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The Warsaw Voice » Special Sections » February 23, 2012
The Real Estate Voice
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New Escrow Accounts – the “Developers Act”
February 23, 2012   
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On Sept. 16, 2011, the Polish Parliament passed the Act on the Protection of Rights of a Purchaser of Residential Premises or of a Detached House (the “Developers Act”) which will enter into force on April 29, 2012. This act imposes several new obligations on real estate developers. Foremost, it is meant to create new protective measures for private non-professional investors and should contribute to the development of new market standards in the preparation of new housing investments.

In practice, individual investors often had no influence over the investment contract terms and conditions and were placed in a “take it or leave it” position. Now, the developer contract has finally been regulated and is in notary form. Also, the developer will be obliged to hand over an information prospectus prior to the contract execution; this document must include the essential data about the developer, the residential investment (flat or house) and the neighboring real estate. Most importantly, the developer will be obliged to hold a bank escrow account, i.e. a trust deposit of funds paid in by individual investors.

The Developers Act makes a cross-reference to Art. 59 of the Polish Banking Act, which states that an escrow account may be used exclusively for storing funds entrusted by a third party to the account holder under a separate agreement. The escrow account agreement is concluded between the bank and the trustee (i.e. developer) and should specify the conditions under which the funds may be paid out to the developer.

The real estate escrow account may be structured as: (i) a closed escrow account; (ii) an open escrow account; (iii) an open escrow account with a bank guarantee; (iv) an open escrow account with an insurance guarantee.

With a closed escrow account, the developer will receive the deposited funds only upon completion of the investment. As to the open escrow account, the funds held in trust will be paid out to the developer only after the respective investment stages have been duly fulfilled. Control of the investment stages should be executed by a bank or a special engineering company.

The funds deposited in escrow will be separated from the developer’s other estate and thus protected against enforcement proceedings against such a developer and against insolvency (in the latter situation, an insolvency administrator will be obliged to continue the investment following a decision by the investors’ general meeting, i.e. all the investors who concluded a contract with the developer).

Since the real estate escrow accounts are a new legal development, they will be prone to market influence and thus respond to current trends. The escrow drafting will at first most likely follow the standards already used by banks which act as commercial escrow agents.

In the longer term, it is expected that new market standards in real estate and financial services will be created, taking into account the degree of protection required by individual investors, the macroeconomics of the real estate market, pricing standards, as well as the financial condition of developers. This opens new possibilities for banks to offer new escrow services, as well as to promote their trust services to a larger public.

The Developers Act comprises only one temporary provision, i.e. after April 29, 2012 the developer will not be obliged to offer an escrow account if it started the sale of residences before this date. In order to benefit from such a waiver, it will not suffice to publish a simple advertisement on the future sale; in fact, the developer should effectively own the real estate (building plot) and obtain a building permit before April 29.

Paweł Kuglarz, Attorney at law, Partner Beiten Burkhardt, Law Firm
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