Property flip agreement in Poland – rules, obligations of the parties and settlements

An agreement to carry out an investment process in the real estate market in Poland, sometimes informally referred to as a ‘flip agreement’, is a legal document entered into between an investor financing the purchase of a property and the person undertaking to organise and execute the investment process.

Given how capital-intensive property investments are, a property flip agreement is most often concluded when one party has the capital, whilst the other has the knowledge, experience, contacts, and often also access to a specific property. Combining these elements allows for the smooth execution of the transaction and the generation of a profit.

A typical investment model, i.e. a ‘flip’, involves the purchase of a property, its renovation to increase its market value, and then its sale to a third party at a profit. In practice, however, this process may be more complex and involve additional elements and obligations on the part of the parties, such as professional home staging or undertaking advanced marketing activities.

It should be emphasised that under Polish law a contract for the conduct of an investment process is not regulated in the Civil Code as a separate type of contract. Consequently, it is an unnamed contract, which means that the parties enjoy broad contractual freedom in shaping their mutual rights and obligations, within the limits set by law.

The aim of this publication is to outline the key issues that should be included in a contract for the management of an investment process.

The contractor’s obligations in a property flip contract – renovation or modernisation of the property

As early as the stage of defining the subject matter of the property flip agreement, the document should clearly define the scope of the parties’ obligations. Given the nature of this type of contractual relationship, the bulk of the obligations will rest with the contractor (sometimes referred to as the ‘investment operator’), who is responsible for the comprehensive implementation of the investment process.

For example – although the scope of these obligations may vary depending on the type of investment – the parties may agree that, in the case of the renovation or modernisation of the property, the contractor undertakes to:

• prepare a reliable and as precise as possible cost estimate for the renovation or modernisation of the property

The cost estimate should take into account all anticipated costs of the flip, and the contractor should submit it to the investor for prior approval. At this stage, the parties may stipulate that the cost estimate forms an annex to the contract and will constitute the basic financial assumptions regarding the implementation of the investment. Any significant overruns of the renovation cost estimate should require the investor’s prior consent, although the parties may, of course, specify how ‘significant’ is to be interpreted, i.e. whether this will be 5% or 10% of the budgeted amount.

• conducting the process of selecting a contractor for the construction works and entering into a contract with them

In many cases, the contractor works on an ongoing basis with a specific provider of renovation and construction services, and the investor is already aware of this provider prior to the conclusion of the investment contract. In such cases, the selection of the contractor requires only the investor’s approval. However, if this is not the case, the contractor should be required to carry out a selection process for a renovation and construction company, involving at least an analysis of available tenders and the presentation to the investor of a recommendation for the selection of an entity capable of performing the works properly and on time. Of course, regardless of the above, the final decision regarding the selection of the contractor for the construction works rests with the investor in each case. 

• exercising ongoing supervision over the execution of construction works

The contractor should oversee the execution of construction works, including their compliance with the construction contract, the cost estimate and the schedule, as well as represent the client in dealings with subcontractors and service providers. The contractor’s obligations may also include ensuring the purchase and delivery of building materials, finishing materials and other items necessary for the project, using funds provided by the client (unless the obligation to provide them rests directly with the contractor).

It is considered good business practice to maintain transparent and up-to-date records of all investment costs, in a format that allows the investor constant access and oversight, for example via a spreadsheet that is updated in real time.

Flip completion deadlines and liability for delays

It is clear that, in the case of a flip investment, one of the key factors determining its profitability is the project’s completion time. Every day of delay generates additional costs for the investor – in particular those related to the need to pay service charges, financing costs or lost profits resulting from the postponement of the sale of the property being flipped.

For this reason, the contractor’s obligations should explicitly cover not only the organisation and supervision of the renovation process, but also ensuring its timely completion.

