Guideline: Brokerage of Housing Under Construction (Project Brokerage)

Guideline Brokerage of Housing Under Construction (Project Brokerage)

GUIDELINE: 21/2011 DATE: 23.06.2011 THE GUIDELING APPLIES TO: Real estate brokerage firms Lawyers engaged in real estate brokerage

FINANS TILSYNET P.O. Box 1187 Sentrum 0107 Oslo

Brokerage of Housing Under Construction (Project Brokerage) 2 | Finanstilsynet

1 Introduction During the period January–April 2011, the Financial Supervisory Authority conducted a thematic supervision focused on the brokerage of housing in projects. The purpose was to focus on the intermediary role with care for both parties in the brokerage of housing from a professional developer to a consumer buyer. This includes safeguarding the requirement for the broker's integrity, the broker's duty to inform and advise, as well as the rules related to the handling of client funds.

This guideline clarifies the broker's duties¹ for this type of brokerage based on the results from the thematic supervision.

Reference is also made to the Financial Supervisory Authority's guideline 9/2007 Duties of the Real Estate Broker in the Brokerage of New Housing/Housing Under Construction and guideline 14/2009 Brokerage of Housing Under Construction to Consumers – Splitting of Property Transactions – Plot Purchase Agreement and Construction Contract.

Resale of contracts has been regulated in the Housing Construction Act and the Sales Act with effect from 1 July 2011.² The Financial Supervisory Authority's assessment of the broker's duties in the brokerage of contract positions is set out in the Financial Supervisory Authority's hearing note of 2 May 2011 with proposals for amendments to the Real Estate Brokerage Regulations.

2 The Sales Phase 2.1 General The consumer protection purpose of the Real Estate Brokerage Act is particularly relevant in project brokerage where there is a fundamental difference in the level of professionalism between the business seller and the consumer buyer. In accordance with the requirement for good brokerage practice, the broker must take into account the level of professionalism of the parties and carefully safeguard the solutions provided in the legislation to balance the power relationship between the parties. This entails inter alia:

• The broker must ensure that the purchase agreement is balanced and in accordance with the normal arrangements of contract law. If the mandatory provisions of the contract laws are deviated from, the broker must explicitly draw the parties' attention to this before the transaction is concluded. • The broker must responsibly ensure that the buyer, before the transaction is concluded, has received information about their duties and rights in such an unambiguous manner that they are enabled to make an informed purchase decision. For example, it is not sufficient to merely present a draft of the purchase contract in connection with the sales negotiations if this contains (for the buyer) special and/or burdensome terms. Examples of such terms may be various types of reservations and disclaimers by the seller for delays and defects, rights for the seller to make changes to the project after the conclusion of the agreement, prohibition on resale before handover, etc. Such terms must be highlighted clearly. • The broker is not permitted to broker contract terms that are in conflict with mandatory contract law or are unfair according to the Marketing Act § 22. • The broker must ensure written documentation of their advice, preferably by having the information included in the sales report, cf. point 2.2. • The broker must ensure that the purchase contract, cf. the Real Estate Brokerage Act § 6-8, does not deviate from what was agreed in the bid and acceptance phase.

2.2 The Sales Report The minimum information in the Real Estate Brokerage Act § 6-7 second paragraph shall be presented in one and the same written report (the sales report), which means that this information cannot be spread across different documents describing the project.

The sales report must bear the name, business address, and organization number of the brokerage firm, so that it is clear to the buyer which document in the total sales information is the broker's sales report. It must also be apparent from the sales report who is the responsible broker for the assignment in accordance with the Real Estate Brokerage Regulations § 6-2.

2.3 Specifically Regarding Completion Time Information related to the completion and handover time, including the buyer's rights in case of delay, is normally of central importance to a consumer buyer. The broker is obliged to inform the buyer in such a way that they can make a purchase decision based on their housing needs. This entails that the broker must clarify whether the developer, in their offer – legally – has committed to a fixed handover time or not, cf. the Housing Construction Act § 10, first and third paragraphs. If the developer does not commit to a fixed handover time upon conclusion of the agreement, the broker must specifically inform the buyer that failure to meet the assumed handover time does not necessarily give the right to daily penalties.³ This type of information must be given in writing.

