Investment projects in Poland - legal forms of implementation
Below, we attempt to present in general outline three legal constructions encountered in practice, whose basic aim is to implement turnkey investments, which therefore require an appropriate decision regarding building permission and are concluded by an occupancy permit.
Agreement on construction work
The agreement on construction work, in which the investor concludes an understanding with the contractor, is frequently encountered in business practice. The legal foundations of this relationship are shaped both by the Civil Code (art. 647-657) and the Construction Law regulating the rights and obligations of participants in the construction process, such as the investor or the construction site manager.
The Construction Law imposes an obligation on the investor to hold a legal title to the land, enabling construction work to be carried out on it. This is a condition for obtaining a building permit for a given project. The legislator has merely indicated exemplary situations giving the investor the "right to dispose of property for construction purposes," such as the right of ownership, perpetual usufruct, management and restricted property rights, but also obligatory relationships (e.g. tenancy, lease or lending for use).
Concluding an agreement on construction work ensures the creation of a clear-cut scheme in which the investor, having a permanent legal right to the land, orders the performance of a specific project. This authorizes it to inspect the progress of the work on an ongoing basis, to carry out a partial and final acceptance of the work, and to report any reservations to the contractor. These issues are subject to detailed regulation in the agreement concluded between the parties. Some obligations of the investor, the performance of which is required by Construction Law, such as obtaining a building permit or an occupancy permit, can be ordered contractually to the contractor of the construction work, which will then act on behalf of the investor on the basis of a power of attorney.
In deciding whether to carry out an investment project by concluding an agreement for construction work, the investor has to take into account the factors indicated above, and primarily the joint and several liability for paying all remuneration due for the performance of construction works covered by the investment project which it has ordered, irrespective of whether those works are performed by the general contractor or its subcontractor, and also note the obligation to present a payment guarantee at the demand of the contractor. These important obligations imposed on the investor result from the updating of the Civil Code which came into force on April 24, 2003, which states in particular that different contractual clauses in the aforementioned matter are invalid.
To minimize the investor's risks connected with joint and several liability, it may introduce an extended system of inspecting the progress of payments on all levels of the investor-general contractor-subcontractor relationship. In practice, for example, contractual regulations arise which make affecting a partial payment for the contractor dependent on presenting evidence that all subcontractors working on a given project have obtained their due remuneration so far. Working out and checking the activity of each of those payment inspection systems and the principles of employing subcontractors requires an additional involvement on the part of both the investor and the general contractor.
Developer agreement on constructing a building
Sometimes, investors decide on the implementation of an investment project on land belonging to a developer. Concluding an agreement obligates the developer to construct a building which meets the requirements of the investor, whose ownership is then transferred to the investor. A similar scheme can also refer to constructing and then selling independent residential or usable premises. The developer, authorized to hold the land, applies for a building permit and then implements the investment process, concluding an agreement for construction work and also other work connected with it, e.g. design work.
In the same way, no direct contractual relations bind the actual investor to the contractor of the construction work. It can merely report any reservations regarding the quality of the work or request a change in the scope of performance to the developer, who will introduce them for implementation by an agreement for construction work with the contractor. The participation of the investor in the construction process is therefore only indirect, because it is not authorized to make entries in the building log or to stop construction.
The developer bears full liability for the end effect in the form of a building or premises. Until the time of concluding a final sale agreement with the investor, the developer remains the owner of the land (or perpetual usufructuary) and the owner of the building constructed on it, which corresponds to the Roman principle of superficie solo cedit, accepted in Polish law. All payments by the investor to the developer, made in the period of construction, have the character of advances towards the sale price, but are not remuneration for construction work performed.
After the building is completed and the formal conditions are met by the developer, which enable the exploitation of the building to commence, it is sold to the investor. In the event of there being defects in the building, the investor, as the acquirer, makes use of a warranty on the subject of sale, in accordance with the Civil Code provisions. According to the Civil Code, a warranty for defects in the building amounts to three years. In transactions between professional entities the warranty can be excluded or its principles changed, e.g. with regard to its duration.