In contractual practice, it is advisable to specify a maximum deadline for the completion of the renovation or modernisation of the property, calculated from the date the keys are handed over to the contractor, whilst linking compliance with this deadline to a mechanism of financial liability on the part of the contractor. A frequently used solution is to introduce a provision whereby, in the event of a delay or default, the contractor’s remuneration is reduced accordingly for each day. This mechanism may, for example, take the form of deducting a specified daily amount from the remuneration due to the contractor

At the same time, to avoid disputes over interpretation, it is necessary to specify precisely in which situations the contractor is liable for delays, and in which cases the completion deadline is extended accordingly without financial consequences. As a general rule, the risk should lie with the contractor in respect of events falling within the scope of their organisation of the investment process, including the acts or omissions of entities they engage. On the other hand, it is reasonable to exclude their liability in the event of circumstances beyond their control, such as changes to the scope of work initiated by the investor or events of force majeure.

The contractor’s obligations in a property flip – renovation and modernisation

Once renovation or modernisation works have been completed, the contractor’s role should not be merely to passively await the investor’s decisions, but to actively support the sales process, with a view to finding a buyer for the property being flipped as quickly as possible. In practice, this primarily involves marketing and organisational activities, often carried out with the involvement of a professional estate agent.

In practice, the steps taken to find a potential buyer for the property should be specified in the contract by setting out the contractor’s specific activities. In particular, this may include the contractor directly conducting or supervising advertising and marketing activities in the property market, organising and conducting property viewings, as well as initiating contact between potential buyers and the investor.

An important element in properly defining this scope of duties may also be the specification of a budget allocated for marketing activities. The lack of a precise indication of this in practice often leads to disputes regarding the legitimacy and amount of expenses incurred; therefore, it should be clearly defined in the contract or in an annex to the contract forming an integral part of the contract.

Furthermore, in many investment models, it is permissible – and often essential – to work with professional estate agents, who support the sales process by providing access to their own client databases and channels for marketing properties. In this context, it is worth noting the typical practical issues associated with exclusive agency agreements with estate agents, particularly regarding the scope of activities, the parties’ liabilities and the allocation of costs, which may also affect the profitability of the flip. This topic is discussed in greater detail in this publication.

The investor’s obligations in a property flip

The investor’s primary obligation remains, first and foremost, the purchase of the property specified by the contractor, as well as the bearing of all costs associated with both the purchase itself and the subsequent renovation and modernisation of the property. This includes, in particular, covering ongoing expenditure on building materials and services, stamp duty, notary fees, court and administrative fees, utility connection costs, service charges, and any other costs necessary for the proper execution of the property flip.

In practice, the investor often provides the contractor with payment instruments linked to a bank account to the extent necessary to make payments related to the renovation and modernisation of the property. Of course, a key organisational requirement remains the obligation to ensure that all expenses incurred as part of the flip are properly documented, in particular by invoices or receipts. The contractor should be responsible for collecting and keeping a running record of these, for example in a spreadsheet, which may be made available to the investor for real-time inspection, with the aim of ensuring full transparency of the accounts.

Furthermore, in relation to the performance of renovation and modernisation works on the property, the developer should also undertake to ensure that the contractor has a realistic opportunity to carry out the tasks entrusted to them. In particular, this entails the obligation to ensure unimpeded access to the property, to resolve formal and organisational matters relating to the supply of utilities, and to enter into a contract with the entity designated by the contractor, within the scope specified in the main contract, or to grant the contractor a power of attorney to conclude such a contract. At the same time, the investor is obliged to pay the remuneration due to that entity on time, which is intended to ensure the continuity of the modernisation works and to avoid organisational downtime.

Remuneration of the parties in a property flip

The scope of the parties’ remuneration upon the conclusion of an investment cooperation agreement stems directly from the principle of freedom of contract, which allows for the flexible structuring of the economic relationship between the investor and the contractor. In practice, this means the possibility of adapting the settlement mechanism to the specific nature of a particular property flip, including, above all, the level of risk and the operational involvement of the parties.

As a general rule, in a property flipping agreement, the contractor is entitled to commission-based remuneration, which may be defined, for example, as a specific percentage of the profit realised on the sale of the property, e.g. 50% of the profit generated from the flip. The key issue in such arrangements, however, is the correct definition of the term ‘profit’. In the most economically and practically consistent sense, it should correspond to the difference between the gross sale price of the property, as stated in the notarial deed, and all documented expenses incurred in direct connection with the implementation of the investment by the investor and the contractor.

