A long and difficult birth

The first draft of this kind of regulation in Poland was already prepared ten years ago by a team made up of myself and Professor Fryderyk Zoll of the Polish-German Centre of Banking Law at the Jagiellonian University in Kraków. Since 2003, further drafts have been prepared by the Foundation of Mortgage Credit. One by one, parliament wasted its opportunities and never got past the stage of inter-ministerial consultation. It was felt that there was no need to introduce such regulations as the market would regulate itself.
Decades ago a number of countries in Western Europe already understood the problem and introduced the legal regulations necessary to help minimise the risk for the purchaser of losing money. In 1954 France was the first to introduce such protective regulations. In the 70s the legal situation of the developer-customer relationship was regulated in Belgium and Germany, then in Austria, Spain and Luxembourg. There are various types of protection, such as acquisition of ownership of the premises when works are in progress, an escrow account combined with bank control over the developer, and the developer providing a bank guarantee. Some systems provide very restrictive solutions, e.g. in Sweden collecting money from customers before the end of the investment is prohibited.
Finally, after the judgement of the Constitutional Tribunal in August 2010, when a loophole in the legislation was pointed out, the work started to speed up. The Tribunal ruled that the lack of protection for purchasers of flats was due to the negligence of the legislator and pointed to the draft Act on the Foundation of Mortgage Credit as the right legislative direction to go in. The basic aim was to introduce the obligation to protect the purchaser's interest in the form of an escrow account or - alternatively - a bank guarantee or an insurance policy.

New standards
The purpose of the new regulations is to fill a gap in Polish law and introduce new standards of protection. This also includes introducing regulations concerning means of protection for the purchaser as well as drafting contracts to be concluded between developers and purchasers. Under the Act the developer is obliged to ensure at least one of the following means of protection for the purchaser: a closed residential escrow account, an open residential escrow account with a bank guarantee or insurance, or simply an open escrow account.
Before concluding the contract the developer is obliged to deliver an information prospectus to all interested parties. The new regulation describes in detail the requirements to be covered by the prospectus, including information about the developer, a financial report for the preceding year and information about the building project - the location and layout of the flats, completion standards, work schedule and financial plan.

Investment under control
The developer is obliged to enter into an escrow agreement (open or closed escrow account) with a bank for each investment. Such an agreement cannot be terminated during the term of the project. The developer may use monies deposited in such an account only for the purpose of the relevant project.
The developer is entitled to withdraw monies from the escrow account in accordance with the work schedule of the project. Prior to each payment the bank carries out a monitoring survey of the work schedule. In the event of a withdrawal from the contract, the bank is obliged to pay back the respective amounts to the purchaser.
In the case of a bank guarantee the purchaser's claims are secured by the bank providing the purchaser with the respective amount of funds, while if the developer uses insurance for protection the purchaser receives the funds from the payout.
Transfer of ownership is possible through obtaining a valid use permit and acceptance of the real property. The Act also regulates the right to withdraw from the developer contract and the right to disclose the purchaser's rights in the land and mortgage register maintained for the real property on which the investment should be placed.
In the case of the developer being declared insolvent, the monies held in the escrow account, the ownership of the real estate or perpetual usufruct and the liabilities of the developer towards the purchaser would constitute a separate insolvency estate and a receiver or trustee would be obliged to continue the developer's project, should the committee of purchasers decide so. The committee of purchasers consists of the buyers who concluded the contract with the developer.
A serious failing of the new regulation is the lack of protection in the case of bank insolvency. The monies deposited in the escrow accounts will not be secured by a guarantee of the Bank Guarantee Fund (EUR 100,000) as are other deposits in the case of bank insolvency. This is unjustified and unnecessary discrimination against home purchasers.
Originally the deputies resolved that developers would be required to ensure double protection, i.e. an escrow account and bank guarantee or insurance. However, this would lead to the bankruptcy or liquidation of most medium and small development companies that could not afford this kind of protection, and to a specific oligopoly of the market where just a few developers would remain. In the short run this would result in a significant increase in housing prices, even of up to 25-30 pct.

Permanent state of transition?
The only transitional provision in the Act excludes the obligation for developers to secure purchasers' claims (escrow accounts, guarantees) following the commencement of sales. The question arises, what does ?commencement of sale' mean? Some developers are convinced that all it requires is an announcement in the press or even on the internet that they have started selling, even at the stage where the project is still being planned, just to be released from the obligation to use an escrow account or other protection. Although one must remember the second part of the definition - the "specific developer project" as defined in Article 3 Point 6, i.e. the factual and legal steps necessary to begin construction and commissioning the facility for use and in particular the acquisition of rights to the real property and obtaining the required administrative permits.
This confirms that the announcement of the sale is not enough; the developer needs to prove that it has acquired the rights to the real estate and obtained a building permit. The aim the transitional provision is to ensure that once the developer starts the investment, it has already borne certain costs by purchasing the land, drafting the building project and planning the financing with the customers' money without an escrow account or a guarantee, and that it is able to finish the investment under those provisions. However, the developer whose only costs are the press announcement cannot be released from that obligation. It would certainly lead to absurd consequences that the buyer, despite the Act coming into force, would not be able to exercise the protection ensured for its funds for the next five to ten years.

Swift amendment
It is clear that the new legislation introduces new standards and is aimed at the sustainable development of the market. But to receive more benefits than damage it is necessary to amend the Act. Two ways are possible for achieving this. A "large amendment", i.e. vacatio legis by the end of 2012 and redrafting the Act, or "a small amendment" that would resolve the most important issues such as precise transitional provision, changes to the area of the flats and bank guarantees or insurance as self-protection.
For the purchaser it would be important to clarify the transitional provision and determine that only the purchased property and the building permit end the obligation to maintain an escrow account. For developers the problem lies in the possibility of the purchaser withdrawing from the contract, even if there has been a minimal change in the area, e.g. by 10 sq cm. They suggest regulating the permissible change of the area (2 pct), which would not provide grounds for withdrawal, but of course such a difference would require a settlement. Until now the Office of Competition and Consumer Protection has not been prepared to accept any difference, and has been unnecessarily strict. Its concern should be to protect the customer from major changes and the obligation to accept property that is too small or too expensive; whereas a minimal change, like 2 pct, which is normal in the building process, would not violate this, and the developer would also feel that it is protected.

Paweł Kuglarz, attorney at law, partner, Beiten Burkhardt P. Daszkowski