In considering the acceptance of this solution, the investor should take into account the security resources intended to protect its interests. Above all, concluding an initial agreement with the developer as a preliminary agreement in the form of a notarial deed will guarantee the investor the right to enter a claim for the conclusion of a final agreement in the land and mortgage register. That entry will cause the extension erga omnes of the right of the investor, which is not, however, tantamount to limiting the developer in the disposition of its own property. Therefore, until the date of concluding a final agreement, the developer can also effectively sell the property. In that case, however, the investor can effectively pursue its sale from the entity which acquired it from the developer and also encumber it with a restricted property right (e.g. a mortgage). In the case of entering the claim of the investor in the land and mortgage register, it has the right to demand that the new acquirer transfer the ownership of the property to it in the performance of the preliminary agreement previously concluded with the developer, or that the mortgage creditor release it from the mortgage.
In a situation where a considerable part or even the whole of the transaction price is paid to the developer in the form of advances, it is necessary to secure the interests of the investor by establishing a mortgage in favor of it on the property which is to be the subject of the sale.
In deciding whether to accept this conception, the investor aims above all to entrust the entire investment process to a specialist entity, which will take over full responsibility for constructing the building and preparing it for use.
To carry out this aim, the investor will transfer to the developer the land concerning which it has a permanent legal title, usually ownership or perpetual usufruct. From that time on, the developer will on its own behalf perform all acts designed to transfer the 'ready product' to the investor.
The agreement concluded between the investor and the developer should contain a clause enabling the developer to "dispose of the land for construction purposes" in the under-standing of art. 3.11 of the Construction Law. As mentioned above, in the part concerning the agreement on construction work, holding such a right is a condition for obtaining a building permit, the beneficiary of which is the developer.
The legal relations between contractual parties in this transactional scheme generally stay the same as in the developer agreement scheme discussed above. After the developer's work is completed, a problem of transfer of agreements for the supply of utilities and the transfer of warranty regarding defects of the building (granted to the developer by the contractor) emerges. In conclusion, this type of construction requires deeper analysis on the part of the investor, because tax consequences, which are not the subject of this article, should be taken into consideration before accepting or rejecting it.
Summary
We hope the above discussion of the main types of agreements leading to the implementation of investments will help in analyzing both the risks and the benefits linked to each of those structures. Obviously, at the stage of choosing one of them, a deeper analysis will be necessary, taking into consideration the individual aims of the investor.
Agreement on construction work
The agreement on construction work, in which the investor concludes an understanding with the contractor, is frequently encountered in business practice. The legal foundations of this relationship are shaped both by the Civil Code (art. 647-657) and the Construction Law regulating the rights and obligations of participants in the construction process, such as the investor or the construction site manager.
The Construction Law imposes an obligation on the investor to hold a legal title to the land, enabling construction work to be carried out on it. This is a condition for obtaining a building permit for a given project. The legislator has merely indicated exemplary situations giving the investor the "right to dispose of property for construction purposes," such as the right of ownership, perpetual usufruct, management and restricted property rights, but also obligatory relationships (e.g. tenancy, lease or lending for use).
Concluding an agreement on construction work ensures the creation of a clear-cut scheme in which the investor, having a permanent legal right to the land, orders the performance of a specific project. This authorizes it to inspect the progress of the work on an ongoing basis, to carry out a partial and final acceptance of the work, and to report any reservations to the contractor. These issues are subject to detailed regulation in the agreement concluded between the parties. Some obligations of the investor, the performance of which is required by Construction Law, such as obtaining a building permit or an occupancy permit, can be ordered contractually to the contractor of the construction work, which will then act on behalf of the investor on the basis of a power of attorney.
In deciding whether to carry out an investment project by concluding an agreement for construction work, the investor has to take into account the factors indicated above, and primarily the joint and several liability for paying all remuneration due for the performance of construction works covered by the investment project which it has ordered, irrespective of whether those works are performed by the general contractor or its subcontractor, and also note the obligation to present a payment guarantee at the demand of the contractor. These important obligations imposed on the investor result from the updating of the Civil Code which came into force on April 24, 2003, which states in particular that different contractual clauses in the aforementioned matter are invalid.
