Reservation agreement: What shape will it take under the new Developers Act?
One of the new features of the new Developers Act is comprehensive regulation of the reservation agreement, so far not governed by separate provisions. It is worth thoroughly analysing the shape the drafters decided to give to this type of agreement when introducing it officially into the Polish legal system.
What is a reservation agreement?
A reservation agreement is an agreement concluded between a developer or other business and a reserving party, i.e. a person interested in acquiring rights to a particular residential unit or single-family house.
The purpose of the reservation agreement is to temporarily exclude the specific property which the potential buyer is interested in acquiring from the developer’s sales offer (in other words, to ensure the exclusive right to acquire the property).
The conclusion of such an agreement is not and will not be obligatory, but it allows the reserving party time to reach a final decision on purchase of the property, in particular to verify the factual and legal status of the property, obtain financing, and so on.
The current status of reservation agreements
So far, there have been no regulations governing the content and provisions of a development agreement. Thus, for the time being, it is a miscellaneous agreement, prepared in accordance with the general contract provisions of the Civil Code.
As a result, developers have almost total discretion to shape the provisions of a reservation agreement, setting high reservation fees or reserving the right to withdraw from a reservation agreement for trivial reasons and without legal consequences.
Although optional, the conclusion of reservation agreements is becoming increasingly popular, especially in view of the surplus of demand over supply and galloping prices—hence the decision to regulate this type of agreement comprehensively.
New regulations
The new Developers Act contains an entire chapter devoted to the reservation agreement. Concluding a reservation agreement will still not be mandatory, but if the parties decide to draw one up, it will have to comply with the standards indicated in the act.
A reservation agreement is not a preliminary agreement. It is only intended to temporarily exclude the unit from the developer’s sales offer. Therefore, the developer’s failure to comply with the reservation agreement will not give rise to a claim on the part of the reserving party to conclude a sale contract.
A reservation agreement may also contain elements characteristic of a preliminary agreement, i.e. obliging the parties to conclude a development agreement in the future, but such arrangements are at the discretion of the parties.
Form and contents of reservation agreement
According to the new regulations, a reservation agreement is to be concluded in writing under pain of nullity. Art. 30 of the new Developers Act indicates the essential elements of a reservation agreement:
- Parties, place and date of concluding the agreement
- The location of the property, the area and layout of the rooms
- Price of the property
- Period for which the property is to be excluded from the sales offer
- Amount of the reservation fee, if such a fee is stipulated by the parties.
The reservation agreement may also contain other provisions important for the parties entering into it, so long as the other terms are not contrary to law or inconsistent with the nature of the legal relationship or principles of social co-existence.
Period of validity
A reservation agreement is concluded for a definite period. Importantly, if the reserving party applies for a mortgage, the duration of the reservation agreement should take into account the period necessary for the party to obtain a mortgage decision or a promise to grant a mortgage.
Information obligation on the part of the developer
The act imposes an information obligation on the developer, according to which, during the term of the reservation agreement, the developer must inform the reserving party of any changes in the prospectus or its appendices.
If the agreement requires the reserving party to pay a reservation fee, the developer’s failure to comply with this information obligation will result in the developer having to refund the full amount of the fee.
Reservation fee
Stipulation in the reservation agreement of an obligation for the reserving party to pay a fee is dependent on the will of the parties. Pursuant to Art. 32(1) of the act, the parties will be able to agree that conclusion of a reservation agreement will entail an obligation on the part of the reserving party to pay a reservation fee. However, the amount of the fee cannot exceed 1% of the price of the property.
Important from the buyers’ perspective, the reservation fee will be credited towards the purchase price of the property. If a development agreement (or other agreement governed by the act) is concluded, the developer will be obliged to pay over the reservation fee to the housing escrow account within 7 days after conclusion of the agreement.
Consequences of non-performance of obligations under a reservation agreement
The rules of settlement of the reservation fee are similar to the rules for settlement of a deposit (zadatek).
If the would-be buyers of the property change their mind and the development agreement is not concluded, then the reservation fee is forfeited to the developer (failure to sign the agreement is deemed to be the buyer’s fault).
If the developer fails to perform its obligation under the reservation agreement, e.g. enters into a development agreement with a person other than the one with whom it entered into the reservation agreement, twice the amount of the reservation fee must be repaid to the prospective buyer.
On the other hand, if the buyer does not obtain a positive mortgage decision for financing acquisition of the property, the reservation fee is returned to the buyer. (This is a significant change from the existing practice, where the developer retains the reservation fee.)
There is also a similar change in the situation where the developer amends the prospectus or the appendices but fails to duly notify the buyer (then it is assumed that there was a change in circumstances and the developer concealed this information from the buyer).
Summary
The amendments introduced to the current regulations seem appropriate, as they bring order to the practice of using agreements preceding the conclusion of preliminary purchase agreements, development agreements, purchase agreements, or other agreements of similar nature and effect.
The parliament has given the parties a right, rather than an obligation, to enter into a reservation agreement, while attempting to balance the interests of the developer and the prospective buyer.
This article originally appeared in Rzeczpospolita daily
Michał Gliński, attorney-at-law, Aleksandra Szczepińska, Real Estate practice, Wardyński & Partners
