It is only weeks now before the New Developer Act (NDA) comes into effect on 1 July. Having looked at what NDA means for developers and home buyers, in this third and final part of our series we focus on the role of banks, and finish with overall conclusions.
We begin, though, with a terminological point. When talking about housing projects, NDA distinguishes between a property development undertaking (“Undertaking”) and an investment task (“Task”). The former refers to the totality of activities, actual and legal, carried out by the developer aimed at transferring the title to a finished home to the buyer, in line with their agreement[1]. The latter refers to an individual building, or a group of buildings forming a whole in architectural-construction terms and which are to be completed at the same point in time. So Undertaking is a broader term than Task. A Task is part of an Undertaking. The developer can divide an Undertaking into two or more Tasks.
We now turn to the functions and powers that NDA entrusts to banks.
I. Operating escrow accounts
Developers contract with banks to operate escrow accounts (EA) for buyers relating to an Undertaking (or Task). These can be closed escrow accounts (CEA) or open escrow accounts (OEA). Banks are required to record, and to maintain records of, all payments going in and out of each buyer’s EA in fulfilment of their agreement with the developer, and to provide the buyer with detailed information about all incomings and outgoings in their account (dates, amounts) upon request. Developers will be required to maintain EA for an Undertaking or Task until the day the last buyer receives the title to their property. As for the release of EA funds to the developer, in the case of CEA the bank will release the funds upon receipt of a copy of the notarial deed transferring the title to the buyer. In the case of OEA, the bank will release subsequent instalments within 30 days of establishing that a given stage of the Undertaking or Task has been completed. The last instalment will be released upon receipt of a copy of the notarial deed transferring the title to the buyer. Such an arrangement incentivises developers to transfer titles to buyers as quickly as possible. On the other hand, it should be noted that delays in this respect often arise for reasons outside developers’ control.
II. Terminating escrow accounts
Importantly, under NDA, the bank – and only the bank – can terminate the EA contract between it and the developer, albeit “only for important reasons”. The maximum allowed notice period is 60 days, within which time the developer has to contract with another bank to operate EA for the Undertaking or Task in question. The bank has to inform buyers about the termination of the EA contract within 10 days of its termination, either in writing or on a “durable medium” such as a CD or pen drive. The funds from the terminated EA will be transferred to the new EA upon submission by the developer to the bank of a statement from the new bank stating that the account is an EA as defined by NDA.
III. Controlling powers over developers
Before releasing EA funds to the developer, NDA stipulates that the bank has to establish the actual status of the Undertaking (or Task). This entails the right to inspect the developer’s bank accounts and all and any documents pertaining to the Undertaking/Task (not just e.g. accounting or financial documents). Thus the bank will be required to make sure, for example, that the developer is not in arrears to the tax authorities or the Social Insurance Office (ZUS), that it has no outstanding and payable obligations to contractors and subcontractors, or that it has paid its mandatory contributions to the Developer Guarantee Fund. Any costs of these verification activities will be borne by the developer – yet another way in which NDA can push up the costs of housing projects and, consequently, home prices.
IV. Transferring developers’ contributions to the Developer Guarantee Fund
The transfer of developers’ mandatory contributions to the newly created Developer Guarantee Fund will take place via their EA banks. NDA lays down the sequence of operations very clearly: 1) the buyer deposits a portion of the purchase price into EA, in line with the schedule set out in their agreement with the developer; 2) the developer calculates their contribution to the Developer Guarantee Fund as a percentage of the amount deposited by the buyer, and pays it into the bank; 3) the bank verifies the accuracy of the developer’s contribution and transfers it to the Developer Guarantee Fund. Both the developer and the bank have to make their transfers within 7 days of receipt of the relevant payment (from the buyer and from the developer, respectively), and not later than on the day of the release of funds to the developer. Banks will open separate accounts through which developers’ contributions will be transferred. The Insurance Guarantee Fund (UFG), of which the Developer Guarantee Fund is part, will keep records of the Developer Guarantee Fund in an IT system. NDA specifies the scope of the data and information to be recorded by UFG, the entities required to provide the data and information, including banks, receivers and developers, and when and how the data and information should be provided.
V. When the EA bank goes bankrupt: the Bank Guarantee Fund
In the event that the bank that operates EA for an Undertaking or Task files for bankruptcy, the developer is required to sign an EA contract with another bank within 30 days, and to notify buyers about this fact within 10 days. Of course the developer also has to register the claims of buyers to recover their escrow money from the bank in its bankruptcy proceeding. The funds deposited by buyers will be repaid by the Bank Guarantee Fund (BFG) – up to a limit of €100,000. Recall that this is different from the situation where the developer goes bankrupt, in which case 100% of escrow deposits are protected via the Developer Guarantee Fund.
VI. NDA – Final conclusions
NDA is a reaction to perceived failings of the existing law, which has regulated the market for more than a decade; it also exemplifies growing procedurisation of social life.
NDA modifies – or tidies up – certain rules and arrangements that already exist, such as EA; and introduces completely new ones, such as the Developer Guarantee Fund or buyer’s recompense for breach of contract, the better to protect the interests of home buyers. But doubts remain over how effective it will be in practice. It lacks a definition of material defect, or a transparent formula for calculating buyer’s recompense. It imposes substantial extra costs on developers – contributions to the Developer Guarantee Fund, for example, have been set at a level seen as excessively high – yet it does not prohibit developers from passing these costs on to buyers.
The new controlling powers given to banks are very extensive, and could result in banks blocking the release of escrow funds to developers without proper justification (or in situations that are hard to judge), thus undermining developers’ financial standing during project execution. Furthermore, they will necessitate investments in new IT systems, and will push up the costs of personal data protection and other processes, forcing banks and developers to hire extra staff. And then there is the issue of NDA’s vague transitional arrangements: it can be viably argued that the existing law will continue to apply even after 2024.
Despite the above doubts and shortcomings, NDA represents a commendable attempt to strengthen the protection of home buyers, and to increase the security of transactions between home buyers and developers. It reflects the complexity of the real estate purchase process, with its multiplicity of involved parties, and illustrates the old maxim that security has its costs.
[1] Cf. part two of our series for what types of agreement are covered by NDA.