To minimize the investor's risks connected with joint and several liability, it may introduce an extended system of inspecting the progress of payments on all levels of the investor-general contractor-subcontractor relationship. In practice, for example, contractual regulations arise which make affecting a partial payment for the contractor dependent on presenting evidence that all subcontractors working on a given project have obtained their due remuneration so far. Working out and checking the activity of each of those payment inspection systems and the principles of employing subcontractors requires an additional involvement on the part of both the investor and the general contractor.
Developer agreement on constructing a building
Sometimes, investors decide on the implementation of an investment project on land belonging to a developer. Concluding an agreement obligates the developer to construct a building which meets the requirements of the investor, whose ownership is then transferred to the investor. A similar scheme can also refer to constructing and then selling independent residential or usable premises. The developer, authorized to hold the land, applies for a building permit and then implements the investment process, concluding an agreement for construction work and also other work connected with it, e.g. design work.
In the same way, no direct contractual relations bind the actual investor to the contractor of the construction work. It can merely report any reservations regarding the quality of the work or request a change in the scope of performance to the developer, who will introduce them for implementation by an agreement for construction work with the contractor. The participation of the investor in the construction process is therefore only indirect, because it is not authorized to make entries in the building log or to stop construction.
The developer bears full liability for the end effect in the form of a building or premises. Until the time of concluding a final sale agreement with the investor, the developer remains the owner of the land (or perpetual usufructuary) and the owner of the building constructed on it, which corresponds to the Roman principle of superficie solo cedit, accepted in Polish law. All payments by the investor to the developer, made in the period of construction, have the character of advances towards the sale price, but are not remuneration for construction work performed.
After the building is completed and the formal conditions are met by the developer, which enable the exploitation of the building to commence, it is sold to the investor. In the event of there being defects in the building, the investor, as the acquirer, makes use of a warranty on the subject of sale, in accordance with the Civil Code provisions. According to the Civil Code, a warranty for defects in the building amounts to three years. In transactions between professional entities the warranty can be excluded or its principles changed, e.g. with regard to its duration.
In considering the acceptance of this solution, the investor should take into account the security resources intended to protect its interests. Above all, concluding an initial agreement with the developer as a preliminary agreement in the form of a notarial deed will guarantee the investor the right to enter a claim for the conclusion of a final agreement in the land and mortgage register. That entry will cause the extension erga omnes of the right of the investor, which is not, however, tantamount to limiting the developer in the disposition of its own property. Therefore, until the date of concluding a final agreement, the developer can also effectively sell the property. In that case, however, the investor can effectively pursue its sale from the entity which acquired it from the developer and also encumber it with a restricted property right (e.g. a mortgage). In the case of entering the claim of the investor in the land and mortgage register, it has the right to demand that the new acquirer transfer the ownership of the property to it in the performance of the preliminary agreement previously concluded with the developer, or that the mortgage creditor release it from the mortgage.
In a situation where a considerable part or even the whole of the transaction price is paid to the developer in the form of advances, it is necessary to secure the interests of the investor by establishing a mortgage in favor of it on the property which is to be the subject of the sale.
In deciding whether to accept this conception, the investor aims above all to entrust the entire investment process to a specialist entity, which will take over full responsibility for constructing the building and preparing it for use.
To carry out this aim, the investor will transfer to the developer the land concerning which it has a permanent legal title, usually ownership or perpetual usufruct. From that time on, the developer will on its own behalf perform all acts designed to transfer the 'ready product' to the investor.
The agreement concluded between the investor and the developer should contain a clause enabling the developer to "dispose of the land for construction purposes" in the under-standing of art. 3.11 of the Construction Law. As mentioned above, in the part concerning the agreement on construction work, holding such a right is a condition for obtaining a building permit, the beneficiary of which is the developer.
The legal relations between contractual parties in this transactional scheme generally stay the same as in the developer agreement scheme discussed above. After the developer's work is completed, a problem of transfer of agreements for the supply of utilities and the transfer of warranty regarding defects of the building (granted to the developer by the contractor) emerges. In conclusion, this type of construction requires deeper analysis on the part of the investor, because tax consequences, which are not the subject of this article, should be taken into consideration before accepting or rejecting it.
Summary
We hope the above discussion of the main types of agreements leading to the implementation of investments will help in analyzing both the risks and the benefits linked to each of those structures. Obviously, at the stage of choosing one of them, a deeper analysis will be necessary, taking into consideration the individual aims of the investor.
