Disclosure of Housing Under Construction to Consumers - Splitting of Real Estate Transactions - Plot Purchase Agreements and Construction Contracts

Circular/Guidance

Sent to:

Estate Agency Firms Lawyers with Estate Agency Activities Housing Associations with Limited Licenses

1. Introduction

This circular addresses issues related to Act No. 43 of 13 June 1997 concerning agreements with consumers for the construction of new housing, etc. (the Housing Construction Act). This circular supplements Circular 9/2007 regarding the duties of the estate agent when brokering new housing/properties under construction, which also applies under the Estate Agency Act from 2007.

The Financial Supervisory Authority has recently received a number of questions related to clients who wish for the agent to facilitate a splitting of the agreement, such that the plot and the housing construction can be sold separately. In practice, this is implemented by selling the plot with an obligation for the buyer to enter into or join a construction contract with a specific contractor on pre-negotiated terms. It is then assumed that the sale of the plot is regulated by the rules in the Sale of Goods Act, while the construction contract is regulated by the Housing Construction Act, cf. § 1a. Normally, it is also agreed that the consideration for the plot is transferred to the seller before the construction of the housing can begin. The building is then paid in installments in accordance with the rules in Housing Construction Act § 47, first paragraph. According to information received by the Financial Supervisory Authority, it varies whether the estate agency firm also undertakes the settlement of the construction contract, or if the buyer pays the installments directly to the contractor.

2. Relationship to the Housing Construction Act

The Housing Construction Act regulates agreements between the seller (contractor) and the consumer regarding the construction of housing. Where the agreement for the construction of housing also includes the plot, the agreement is regulated by the Housing Construction Act, cf. § 1b.

A concrete assessment must be made as to whether the agreement practically includes the plot or not. Where two separate agreements are entered into with the same seller for the plot and the building, the entire contractual relationship falls under the Housing Construction Act. If the construction contract is entered into with someone other than the plot seller, a question arises in practice – as seen by the Financial Supervisory Authority – as to whether the splitting is a pro forma arrangement.

3. Relationship to the Estate Agency Act

a) General

Facilitating contractual relationships that conflict with mandatory contract law will also be in conflict with the requirement in Estate Agency Act § 6-3 regarding good estate agency practice.

In the Financial Supervisory Authority's assessment, splitting the real estate transaction with different agreements for the plot purchase and housing construction entails disadvantages for the buyer, and the splitting effectively transfers a large part of the economic risk for the implementation of the project from the seller to the buyer. If the contractor goes bankrupt during the construction process, the buyer will only have security in the value of the plot and potentially the value of what has been added to the plot. The price relationship between the plot and the construction contract will thus be of significant importance to the buyer. If it turns out that the buyer has paid a proportionally too high consideration for the plot, the value of the work performed on the plot will be correspondingly less in relation to the buyer's costs to have the housing completed by a new contractor.

An agent may broker a plot with a construction clause under the Sale of Goods Act if the plot seller and the person who is to carry out the construction of the housing are not the same person, and the agent otherwise assesses that the current situation is in accordance with the rules in the Housing Construction Act, cf. point 2. In such brokerage, the agent's duty to inform and advise is expanded, cf. point c) below.

b) Brokerage of Construction Contract Alone

Brokerage of the construction contract alone under Housing Construction Act § 1 letter a will as a general rule fall outside the Estate Agency Act because the transaction does not involve real estate, cf. Estate Agency Act § 1-2 second paragraph no. 1. Brokerage will in that case not be covered by the security provided by the estate agency firm. This leads, in the Financial Supervisory Authority's opinion, to homebuyers receiving false security, and is therefore "suitable to weaken trust in the firm's integrity and independence", cf. Estate Agency Act § 5-1. Estate agency firms may therefore not undertake assignments that involve brokering construction contracts when the brokerage falls outside the scope of the Estate Agency Act. This means that an agent cannot provide building technical advice, assist in contract drafting, or be involved in connection with the exchange of services under the construction contract. Payment for the construction of housing cannot, in other words, take place through the estate agency firm.

In assignments that include both the brokerage of a plot and a construction contract to consumers, the estate agency firm can normally only carry this out as ordinary brokerage under the Housing Construction Act, cf. § 1 letter b.

c) Brokerage of Plot with Construction Clause

When brokering a plot with a construction clause under the Sale of Goods Act, it must be clearly stated in the marketing, i.e., in headlines in advertisements, centrally in the sales statement, etc., that this concerns plot sales and not housing sales.

Furthermore, the buyer must receive written information prior to entering into a binding agreement, which must at a minimum include the following:

An explanation (summary) of the central duties for the buyer under the construction clause (i.e., all matters of significance for the transaction) with references to the construction contract that must accompany the sales statement.

That the construction contract is not part of the agent's assignment, that the agent has no responsibility for the settlement of the construction contract, and that payments linked to the contract are made directly to the developer.

That the agent has no responsibility for following up the developer's guarantee obligations under the Housing Construction Act § 12 and potentially § 47, and that the buyer must obtain these themselves.

The Financial Supervisory Authority will emphasize that it is important that such information is formulated clearly in the sales statement.

The agent's duty of care towards the buyer entails that he/she must give the buyer relevant advice regarding the difference in risk when buying a plot with a construction clause under the Sale of Goods Act compared to entering into a combined agreement for new housing, cf. point 3 a). In this context, it is particularly important that the buyer knows how to assess the value of the plot independently of the future housing construction before the transaction is entered into. In the Financial Supervisory Authority's assessment, the information linked to risk is so fundamental that this must be given in writing.

It is also important that the agent, in their advice to the parties, is aware of the rules in Housing Construction Act §§ 20 second paragraph and 34 third and fourth paragraphs, which give the buyer the right to rescind the agreement for the purchase of the plot if they have the right to rescind the construction agreement due to delay or defects. Furthermore, the consumer may rescind the construction agreement if the agreement for the purchase of the plot is rescinded due to misrepresentation on the part of the plot seller. Upon rescission of the agreements, the consumer may demand that the rescission settlement takes place by each party's obligation to fulfill the agreement falling away, and that each party receives back what they have provided.

The Financial Supervisory Authority believes that estate agency firms that broker plots with construction clauses should also clarify routines and guidelines for such brokerage with those providing security.

When carrying out the plot transaction, the agent must in the usual manner ensure that the conditions for payment set by the buyer or the buyer's lender are fulfilled before the purchase price is transferred. The requirement for secure exchange of services normally means that no part of the purchase price can be paid out to the plot seller before the buyer has received title to the plot free of encumbrances for the seller.

Eirik Bunæs

Wilhelm Mohn Grøstad

Subscribe to news

Register to receive news alerts when Finanstilsynet publishes cases you are interested in.

Subscribe to news