Reservation agreement, developer agreement, preliminary agreement, ownership transfer agreement – types of agreements concluded with a developer

As a consequence of lenient mortgage lending criteria applied nowadays by banks, more and more Poles can afford to buy their own dwelling. According to AMRON-SARFiN Report 2/2021, the number of loans granted in the second quarter of 2021 increased by 17.21% compared to the previous quarter. Before implementing a plan to purchase a dwelling, it is good to know all details related to legal aspects of the transaction, including types of contracts and rights they ensure for the contracting parties. In June 2021, an amendment to the Act on the Protection of Rights of Buyers of Housing Unit or Detached Houses and the Developer Guarantee Fund was announced, which provides the legal basis for agreements with developers. The amended Act will enter into force July 1, 2022.

There are several types of contracts signed by a purchaser and a developer, depending on the stage, at which the contract is concluded: a reservation agreement, a developer agreement, a preliminary agreement and an ownership transfer agreement. How do they differ and what should we pay special attention to?

Reservation agreement

According to Article 29.1 of the Act of May 20, 2021 on the Protection of Rights of Buyer of Housing Unit or Detached House and the Developer Guarantee Fund, ‘a reservation agreement is an agreement between a developer or an entrepreneur other than a developer (…) and a person interested in the sale offer (…), the subject of which is an obligation to temporarily exclude from the sale offer a dwelling or a detached house selected by the reserving party.’ A reservation contract is most often concluded at the initial stage of a project, when the booker is planning to buy an estate, but, for example, is not 100% sure, is looking for other offers or has not yet received a credit decision. In practice, the agreement requires the developer to exclude the property from sale and is often followed by a developer agreement. In order for a reservation agreement to be valid, in addition to the standard elements, it is required to include:

• the price of the dwelling or detached house;
• the amount of the reservation fee;
• the period during which the subject of the agreement is excluded from sale;
• the location of the dwelling in the building (in case of a flat);
• the usable area and the layout of the rooms.

As regards the reservation fee, the previous legislation did not regulate either the amount of the fee or the conditions for its reimbursement in the event of termination of the contract. Accordingly, the developer may have drafted an agreement that would disadvantage the booker, for example, despite a negative credit decision that is beyond the booker’s control, the booker will not receive a fee refund. The amendment to the Act clearly regulates that the reservation fee cannot exceed 1% of the price of the dwelling and in case of conclusion of the developer agreement it is credited towards the purchase price of the property. The new regulations also specifies the cases, in which the reservation fee is refunded to the reserving party:

• failure to obtain a positive credit decision or a promise to grant a credit;
• the developer – without informing the reserving party – made changes to the information prospectus or its attachments;
• if the sale agreement was preceded by the reservation agreement, and the developer or the entrepreneur failed to remove the defects reported in the acceptance protocol, as a result of which the buyer did not sign the sale agreement (double fee to be reimbursed)
• if the developer or the entrepreneur fails to comply with the terms and conditions of the reservation agreement (double fee to be returned).

A reservation agreement does not oblige the booker to buy the property, but it gives the possibility of excluding the property from sale for a certain period of time, during which the booker has time to arrange the formalities related to obtaining a loan. Signing a reservation agreement is not mandatory, but it is usually the first step in the process of buying a property from a developer and precedes the conclusion of a developer agreement.

Developer agreement vs. preliminary agreement

Both the developer agreement and the preliminary agreement constitute a mutual obligation of the developer and the buyer to sign an agreement on the transfer of ownership rights to the estate in the future. This means that at the time the contract is signed, the buyer does not yet have rights to the estate. The difference between a development agreement and a preliminary agreement is the condition of the property. A developer agreement regulates the process of acquisition of an estate in the situation when the investment has not yet been released for use, for example, dwellings have not been separated. In order to formally complete the construction work by a developer, the construction supervision authorities must conduct an inspection. This is necessary for obtaining an occupancy permit for the building – only after that it is possible to conclude a preliminary agreement or an ownership transfer agreement with the buyer. The construction supervision authorities may refuse to issue an occupancy permit when, for example, the investment does not conform to the construction design or does not meet technical, fire or sanitary standards.In such case, the developer is fined with a penalty fee, the amount of which is regulated by the Act of 7 July 1994 – Construction Law. In addition, the construction supervision may order the suspension of construction works, demolition or impose an obligation to bring the building into conformity with the law and the design. For a potential buyer, this means an extended waiting period before being able to live in the estate.

