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Protection in the event of the bankruptcy of a development company

Protection in the event of the bankruptcy of a development company

Dodano: 2022-09-06

The Law of 20 May 2021 on the Protection of the Rights of the Purchaser of a Residential Unit or Single-Family House and the Developer Guarantee Fund, promulgated on 30 June 2021, initiated by the President of the Office of Competition and Consumer Protection (OCCP), is effective as of 1 July 2022. It introduces the Developer Guarantee Fund (DFG), which is operated by the Insurance Guarantee Fund (UFG).

The purpose of introducing the law was to protect buyers of new apartments, particularly in the event of the bankruptcy of a development company or a bank operating a residential escrow account. As a long-term goal, the legislator set out to increase confidence in the real estate development industry, which, due to the current market conditions (incl. the almost complete lack of social housing), is responsible for most of the housing market in Poland.

Recently, despite the ever-increasing number of new apartments and soaring interest rates, demand remains high. This has had an impact on rising real estate prices, which is worrying for both potential buyers and experts. The latter fear a collapse in the market, which could lead to industry insolvency. For this reason, the president of the OCCP has put forward proposals for amendments to the law, subsequently adopted by the Council of Ministers. They are intended to increase protection for real estate buyers.

Existing regulations

The previous regulations, through the so-called Development Act of 2011, stipulated buyers’ protection through mandatory payments into residential escrow accounts. This largely shifted the burden of risk from the buyer to the developer. However, open accounts, which were less favourable to buyers, were often used in practice. In such a situation, the funds could be released by the bank after the completion of the development stage. Consequently, this did not minimise the risk of losing some of the funds paid to the developer when the developer goes bankrupt during the development or fails to transfer ownership of the property to the buyer.

DFG’s rules of operation

Formally, the DFG will not be a corporate entity and will be represented by the UFG or its bodies. Funding will come from contributions made compulsorily by developers – the law specifies their amount and the manner of calculation (e.g., differentiation of the amount of the contribution for a closed and open trust account). Other mechanisms contained therein also make it possible to respond to the changing market situation.

Importantly, the temporal provisions stipulate that if a sale has been initiated and at least one contract has been concluded before the law comes into force, the current provisions are to be applied. In that case, buyers will not be covered by DFG protection.

Who will pay?

It is hard to imagine it the legislator’s intention to link the operating costs of the DFG with the final price of the property. Despite the ever-increasing revenues recorded by the real estate development industry (due to the above-mentioned market conditions), it is reasonable to fear that developers will want to pass on the cost of increased administrative handling of the described protection to buyers.

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