Property law: Securing buyers' rights

One of these issues involves the rights of property buyers. The Ministry of Construction, in response to the increasing number of buyers who have been treated unfairly during their contracting with investors, is attempting to address this issue. In order to eliminate unfair market practices, a new draft act on the protection of buyers contracting with professional entities is currently being worked on.

Arrival of the notarial deed

Under the draft act, investors will be obliged to conclude preliminary sale agreements in the form of a notarial deed. At present, should a potential buyer wish to contract under a notarial deed and the investor refuse to do so, there are no practical tools available to the buyer. From a theoretical perspective, however, the notarial-deed proposal may be seen as another brick added to the ever-thickening wall of bureaucracy but its implications are far more appealing.

A notarial deed acts as a guarantee that neither the agreed price of the property nor any other material conditions will change. The draft provides a non-exhaustive list of such other material terms and conditions, such as the location of the property in the building, its area, scope and standard of the anticipated fit-out works, as well as the deadline for transferring the property title to the potential buyer. Any subsequent change to the preliminary sale agreement made to a notarial deed, and therefore secured by it, must also be in the form of a notarial deed.

In addition, the draft act states that if a buyer contributes at least 20 percent of the overall investment price upon signing the notarial deed or thereafter, then the investor is obliged to open an escrow account and deposit the advance payment therein. The escrow agent will then release partial payments as certain thresholds in the construction progress are crossed. The Ministry of Construction also proposes that deposits be exempted from the investor's bankruptcy estate.

Of equal importance in contracting under a notarial deed is the buyer's right to claim that the transfer of the property title is effected by a court decision, substituting the investor's statement of intent in that respect. Such a contractual agreement is particularly crucial in a situation in which the investor wishes to withdraw from an agreed-upon transaction.

A double-edged sword

According to the draft act, buyers will, on one hand, be protected against unfair market practices, such as subsequent changes to price, postponement of the property's delivery date, etc. Their rights will be guaranteed by tools necessary to exercise them effectively. Public notaries will certainly benefit from the introduciton of the notarial deeds. Investors will be limited in their options to structure the sale process solely for their own benefit - the introduction of an obligation to open an escrow account, for example, ensures that buyers' funds will be used only as progress is made in construction.

On the other hand, however, buyers will be charged for the additional notary service, and investors will have to adapt to the new market regime. This means that the risk of market fluctuations between the conclusion of the preliminary sale agreement and the final agreement will be, subject to extraordinary circumstances, borne exclusively by investors. Such a new reality will require sales policies to be redrafted, including various calculation methods and an accurate method of forecasting market trends. Furthermore, the restraints proposed in the draft act may appear to be problematic for smaller investors, whose financing structure is mainly based on the advance payments made by the buyer.

Maciej Jodkowski is an associate with Linklaters email: maciej.jodkowski@linklaters.com