Purchasing a single-family home or an apartment in the primary market is a significant decision in anyone’s life and requires familiarity with the provisions of the Act of September 16, 2011, on the Protection of the Rights of Buyers of Residential Units or Single-Family Houses, commonly referred to as the Developer Act. This Act aims to protect the rights of property buyers, particularly consumers in this case.
The primary goal of the Act is to ensure that the funds are used for purposes related to the completion of the development project. It also regulates the legal relationship between the developer and the buyer as defined in the so-called developer agreement. As a rule, the Developer Act tends to favor buyers.
First, you choose your dream home or apartment, and then you negotiate the price. But what should you pay attention to when taking the next steps?
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Securing Funds
The Developer Act (Article 4) provides four ways to protect the buyer’s funds:
1) closed residential escrow account;
2) open residential escrow account with an insurance guarantee;
3) open residential escrow account with a bank guarantee;
4) open residential escrow account.
The most commonly used method by developers to secure your funds is the so-called open residential escrow account. The developer opens this account in a bank, and the bank records the payments made by each buyer separately. In this case, the developer can only use the funds paid by you (or your bank) after achieving specific construction milestones.
Importantly, according to Article 12(1) of the Developer Act, the bank verifies the completion of each stage of the development project outlined in the development project schedule before releasing funds from the open residential escrow account to the developer. For this purpose, a person appointed by the bank with appropriate construction qualifications confirms that the entries in the construction log by the site manager match the actual state. Therefore, the Act imposes an obligation on the bank to monitor the progress of the development project. The Act also requires the developer to use the funds obtained from the escrow account solely for purposes related to the construction being carried out.
Of course, the methods of buyer fund protection listed in points 1-3 are even more favorable from the buyers’ perspective; however, developers are reluctant to use them due to the higher costs of establishing them. For example, if the developer opted for a closed residential escrow account, they would not be able to use the funds paid by their clients until the completion of the project. On the one hand, this provides immense security for the clients, but on the other hand, it increases the cost for the developer, who would need to source the necessary funds for completing the project elsewhere.
NOTE: If the developer, when selling properties before the completion of the development project, does not use residential escrow accounts—i.e., wants the funds to be transferred directly to their account—it is crucial to carefully analyze the legal situation!
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Information prospectus and developer agreement
The developer is required to provide the client with a draft developer agreement and an information prospectus.
Special attention should be paid to analyzing issues such as nearby or planned investments, especially those that could impact the quality of life in the area—whether positively or negatively—such as those related to road infrastructure, public utilities, nuisance services, or industry. To do this, it is worth examining the Local Spatial Development Plan (if one exists) and other planning documents. This can help avoid unpleasant surprises.
From reviewing the draft developer agreement and the information prospectus, we should obtain other crucial information, such as the land registry number of the property (allowing us to check for encumbrances on the property and the number of developer agreements already concluded). It’s also worth checking what portion of the project the developer is financing with their own funds, requesting access to the final building permit decision, and securing a promise from the bank for unencumbered separation of the property. This ensures that the purchased and separated residential unit will be free of any encumbrances, such as a mortgage established in connection with the loan granted to finance the construction.
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Risk distribution
The most common way to finance the purchase of a house or apartment is through a mortgage. Frequently, potential buyers do not check their creditworthiness before signing the developer agreement, leaving them uncertain about whether and how quickly they will be able to pay for the property.
To avoid additional costs and problems associated with loan refusals or lengthy procedures, it’s essential to secure yourself appropriately. This can involve ensuring the developer agreement includes a clause allowing you to withdraw from the agreement without incurring additional costs if the buyer fails to obtain a loan. It should be kept in mind that completing necessary banking procedures can sometimes take several months, and this should be considered when signing the developer agreement.
When signing a developer agreement, the projected apartment size outlined in the construction project is often included. To ensure a fair distribution of risk, consider including a clause stating that if the apartment turns out to be smaller than stipulated in the developer agreement, the price of the property will be proportionally reduced.
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Handover protocol – comparing with execution standard
When signing the developer agreement, you will receive an information prospectus containing the execution standard of the property you are purchasing. This standard should be analyzed before signing the agreement, but it’s equally essential to verify during the handover of the property that it has been executed in accordance with the agreed execution standard.
Without specialized knowledge of construction, including materials and techniques, properly verifying the agreed execution standard against reality can be challenging. For this purpose, it’s worth hiring a professional to assess the technical condition of the property. The handover protocol is the right moment to report defects, as it leaves room for negotiation before signing the property transfer agreement.
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The content of the property transfer agreement compared to the developer agreement
The agreement under which the buyer acquires ownership of the property is the property transfer agreement.
It is absolutely necessary to review this agreement carefully. If ownership is to include the right to exclusive use of a balcony or plot of land, this must be explicitly included in the agreement. Similarly, for the unencumbered separation of the property, the appropriate document should be presented and attached to the notarial deed, ensuring the separated residential unit is free of mortgage encumbrances.
If you need legal assistance in purchasing your house or apartment or have any questions, feel free to contact me:
Phone: 508-399-084