Proposal for the client

The necessity to regulate development activities by way of enactment confirms the lack of protection of rights of those who buy apartments or houses. In agreements on building of residential premises, the law does not favour the purchasers. It also does not protect them from the risk of bankruptcy of development companies or building societies.

Agreement full of data

The Bill on protection of the purchaser in development contracts refers to undertakings being implemented by developers and building societies, provided they build residential premises on the basis of separate premises ownership. The prepared Bill prescribes what kind of information regarding the investment should be included in the respective provisions of a development contract. As a result, not only the basic parameters of the project (among others information on the plot, where it is being realized, relevant features of the building), but also the date of title transfer of the premises to the purchaser, as well as the payment schedule would be guaranteed for the purchaser in the agreement. In the Bill, there is also a proposal for the purchaser to make payments exclusively to the escrow account defined in the contract, including basic processing information. If the contract was deficient, the purchaser could demand from the developer to complete it. However, the draft does not require preparing an annex but only providing the purchaser with missing contract data (otherwise the purchaser may withdraw from the contract).

Agreements only in writing

Furthermore, the Bill also sets forth that the developers - by the time of concluding the first development contract at the latest - would be obliged to prepare an information prospectus including basic information about the developer (form of organization, capital, management board, financial statement for the last accounting year) and on the project itself (location, planning scheme for the neighbouring plots, location and arrangement of apartments, finishing standard, schedule of works, financing plan, completion date and date of title transfer). In case of discrepancies between the prospectus and the agreement, the content of the prospectus would be binding upon the parties - if its provisions were more favorable for the purchaser. At present, most so-called development contracts are in writing, despite the fact that art. 9 of the act on ownership of premises stipulates a notarial form. As a result, the ability for the purchasers to make claims against developers is limited. Taking that practice into account, the Bill provides for development contracts to be written form, otherwise being considered null and void, as well as the necessity for the developer to enter the claims of the purchasers into the land and mortgage register.

Entrust with the trustee

According to the Bill, the purchasers' moneys shall be secured by depositing them in an escrow account. In that case, a developer shall be obliged to open a bank account before concluding the first development contract regarding a particular investment. A separate account would be kept for each project (should the latter consist of several buildings, each would have a separate account). The developer would not be able to allocate the funds deposited for constructing one building for the construction of others. The Bill provides for a closed or open account. The funds from the closed account would be released only once - upon the transfer of title regarding the premises to the purchaser. From the open account, moneys would be transferred to the developer's account in tranches, in accordance with the schedule of the undertaking. Supervision of the safety of the financial resources deposited by the purchasers is entrusted by the authors of the Bill to the bank which should release them only upon verifying that the investor is implementing the investment in compliance with the obligations undertaken. If the schedule would breach the Bill's regulations, then the bank would release the funds from the account only upon completion of the investment. Additionally, the Bill prohibits transferring moneys from the account before acquisition of ownership in the building plot by the developer, issuing the payment for the plot as well as obtaining the final building permit. Opening the escrow account is not necessary, should a developer be granted an unconditional, irrevocable bank guarantee payable on first demand. The other possibility for the developer is maintaining insurance enabling the reimbursement of the amounts paid by the purchasers, in particular, if the purchaser was entitled to claim reimbursement of the deposited resources under the insurance agreement between the developer and the insurer.

In case of bankruptcy

The authors of the Bill have also taken care of a possible bankruptcy of the bank. In such case, the developer would be obliged to conclude a fiduciary agreement with an another bank, to which the bankruptcy receiver would transfer the deposited funds. While, in case of the developer's bankruptcy, the moneys deposited in the account and the claims of the developer vis a vis the purchasers would be considered as separated estate, serving exclusively the purpose of satisfying the claims of the purchasers of the premises. That mechanism will protect both funds already deposited as well as future funds to be paid by the purchasers. According to the Bill, the bankruptcy receiver would be obliged to continue construction. The judge commissioner would be able to dismiss the bankruptcy receiver from such an obligation, should continuation of the undertaking not predict chances for completion.

Developer with a better image

The Bill creates a chance to limit concerns of potential clients to benefit from developers' offers. At the same time, it should influence an increased sense of security for the developers who obtain a guarantee of receiving payment upon the proper realization of the agreement. The accuracy of presumptions of the Bill's authors has already been confirmed by the developer market where first investments appear, realized with participation of escrow banks supervising the proper utilization of the purchasers' financial resources.

Lidia Dziurzyńska - Leipert

Paweł Kuglarz,

co-author of the Bill

The authors are lawyers

at Beiten Burkhardt Rastawicki law office