To snare a PUMa

The current boom in residential real estate is leading local developers to accept greater risks in buying land not covered by either local master plans or valid outline planning decisions. Property lawyers have a handful of mechanisms available to protect developers in such situations

The growing demand for apartments in Warsaw and other metropolitan areas, coupled with a limited supply of attractive properties covered by valid local master plans, is causing an increase in the tendency among developers to purchase land in advance of acquiring the necessary outline planning decision (WZiZT). It is not only important for the developer to confirm whether it is legally possible to locate a residential development on a given lot, but also, and even more importantly, to determine the total usable area (PUM) of such a development. The PUM sets the price a developer is willing to pay for a plot of land, together with the project\\\'s potential profitability.
When a queue of interested investors forms to purchase a desired site, a developer may not have the luxury of waiting for the issuance of the required WZiZT prior to making the commitment to purchase. In this situation the issue then arises of how to link the price paid for the property to the amount of PUM, a figure that will not be determined until sometime after the actual purchase by the developer.

Warranty will not suffice
If a developer is prepared to accept the risk and to proceed with purchase of the plot based upon the belief that eventually the approved PUM for a residential project will be \\\'x\\\' as represented by the seller in the sale agreement, then the developer\\\'s interest will need to be somehow secured in the event of the WZiZT decision - when issued following the purchase - defining the amount of PUM at an amount significantly lower than anticipated. It may seem at first glance that in such a situation the developer, based upon statutory warranty provisions, would be entitled to demand a reduction in the price due to the apparent \\\'defect\\\' in the subject of the sale agreement. Unfortunately, however, upon further legal analysis, a statutory warranty in this case would be meaningless due to the fact that the civil code does not recognize such a defect (the inability to develop real estate in a specific manner).
Such a statutory warranty would be equally ineffective in the case of the developer wishing to pull out of the sale, on the basis that he or she had entered into the sale agreement after believing the false assurances of the seller that the planned development could be realized. The first doubt is whether such a misapprehension is sufficient to annul the sale agreement. The second doubt relates to the fact that even if such misrepresentations are sufficient to \\\'reverse\\\' the legal consequences of the sale agreement, such a reversal would lead to the revocation of the entire agreement and not merely a reduction in the price.

Minus ratio
One possible solution available to developers in such situations concerns how the price is defined in the sale agreement, when such a definition is made contingent upon the final amount of PUM announced in the WZiZT decision. In practice, if the WZiZT decision made was for a reduced amount of PUM, the purchase price would then be reduced in proportion to the difference in the actual amount of PUM given in the WZiZT decision and the amount assumed in the original sale agreement. In order to secure the future adjustment of the price upon issuance of the WZiZT decision, a portion of the price should be set aside in escrow at the time of purchase, from which - depending on the details of the WZiZT decision - the appropriate amount would then be released to the bank account of the developer or seller.
Critics point out that a real estate sale agreement that does not contain a final fixed price (but only includes a formula to calculate such a price) merely leads to the conditional transfer of the legal title to the property. And further that such a conditional transfer is not valid. We disagree. In our opinion, the manner of determining the final price does not result in the conditional transfer of the legal title, but rather an extension of the obligations set out in the sale agreement.

PUM Guarantee
A second solution we propose is for the seller to provide a guarantee to the developer that the terms of the WZiZT decision to be issued in the future will include a minimum amount of PUM, in other words, to guarantee to the purchaser that the WZiZT decision will include all the terms necessary to realize the residential development as planned. In order for such a guarantee to be valid, the seller will need to include in the sale agreement an affirmative declaration that the WZiZT decision will contain the terms and conditions necessary to realize the planned development within the price defined. In case the terms and conditions included in the WZiZT decision differ from those anticipated in the sale agreement, the seller would then be required to pay a specified amount as a contractual penalty, proportional to the difference between the anticipated PUM and the actual amount of PUM set forth in the WZiZT decision. In order to ensure the payment of this contractual penalty, a portion of the price would need to be deposited into escrow, the release of which would only occur after  the WZiZT decision.
Similar to the first solution, this second solution is also vulnerable to attack. In this case the developer\\\'s claim for payment of a contractual penalty would be based upon the seller\\\'s obligation to obtain a decision having a minimal amount of legal content. In the event of the WZiZT decision not being the one expected, the sellers may be able to defend themselves against being forced to pay such contractual penalty, arguing that the satisfaction of such a conditions was impossible due to the nature of the obligation, leading to such an obligation being deemed to be null and void, including the obligation to pay the resulting contractual penalty. We believe, however, that assuming with certainty that the WZiZT will be issued permitting a residential development, but without any certainty as to its final terms and conditions, the defence of impossibility has no merit.

No Perfect Solution
In the event of a developer being prepared to purchase land for the purpose of developing a residential project prior to issuance of a WZiZT decision, the risk associated with such a purchase may be mitigated by the inclusion of specific safeguards in the sale agreement. Such solutions are effective but not fool proof, and will most likely lead to a more complex deal, including in terms of the tax consequences.

Konrad Marciniuk and Wojciech Langowski
The authors are lawyers at Miller Canfield