3 Execution of the Transaction 3.1 Guarantee Provision According to the Housing Construction Act § 12 The seller's duty to provide a joint and several liability guarantee according to the Housing Construction Act § 12 arises immediately after the conclusion of the agreement. The seller cannot wait until any reservations are clarified.⁴

To safeguard their duty of care towards the buyer, the broker must follow up to ensure that the seller fulfills this contractual obligation. If this does not lead to results, the broker is obliged to inform the buyer in writing about the breach of contract as well as what consequences the lack of guarantee provision may have for the buyer, including the right to withhold the purchase price until the guarantee is provided. The broker must inform the buyer that no part of the purchase price becomes due for payment until a guarantee is provided. The broker cannot demand payment of any part of the purchase price before this time.

The Financial Supervisory Authority reminds that the minimum requirement for the size of the guarantee for purchase agreements entered into after 1 July 2011 has been extended to 3 percent and 5 percent of the consideration respectively before and after handover. The guarantee must last for at least until five years after handover.⁵

3.2 Advance Payment and Interest on Client Account In the sale of new housing according to the Sales Act (from business to consumer), it cannot be agreed that the buyer shall pay any part of the purchase price before transfer of title (mandatory performance against performance settlement). ⁶

In sales according to the Housing Construction Act, it can be agreed that the buyer pays the whole or part of the purchase price as an advance (before transfer of title) if the seller provides a bank guarantee.⁷

If such a bank guarantee is not provided, the buyer's payment is considered to be under the buyer's right of instruction.⁸

Interest earned on the broker's client account belongs to the person to whom the money belongs at any given time. ⁹

Interest earned on the buyer's payment that is not considered advance payment to the seller according to the Housing Construction Act § 47, thus belongs to the buyer until the seller has fulfilled their part of the agreement.

The broker cannot broker terms stating that interest belonging to the buyer shall nevertheless be paid to the seller. ¹⁰

3.3 Handover and Settlement Where it is agreed that the seller shall deliver a completed housing unit, the broker is obliged to ensure that a certificate of completion is available before handover and settlement take place. ¹¹ The duty lies with the broker, and it is not sufficient to urge the buyer to investigate whether a certificate of completion has been issued before the property is taken over. The client (sales broker) is also responsible for such control, even if the settlement is outsourced to an external settlement firm. In addition, the settlement firm has an independent duty to control whether a certificate of completion is available before settlement is carried out.

The duty to control that a certificate of completion is available before handover and settlement also applies to pure settlement assignments.¹²

Amendment of the Planning and Building Act of 25 June 2010 seems to imply that handover and settlement can no longer be carried out based on a temporary use permit. Reference is made to the preparatory works' statement¹³ that the change entails a tightening of previous regulation and a clarification of the certificate of completion time as one final cutoff time for completion. The department further states that “the contracting parties should base handover on the certificate of completion, instead of the temporary use permit as today.” The Financial Supervisory Authority assumes that the broker adapts their routines in accordance with these statements.

The broker shall, in connection with the handover, give advice to the parties regarding any remaining work, including regarding the buyer's right to withhold sufficient consideration as security for the seller's performance.¹⁴

The broker cannot facilitate or contribute to housing being put into use in violation of the Planning and Building Act. If the broker is instructed by the parties to carry out the transaction before the housing can legally be put into use, the broker must inform the parties in writing about the possible consequences of this, including the risk that a certificate of completion may not be issued later and the loss of the right to daily penalties.

The broker cannot leave the notification and execution of the handover to the parties, but must have an active role in this phase of the assignment.

Before the purchase price is paid to the seller, the broker must ensure the following:

• that statutory prerequisites are fulfilled • that the buyer's and/or lender's payment prerequisites are/are being fulfilled • that the buyer is otherwise not exposed to the risk of economic loss associated with the settlement

Guarantee according to the Housing Construction Act § 47 shall secure the buyer's advance payment until the buyer has obtained legal protection. The guarantee therefore cannot be agreed to be dissolved before this time.

Eirik Bunæs Wilhelm Mohn Grøstad

Contact Persons: Supervisory Advisor Anne-Kari Tuv, tel. 22 93 98 04 Senior Advisor Eva Marie Hansen, tel. 22 93 97 75 Senior Advisor Johan Andreas Skartveit, tel. 22 93 99 24 Advisor Marit Skjevling, tel. 22 93 97 27

FINANS TILSYNET P.O. Box 1187 Sentrum 0107 Oslo POST@FINANSTILSYNET.NO WWW.FINANSTILSYNET.NO