UD361: a new chapter in the regulation of the development market

Yesterday, the draft amendment to the Development Act — the Act of 20 May 2021 on the protection of the rights of purchasers of residential units or single-family houses and the Developer Guarantee Fund — marked with the symbol UD361, was published on the website of the Government Legislation Centre.

The draft forms part of a broader trend towards further detailing developers’ obligations and strengthening purchaser protection.

Several proposed changes are particularly noteworthy, as they may have a direct impact on the legal and operational risk borne by developers.

1. The sale price specified in a development agreement will not be subject to indexation. Currently, a developer is only required to inform the purchaser in the information prospectus of the possibility of price indexation and the rules for applying it, if the developer provides for such a possibility.
2. The catalogue of information concerning the development project to be published on the developer’s website is to be expanded to include information on the floor plan of the residential unit or single-family house, together with information on appurtenant rooms, including the dimensions and area of each room. In addition, the developer will have to clearly indicate that photographs posted on the website do not come directly from the development being sold or constitute visualisations.
3. Restrictions on the permissibility of assigning rights under agreements governed by the Act are also to cover agreements whose subject matter is the construction of a residential building, followed only subsequently by the establishment of separate ownership and/or transfer of ownership of an apartment or single-family house, and not only agreements concerning the establishment of separate ownership and/or transfer of ownership of such properties. The restrictions will also apply to agreements concerning commercial units.
4. In the event of the dissolution of a limited liability company, liability under the statutory warranty for defects in the real estate is to pass by operation of law to the shareholders of that company. In the case of a simple joint-stock company and a joint-stock company, the draft provides that dissolution may take place no earlier than five years after the date of transfer of ownership to the purchaser.
5. The amount payable by the developer to the purchaser as a refund of the reservation fee is to be increased where the developer fails to perform an obligation arising from the reservation agreement, as well as where the developer has failed to remove defects recorded in the handover protocol and the purchaser has refused to proceed with the execution of the agreement transferring ownership of the real estate. The change consists in increasing the refund to four times the amount of the reservation fee, instead of twice that amount.
6. The information prospectus is to include more detailed information concerning the developer’s business activity, as well as the finishing standard of the apartments or single-family houses offered.
7. The bank maintaining the escrow accounts into which purchasers’ funds are paid is to verify whether the developer is in arrears with obligations towards purchasers each time before any funds are released to the developer, and not only when completed stages are inspected.

The planned amendment is not limited merely to clarifying the provisions, but will have a real impact on the allocation of risk between the parties to the investment process. For developers, this means the need to reassess the contractual and organisational solutions currently in use.

An early response may be of significant importance for the legal and financial security of development projects.