The anti-development act

New law, old practices
The act might be problematic for many developers, but not for all of them. Eco Classic introduced the option of concluding preliminary agreements in the form of notarial deeds back in 1995. In 2011 the company introduced escrow accounts into which home buyers could make payments. But not everyone has adopted such practices. Still, the new Law on the Protection of Purchasers of Apartments or a Detached Houses will change the residential market when it comes into force on April 29th. For the better? We shall have to wait and see. The name of the act is slightly unfortunate, since its aim is to protect clients when developers go bankrupt. Its provisions will also make developers' lives difficult. "A lot of inexperienced companies appeared during the bull market. They wanted to take advantage of the market capacity. Unfortunately, some of them turned out not to be viable. The crisis made it impossible for them to finish their projects. Consequently the reputation of the whole sector has suffered. For this reason we were among the supporters of introducing the changes that additionally secure clients' interests. The Development Act was supposed to serve this role. However, it has since become clear that its provisions are difficult to interpret unequivocally. That is why we have established a team whose task is to prepare the company for the implementation of the act's provisions. At the same time consultations are being carried out with external entities such as banks and law firms," says Małgorzata Szwarc-Sroka, director of the economic division of J.W. Construction Holding. Meanwhile, Kielce-based Echo Investment has decided to implement the new law a little earlier. Starting from January, the company is to offer the option of buying homes under the new act's provisions. But how is the act to protect clients? Firstly, developers will have to keep a closed trust account. In order to use the funds it will be necessary to transfer the ownership of the property to the buyer, or to an open account from which funds will be transferred gradually at the relevant stages of the project. But there is a loophole. Homes put on sale before April 29th will not be subject to the provisions of the act. This is why some developers are now hurrying to put their latest projects on the market. And there is a lot to fight for...

It's about the money
"After the act comes into force, we will have to prepare an individual information sheet for each apartment in our offer. This is going to require additional work and financial resources. Moreover, the banks servicing developers in Poland still do not provide a solid offer for trust accounts. However, we do not expect the act to influence our sales plans or financial liquidity," believes Janusz Stolarczyk, member of the management board and development director of Dom Development. A novelty in the act is the splitting of notarial costs equally between the developer and the buyer. So far it has been clients who have paid the majority of the costs connected with signing notarial deeds. Will developers try to make up for this by increasing apartment prices? "In our company's case the act will not influence the price level," assures Wojciech Fabiński, president of the management board of Eco Classic. But he goes on to add: "We can assume that projects that will be subject to the severity of the new act may be regarded as more secure. If providing this security requires the developer to increase expenditure, this could translate into an increase in prices. Still, such a process should be limited due to the current high levels of competitiveness," thinks Mr Fabiński. For smaller players, however, the new regulations could be the kiss of death. "Adopting new rules could turn out to be too difficult for some companies, especially the smaller ones and those for which the necessity to adjust to the new act represents a complete change - particularly taking into consideration the fact that development companies have been struggling with liquidity and profitability issues since the credit crunch. As a result it should be expected that the development market will be somewhat thinned out after the act comes into force," predicts Wojciech Fabiński.

Lots of doubts
The new act also extends the bankruptcy and reorganisation law through a very important provision on the bankruptcy of development companies. According to the provision, in the event of a bankruptcy declaration the funds built up in residential trust accounts and the ownership or perpetual usufruct of a given project together with the payments made by buyers will constitute a separate bankruptcy estate. This will be used to pay back the developer's clients first. Buyers will hold a privileged position, even superseding mortgage creditors. The question arises whether the banks financing projects will require additional security from investors. "Lawyers' opinions on the priority of the mortgage of the bank financing the developer are inclined towards the notion that the priority is not at risk. The bank, apart from the most often used collateral - mortgages on the property - also uses other collateral, such as shareholder or partner sureties, corresponding to the risk level attached to the client and the transaction as well as problems with possible enforcement in the event of bankruptcy," explains Arkadiusz Michalak, the head officer of the residential clients department of PKO Bank Polski. However, he goes on to add that the development act contains a number of inconsistencies. Developers have been quick to express doubts. "It seems that the act itself contains a lot of inconsistencies, particularly with regard to its practical implementation. I believe that it will have to be amended immediately after coming into force," says Janusz Stolarczyk of Dom Development.

Advantages? There actually are some
Could the development act be in any way be a good thing for developers themselves? Paradoxically it could, if the demand for apartments and houses on the primary market increases due to the lowering of the risks attached to home purchases. And the fact that developers will be obligated to prepare an information prospectus about each project (the act contains a template for this) will increase the ability of clients to compare different offers. Apart from including the developer's basic data, the prospectus will also include information about the company's history, its finished projects, the land on which the project is to be built and the relevant data of the project itself (e.g. whether it has already received a build permit). The result? The more professional type of developer should not lose out in the competitive struggle that will follow. At least that's the theory.