NEW DEVELOPER ACT

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.