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The Warsaw Voice » Special Sections » February 23, 2012
The Real Estate Voice
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Developer Act—What Changes Does it Introduce?
February 23, 2012   
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Bartosz Miszkurka, Partner at Deloitte Legal, Pasternak i Wspólnicy Kancelaria Prawnicza Sp. k.:

The Act on protecting the rights of purchasers of apartments and houses of 16 September 2011, which comes into effect on 29 April 2012 and is commonly known as the Developer Act, significantly changes developer business practices. The purpose of the changes is to provide those buying apartments and houses from developers with the right to obtain exhaustive information about the terms of transactions they are about to conclude and with full coverage in case a developer goes bankrupt or fails to execute the agreement for other reasons.

New regulations—who do they protect and who do they impose duties on?
The Act provides protection for clients who purchase apartments as well as those who purchase/obtain perpetual usufruct of the land on which their houses are located. This exclusively applies to individuals. On the other hand, developers, as defined in the Act, include both individuals and corporate bodies, as well as organizations without corporate status such as partnerships.

Bank as the “guardian” of the client’s savings
The obligation for a developer to hold an open-end or closed-end escrow account in a bank for the purpose of the investment is a key change introduced by the new law. Clients purchasing property from a developer pay cash not to the developer himself, but directly to such an account. Only when it has been determined that the developer has properly completed the given investment stage does the bank transfer the collected funds to the developer, but only an amount covering the stage in question. This principle does not apply to the closed-end account, which shall be disbursed on a one-off basis once the ownership title to an apartment or a plot of land has been transferred to the buyer. Should a client withdraw from the agreement due to the developer’s fault, e.g. if a developer has failed to transfer the ownership title to an apartment or a plot of land to the buyer within the contractual deadline, the bank shall pay cash from the account to the client.

Right to proper information as the basic right of the client
When commencing the sale of apartments or plots of land, a developer is obliged to prepare an informational prospectus to include information regarding the developer himself, his professional experience and the property being sold, as well as to present such a prospectus to potential clients per their request. On request, a developer should give potential clients access to such documents as a copy of the entry in the National Court Register or the Business Register, his financial statements, a copy of the land register entry regarding the property being sold, as well as copies of obtained construction permits and of the architectural design.

Bankruptcy of the developer will not threaten his clients anymore
In case a developer is declared bankrupt, funds accrued at custody accounts along with the ownership or perpetual usufruct title to the land under development form a separate bankruptcy estate, giving claims of buyers privileged treatment in relation to all other creditors of the developer. Clients may also decide to have the investment continued by the receiver or bankruptcy estate manager, as well as to conclude a composition agreement with the developer.

Banks in control
Both developers and bank analysts predict that one of the implications of the new regulations will be that banks will gain control over investment projects carried out by developers. The opening of an escrow account, however, is a necessary condition for launching an investment project. What’s more, according to preliminary forecasts, most banks will be inclined to offer closed- rather than open-ended escrow accounts. This will mean that investment projects will have to be wholly financed from developers’ own funds, and if such funds are unavailable, bank loans will be used, which will further strengthen the role of banks. At a time of slowdown on the market, this may result in the elimination of smaller developers, especially beginners, who will be unable to launch operations in practice because they do not have sufficient funds of their own or possibilities to obtain external financing. This problem could be remedied by using sources of funds other than loans, for example mutual funds or working with other investors as part of joint venture projects.
Troublesome responsibility
Banks are also critical of the new regulations although it may seem that the Developer Act is bound to produce an increase in demand for their products. Banks are concerned because they will share responsibility with developers for the success of their investment projects, while having no practical possibilities to monitor their course in an effective manner. Fearing that they may become the target of compensation claims from developers’ disgruntled customers, banks will choose to cooperate (in both running escrow accounts and financing investment projects) with experienced companies that are well known to them, thereby eliminating or at least limiting such a risk. It is difficult to predict at this point how banks will carry out tasks related to supervision over investment projects carried out by developers.

It is possible that they will be outsourcing these tasks to external companies, which may lead to an increase in demand for project management services.

Amendment in store?
The widespread criticism of the new regulations may lead to a situation in which some of the Act’s provisions will be amended before the law takes effect on April 29, 2012. It is also possible that organizations bringing together developers will seek to appeal against the most controversial provisions to the Constitutional Court.
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