The developer agreement contains more detailed information than the preliminary agreement and its scope is regulated by the Act of 20 May 2021 on the Protection of Rights of Buyer of Dwelling or Detached House and the Developer Guarantee Fund. It includes:

• information regarding the location of the detached house or the location of the dwelling unit in the building and a detailed description of the property;
• the purchase price of the rights to the real estate;
• the date of transfer of the ownership rights to the property to the purchaser;
• information regarding the housing trust account, into which payments are to be made by the purchaser;
• the number of the building permit and the date of commencement and completion of construction works;
• definition of the conditions for withdrawal from the contract and the stipulated amount of interest and contractual penalties;
• buyer’s declaration of acceptance of the information prospectus, which must be prepared by the developer before signing the developer agreement;
• information about the conclusion of a reservation agreement and a reservation fee or about the lack of such an agreement.

In case of a developer agreement, legal regulations impose an obligation on a developer to accept buyer’s payments into a housing trust account. The money accumulated on this account is intended to secure the buyer in case the developer does not complete the construction, for example, in connection with bankruptcy, thanks to which the buyer may recover all or a significant part of the funds paid. In case of a preliminary agreement, the buyer may pay an advance or deposit, which is regulated by the provisions of the Civil Code. In addition to specification of the parties, the subject of the agreement and the price, the preliminary agreement may also include the date of signing an agreement transferring the ownership rights to the real estate to the buyer. A preliminary agreement may be drawn up in form of a notarial deed, but also in an ordinary written form, whereas a developer agreement may be concluded in the form of a notarial deed under pain of nullity. A developer agreement cannot be replaced by a preliminary agreement. A preliminary agreement may be concluded only when the real estate has been approved for use by the construction supervision authorities. Otherwise, it is unlawful to attempt to conclude it. On the other hand, when construction work is still in progress, it is obligatory to conclude a developer agreement. Therefore, both of these agreements are concluded before signing the ownership transfer agreement – the developer agreement when the property is under construction and the preliminary agreement after the construction work is completed. In the situation when the purchaser, at the stage of construction of the real estate, has already entered into a developer agreement, a preliminary agreement is not necessary, because in accordance with the Act, the developer agreement constitutes a mutual obligation of the developer and the purchaser to sign the ownership transfer agreement. If the buyer decides to purchase the property when it has already been released for use, the transfer of ownership agreement may be signed right away, but it also may be preceded by a preliminary agreement. Such a situation would occur, for example, when a buyer applies for a loan and the bank requires a preliminary agreement.

Ownership transfer agreement

An ownership transfer agreement is the final step in the process of purchasing a property on the primary market. It may be concluded only after the technical acceptance of a dwelling, during which the buyer verifies whether the dwelling meets construction standards and has been constructed in accordance with the developer’s agreement, if such has been previously concluded. A protocol is drawn up during the technical acceptance. An ownership transfer agreement, unlike a preliminary agreement, must be drawn up in the form of a notarial deed under pain of nullity.

Summary

The purpose of amending the existing Act is to protect a buyer of a dwelling, who has a number of relate to a reservation agreement or a developer agreement. In turn, both a preliminary agreement and an ownership transfer agreement are governed by the provisions of the Civil Code. The above agreements, despite their differences, are interrelated. Purchasing a property from a developer solely on the basis of a transfer agreement, without entering into any preceding agreements, possible in theory. However, given the high demand for primary market properties, it often proves insufficient.

Daria Łaskowska
Maintenance and Development Specialist