On April 20, 2021, the Sejm passed an amendment to the act on the protection of the rights of buyers of a flat or a single-family house and on the Real Estate Development Guarantee Fund, the draft of which was submitted by the President of the Office for the Protection of Competition and Consumers (“OPCC”). The OPCC again attempted to prepare a proposal to amend the provisions of the Real Estate Development Act after the amendment to the regulations presented by the Office in 2018 was widely criticized. This time, the draft provides for the adoption of a completely new law, which will repeal the existing one of 2011. The new regulations will introduce many changes, in particular the one concerning the establishment of a new obligatory instrument: the Real Estate Development Guarantee Fund (“REDGF”), the declared ratio legis of which is to protect buyers of new apartments in the event of a collapse of a real estate development company. The planned fund is intended to provide greater protection to buyers of apartments, eliminating the risk of losing funds deposited on residential escrow accounts. According to the authors of the draft, the current system of protection of funds paid in by a buyer of an apartment does not provide adequate security, because in the event of a real estate developer’s bankruptcy, an open residential escrow account, without additional security in the form of a bank or insurance guarantee, causes a risk of losing both, funds and the real estate by the buyer.
REDGF is to be financed by contributions paid by real estate developers, regardless of whether they maintain an open or closed residential escrow account. These payments will be made by real estate developers in each case within 7 days after they receive the payments to the residential escrow account made by a real estate’s buyer.
The provisions governing the contribution mechanism seem to be unfavorable to real estate developers not only because contributions will have to be deducted from each payment made by a buyer, but above all because they are not expected to be returned. This means that in the event of a withdrawal from a real estate development agreement, due to a fault of one of the parties, and subsequently conclusion of a new real estate development agreement regarding the same premises, the contribution will be transferred again. The exact amount of the percentage rate is not known yet, however it is known to be determined by an ordinance of the Minister for Construction, Spatial Development and Housing. According to the draft act, “the basis for calculating the amount of the contribution to the Fund will be the value of the payment made by the buyer to the residential escrow account, and the maximum percentage rate shall not exceed:
- 2% – in the case of an open residential escrow account, or;
- 0.2% – in the case of a closed residential escrow account”.
The new regulations also provide for protection of agreements related to commercial premises, if they are concluded together with an agreement for residential premises. This means that the provisions of the act will apply to garages, storage units and parking lots.
The amendment to the act also includes provisions that allow for a buyer’s refusal to accept a flat or a single-family house if they are affected by significant defects. Although the regulations do not define the concept of a significant defect, they allow for a withdrawal from the agreement if the buyer presents an opinion of a construction expert on the existence of such defect. In the opinion of the OPCC, the current procedure for the acceptance of premises does not provide buyers with a real possibility of influencing the time and quality of removing the reported defects.
Another significant change from the perspective of both, real estate developers and buyers is the clarification of certain rights and obligations of both parties to the real estate development agreement. In particular, the rules of making payments by a buyer to the residential escrow account (“REA”) as well as the provisions on the bank’s control powers and the rules of making payments from REA to a real estate developer’s account were precisely defined. It has been proposed, for instance, that the payment of funds from the escrow account to the real estate developer’s bank account could not take place before 30 days from conclusion of the real estate development agreement or the ownership transfer agreement. Moreover, the payment will be made only after a bank confirms that a given stage of works was completed, as well as that the developer is not in arrears with taxes and contributions to Social Insurance Fund, that the developer fulfilled financial obligations towards contractors and subcontractors, and that the payments of the due contribution to REDGF were made. Also, the new regulations oblige the developer to maintain an escrow account agreement until the conclusion of the agreement for the transfer of ownership to the buyer or sale of the last apartment, garage or storage unit, if they constitute commercial premises built as part of a single development investment.
According to the current wording of the draft, the new regulations will enter into force after 12 months of their publication in the Journal of Laws, except for the provisions regarding the establishment of the Real Estate Development Guarantee Fund, which are to come into force after 30 days from the date of publication.
As a consequence, a significant tightening of the legal regulations of the already strictly regulated area of economic activity, which is real estate development activity, is to take place. Undoubtedly, the proposed solutions will not be conducive to lowering operation costs of real estate development companies, what will be reflected in a further increase of prices and will not result in an escalation of the number of flats being built. In addition, it is worth pointing out that the new requirements may constitute a relatively greater burden for real estate developers operating on a smaller scale, which will worsen their competitive position in relation to larger real estate development companies, that will be able to spread the costs of managing new risks and performing new duties over a larger number of investments and apartments under construction. This phenomenon may accelerate concentration processes in the real estate development market, which in the end may not be necessarily good for consumers. The analysis of the justification of the proposed changes, finally, prompts us to ask the question, whether the actual scale of irregularities and problems that the new regulation aims to solve actually justifies the introduction of the proposed solutions, or it is rather an expression of the legislator’s general distrust to market mechanisms, even those that have been subject to correction resulting from the existing solutions protecting buyers of residential premises.
Sonia Dworak
Prawnik | Lawyer
T: +48 22 447 43 00
E: dworak@millercanfield.com
Disclaimer: This publication has been prepared for clients and professional associates of Miller Canfield, and is based on the facts and guidance available at the time of its release which may be subject to change. The purpose of the publication is to draw attention to the legal events indicated in it and should not be the sole basis for any decision regarding a particular course of action; nor should it be relied on as legal advice or regarded as a substitute for detailed advice in individual cases. The services of a competent professional adviser should be obtained in each instance so that the applicability of the relevant legislation or other legal development to the particular facts can be verified.