it applies to); and the relationship between NDA and its predecessor (or why “the old developer act” will not become a thing of the past just yet).

Developer Guarantee Fund

The Developer Guarantee Fund (henceforth the Fund) is a dedicated sub-account of the Insurance Guarantee Fund (UFG). The Fund’s money can come from several sources, including mandatory contributions paid by developers, money recovered from bankrupt developers’ estates, or loans obtained by UFG for the benefit of the Fund. Importantly, in the event of a funding shortfall, UFG can provide repayable financing to the Fund, worth up to 5% of UFG’s deposits and to be repaid in up to a year. The arrangement is not new in Polish law[1].

The Fund will guarantee the repayment of money paid by home buyers into open escrow accounts (henceforth ORP) in connection with the execution of developer agreements (or other types of agreements enumerated in NDA) in the event the developer goes bankrupt, or fails to repay a buyer who legitimately withdraws from their agreement[2], or in the event the developer’s judicial receiver or administrator withdraws from the agreement as part of an ongoing bankruptcy or restructuring proceeding.

The intent of NDA is to offer home buyers who pay earnest money into ORP the same level of protection as that enjoyed by those who pay money into closed escrow accounts (henceforth ZRP). The difference between ZRP and ORP is that, whereas money from ZRP is released to the developer only after the transfer of ownership (i.e. after the home sale contract is concluded), money from ORP is released in tranches as the project progresses, in line with the terms of the developer agreement. This allows developers to use the money from ORP to help fund project costs. But it also means that if the developer runs into problems and fails to complete the project, the buyer may lose the money paid into ORP.

Furthermore, in contrast to bank deposits, the Fund will guarantee the repayment of 100% of the escrow account deposits. Importantly, under NDA, the developer is required to maintain ORP or ZRP for every project until the last home is sold.

Buyers’ recourse claims against the bankrupt developer will transfer automatically to the Fund the moment the Fund repays them[3].

The Fund will thus protect home buyers when their developer runs into problems. But it will also protect them when the bank that manages their ORP or ZRP goes bankrupt, an issue that we will discuss in the third and last part of our series.

The mandatory contributions payable by developers into the Fund will be a percentage of the money paid by buyers into ORP or ZRP. NDA does not set the exact percentage, leaving it to be decided by the competent minister in a regulation. The issue has generated considerable controversy[4].

Without wishing to enter into that debate, it is worth remembering that security has its costs. Offering home buyers’ more protection than ordinary bank deposit holders cannot but affect home prices.

Information requirements

NDA imposes new information requirements on developers. Apart from the requirement to prepare an information prospectus about each project and to provide a copy of it to the buyer – which we will discuss in greater detail in the second part of our series – NDA also requires the developer to show to the prospective buyer, upon request, the occupancy permit, the certificate of independence of a residential unit or the act of establishment of separate ownership of a residential unit, depending on what kind of agreement the buyer is about to sign. It also requires the developer to show to the buyer the bank (or other mortgage lender)’s consent for the residential unit to be entered without encumbrance into the land and mortgage register (or a document in which the bank or lender undertakes to give such a consent)[5].

Scope of NDA

NDA applies to transactions between home buyers (individuals) and developers, but also any other companies that sell residential units (special purpose vehicles, “house flippers,” etc).

NDA applies both to developer agreements – i.e., agreements to build and transfer the ownership of a home that does not yet exist – and to sales of existing homes. Among types of agreement it applies to, other than the developer agreement, are e.g. “agreement establishing separate ownership of a residential unit and transferring its ownership and occupancy rights”; or “agreement transferring the ownership and occupancy rights to a residential unit”.

NDA’s scope also extends to garages and storage rooms sold together with homes (but not to commercial units of this kind).

Relationship between NDA and its predecessor

NDA is coming into force on 1 July 2022. However, some of its provisions, notably those establishing the Fund, already took effect on 31 July 2021. At the same time, NDA’s transitional arrangements specify matters to which provisions of the “old developer act” of 16 September 2011, which NDA replaces, will be applicable, albeit together with selected provisions of NDA (e.g. those pertaining to the buyer’s right to withdraw from the agreement).

Namely, the old developer act will apply for two years to projects that were put on sale, and in which at least one developer agreement was concluded, before 1 July 2022 (Article 76 paragraph 1).

But paragraph 2 of Article 76 complicates matters considerably. It says that provisions of the old developer act will be applicable to developer agreements signed between 1 July 2022 and 1 July 2024 as long as ownership transfer does not occur within that period (in other words, the home remains under construction). This appears completely at odds with NDA’s explicit intent, and defies rational explanation. It means that in many cases, NDA will remain dead in letter and spirit – with buyers receiving much weaker protection – until as far into the future as 1 July 2024.

By Jan Akimenkow, trainee attorney-at-law

Originally published in PMR Construction Insight: Poland, No. 5 (254), May 2022

[1] For a discussion cf. Ratajszczak A., Upadłość dewelopera a Deweloperski Fundusz Gwarancyjny, LeX updated commentary, 2021.

[2] Cf. Article 43 of NDA, which lays down a fairly long list of situations in which the buyer is entitled to withdraw from the agreement.

[3] Ibid.

[4] According to the Polish Association of Developers (PZD) – reads an article on the Muratorplus.pl website – a contribution to the Developer Gaurantee Fund set at up to 0.3% would be commensurate with the value of the market for developer-built homes in Poland and sufficient to ensure an appropriate level of protection of buyers. The amount proposed in the draft law [i.e., 1% – J.A.] is considerably too high and divorced from market reality, and would very likely cause an increase in home prices, with developers passing its cost on to buyers. It could also push up total housing project costs to prohibitively high levels for smaller developers.

[5] Cf. Articles 20 – 28 of NDA, which lay down the information requirements and list all the required documents.