The Act on Protection of Rights of Buyers of Residential Premises or Single-Family Houses and the Developer Guarantee Fund (the “Developer’s Act” or “Act”), passed on May 20, 2021, contains inaccuracies in interpretation and only future practice will determine how certain regulations contained therein should be understood. Lawyers have already noted that the procedure for acceptance of premises may prove problematic as it has been significantly changed and supplemented in the new “Developer’s Act”.
The most controversial issue is the right of a purchaser of a dwelling or single-family house to refuse to accept the dwelling if a material defect has been found. Unfortunately, the legislator does not indicate what is meant by the term “material defect,” as the act does not contain a legal definition or a reference to another regulation. Practitioners have already warned of the possibility of abuse of this institution by prospective purchasers; doubts have also been raised as to how this entitlement affects the application of warranty provisions for physical defects.
The previous act regulated only the acceptance of the premises in a general manner, not distinguishing material and immaterial defects. The new rules, however, introduce a statutory right of substitute removal of insignificant defects if the developer refuses to remove them, and even the possibility of withdrawal from the agreement in case of significant defects. According to the legislator, the purchasers in this way will have an impact on the pace and the quality of the repair works as the spectre of dangerous consequences will hover over the developer. Especially that the developer will have to face a total of three deadlines for the removal of defects. The existing warranty provisions provided for the right to withdraw from the agreement as a last resort, which is to be changed by the new Developer’s law by making the complaint procedure with the developer more effective and faster.
The Act also introduces the possibility that the purchaser commissions the preparation of an opinion of a construction expert in the event that, in the opinion of the purchaser, such a material defect is still present upon the second acceptance of the premises. If the building surveyor finds in the opinion the existence of a material defect, the purchaser may withdraw from the agreement. In addition, the Act requires that the costs of such an opinion be paid by the party that was wrong in the dispute over the material defect.
Due to lack of specification of what is meant by the term “material defect” and sanctions that may be imposed on the developer, this procedure is subject to high risk of future court disputes. Among other things, the amendment giving the purchaser of the premises the right to withdraw from the contract even if a defect in the premises is revealed after the acceptance of the premises is to be assessed negatively. This is important because if the purchaser withdraws from the agreement due to material defects, the purchaser will have a claim to the Developer Guarantee Fund (“DFG”) for payment of the amounts paid, and the Developer Guarantee Fund will have a recourse claim against the developer. Theoretically, it is possible when the buyer withdraw from such an agreement and therefore, receives a refund of the entire amount paid and, if he previously concluded also a reservation agreement – then he receives his payment in a double amount, additionally charging the developer with the maximum interest. This regulation is an unjustified privilege for the buyer, as it makes the reimbursement from DFG dependent on subjective assessments of one party to the transaction, without any possibility of reliable verification. Moreover, there is a risk of abuse of this institution, for example by intentional delay in submitting such a declaration and charging statutory interest, as the Act does not provide for an end date by which the buyer may in fact exercise such right to withdraw.