The changing market environment in new residential construction is presenting project developers and builders with considerable challenges. A combination of higher construction costs, increased financing rates and noticeable buyer restraint is causing liquidity bottlenecks or insolvency among several market participants. With roughly every second new home nationwide built via a property developer, project failures pose substantial economic risks for private buyers. In standard developer contracts, which link the purchase of the plot with the construction of the property, experts believe the current provisions of the German Civil Code fall short in the event of insolvency.
The consumer protection association Wohnen im Eigentum points out that in a crisis, private homebuilders often face lost instalment payments, unfinished trades and incalculable additional costs. Dr Sandra von Möller, executive board member of the association, stresses that buyers are insufficiently protected by law when a developer becomes insolvent. Although well-founded proposed solutions have long been available, the federal government lacks the determination to close the existing loopholes in developer contract law in a binding manner.
Criticism of patchy data base and delayed legislation
Concrete recommendations for statutory revision have existed for several years. A working group set up in 2014 by the Federal Ministry of Justice and Consumer Protection, with the participation of Wohnen im Eigentum, drafted proposals for an independent developer contract act up to 2019. The provisions envisaged, among other things, that developers would either have to waive instalment payments until complete move-in readiness and handover, or secure these advance payments using mandatory instruments such as insurance bonds. However, statutory implementation has failed to materialise so far.
A minor interpellation by the Bündnis 90/Die Grünen parliamentary group in the Bundestag recently highlighted that the federal government lacks reliable figures on the true scale of the problem. Neither the number of affected private households nor the volume of unfinished housing units or average financial losses are recorded statistically. Von Möller described this information deficit as a political failure, but emphasised that the lack of detailed statistics must not be a reason to delay necessary protective regulations any further.
Increased complexity for owner-occupied flats
Insolvency hits buyers of owner-occupied flats particularly hard, as their purchase makes them part of a condominium owners' association. If the developer defaults during the construction phase, the halt in work mainly impacts the common property. Key parts of the building such as roofs, staircases, lift installations and utility connections cannot be completed by individual owners in isolation. The necessary coordination within the owners' association, along with open responsibilities and substantial supplementary financing requirements, frequently stall construction progress for years.
Until the statutory framework is reformed, the association recommends that private buyers have contracts examined in detail by legal specialists in advance and consistently demand security mechanisms:
- —Make instalment payments strictly in line with the specifications of the Real Estate Agent and Commercial Contractor Regulation as well as the contractual agreements.
- —Conscientiously inspect actual construction progress before releasing any payment.
- —Consistently reject demands for services not yet performed or unagreed additional works.
- —Have the developer contract reviewed by an independent expert prior to notarial certification and contractually anchor safeguards for the event of insolvency.
