Since certain recent bankruptcies, off-plan sales (VEFA) legislation, supposedly protective of buyers, has shown its limitations.
This is particularly true of guarantees of completion and reimbursement guarantees (garanties d'achèvement respectivement de remboursement), which should be returned to buyers, around which there are many questions and much uncertainty: what exactly does the guarantee cover? What are the guarantor's obligations and what are the limitations thereof?
These issues contribute to increasing potential buyers' mistrust of VEFA, adding to the difficulties caused by rising interest rates and energy prices in particular.
While the Ministers of Justice, Housing and Finance have begun to provide answers to a number of thorny issues in response to parliamentary questions, they have made it clear that an in-depth analysis of the situation is necessary in order to adjust legislation, if necessary, to better protect buyers.1
To date, the following points have been addressed:
- Completion guarantee issued by an insurance company
The first question asked in the context of parliamentary question No. 7963, was whether the Ministers considered that a completion guarantee issued by an insurance company offered the same degree of protection as a guarantee issued by a bank.2
The Ministers replied on June 8, 2023 that the degree of protection offered depends above all on the intrinsic content and terms of the guarantee issued, and not on the quality of the guarantor. Given the equivalent creditworthiness of bank and insurance guarantors, we need to look at the terms and conditions of the guarantees on offer to determine which offers the best protection. This is the only way to determine which of the guarantees on the market offers the best protection.
Although the legislation, albeit somewhat terse, stipulates that the guarantees issued must comply with certain conditions, there is nothing to prevent the developer from seeking more protective guarantees than those legally required.
Nowadays, offering a more protective warranty can be a strong selling point to anxious customers in need of reassurance.
- Reimbursement guarantee
With parliamentary question No. 7963, the Ministers were also asked whether they intended to legislate against the option of substituting a repayment guarantee for a completion guarantee.
The Ministers did not comment on the substance of the issue; they merely announced that they would analyze the question in conjunction with the various players involved, and that the legislation would be adjusted "as necessary".
Transformation is therefore possible under the current circumstances, and it would be hard to imagine ruling it out altogether, even though completion may prove impossible in practice, for either material or legal reasons.
- Site coverage
Parliamentary question No. 8070 asked whether or not the guarantees issued should include the land, or the share of land sold to the purchaser, a question that is all the more fundamental in the event of a repayment guarantee being substituted for a completion guarantee.
The answer is clear: this is a possibility, but not an obligation, since "unlike the seller of the construction share, the seller of the land or land share is not directly involved in the construction of the building".
This may prove problematic, since in the event of reimbursement, in the absence of a land warranty, the guarantor will only reimburse the purchaser, after the VEFA contract has been terminated, the amounts duly paid to the developer for the buildings provided for in the specifications, while reimbursement of the price of the land must be claimed from the entity that sold it.
Thus, there is no certainty that the purchaser will be able to recover the full price if the seller of the land does not have the necessary funds, or if it does not manage to resell the land it recovers at the price paid by the purchasers.
This raises the question of whether it would be appropriate to make the land warranty compulsory.
The answer is not clear-cut.
More specifically, "the government intends to analyze existing legislation and market practice with a view to adjusting buyer protection where necessary", and intends to involve "the various players in the field" in this analysis.
However, the initiative to offer a land warranty, even when not required to do so, should help reassure buyers who are understandably hesitant.
In conclusion, a change in legislation cannot be ruled out, and is in any case desirable.
Footnotes
1. Response of 8 June 2023 of the Minister of Housing, Minister of Finance and the Minister of Justice to parliamentary question No. 7963 on VEFA completion guarantees; Response of 5 July 2023 of the Minister of Justice to parliamentary question No. 8070 on completion guarantees for on-plan housing sales.
2. We note that in its sectoral survey of July 2023 on residential real estate, the competition authority deemed, correctly in our view, that Article 1 of the Grand-Ducal Regulation of 24 February 1977 which provides that only banking and saving institutions can issue such guarantees is unconstitutional.
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