Costs directly related to the performance of the contract include, in particular:

• the costs of acquiring the property, together with associated expenses (such as estate agents’ commissions or notary fees),
• the costs of renovation or modernisation,
• the costs associated with the disposal of the property,
• any charges arising from the ownership of the property during the investment period, which may include, in particular, charges payable to the housing association (renovation fund, management), utility and operating costs (heating, water, sewage, internet), property tax, and (where applicable) a perpetual usufruct fee.

Correctly determining the remuneration requires, in each case, a detailed calculation based on the full set of accounting and cost documentation available to the parties, in particular invoices, bills and statements of expenditure. Only such an analysis will allow for a precise determination of the actual financial outcome of the investment.

Securing the investor’s profit in a property flip

From the investor’s perspective, a key element in securing an adequate profit is the possibility of introducing a specific guarantee mechanism. For example, this mechanism may take the form of a provision whereby the contractor guarantees the investor priority in the distribution of profits from the flip, and in the event that the investor’s share of the investment return falls below a specified threshold (e.g. PLN 50,000), the contractor covers the resulting shortfall from their commission.

For example, assuming that the property was purchased for PLN 600,000, renovation and modernisation costs amounted to PLN 150,000, and transaction and operating costs totalled PLN 50,000, the total cost of the investment is PLN 700,000. If the property is subsequently sold for PLN 780,000, the actual profit on the investment will be PLN 80,000.

In such a situation, assuming a guarantee mechanism that stipulates a minimum profit for the investor from the flip of PLN 50,000, the investor receives the full PLN 50,000, whilst the remaining PLN 30,000 constitutes the portion of the profit subject to further distribution in accordance with the agreement (e.g. as part of the contractor’s commission). If, however, the profit from the investment amounted to only PLN 40,000, the contractor, in accordance with the guarantee mechanism described, would be obliged to cover the shortfall of PLN 10,000 from their commission, so that the investor receives the guaranteed amount of PLN 50,000.

Securing the contractor’s remuneration in a property flip

In order to safeguard the contractor’s interests, the remuneration structure may include mechanisms protecting them against their share in the transaction being circumvented or against the investor’s actions preventing the proper settlement of the investment.

In particular, the contractor may also be entitled to commission-based remuneration if the investor fails to proceed with the agreed sale of the property, which came about as a result of the contractor’s actions, in accordance with the provisions of the contract. Similarly, such remuneration will also be due if, during the term of the agreement, the investor disposes of the property without involving the contractor or without the contractor’s participation in the transaction process.

It is also possible to introduce a mechanism that ‘compels’ the investor to fulfil their settlement obligation, or to adopt a simplified mechanism for calculating remuneration, under which the contractor’s remuneration corresponds to a certain percentage of the anticipated profit from the sale of the property, as specified in the annex to the contract. This solution serves a preventive and disciplinary function, limiting the risk of circumventing the economic purpose of the cooperation and ensuring the enforceability of payment of the remuneration from the flip to the contractor.

The flip investment agreement and the scope of the contractor’s liability

A flip agreement should also precisely define the contractor’s scope of liability. The structure of the contractor’s liability in agreements concerning the implementation of ‘property flip’ investment projects may (though need not) be based on the assumption that there is no guarantee of an economic result in the form of achieving a specific profit. In practice, this means that the agreement is a contract of best efforts rather than a contract for specific results.

When adopting such a model, it is crucial to make it clear that the contractor is not liable for the investor achieving a specific level of return on investment. This is because any investment activity is subject to market risk, including, amongst other things, fluctuations in property prices, renovation costs or changes in sales conditions. Consequently, the financial forecasts set out in business models will be of an estimative nature and cannot form the basis for claims against the contractor in the event that the anticipated results are not achieved.

At the same time, whilst adopting this approach, the contractor’s liability is not entirely excluded – they remain liable under general principles for non-performance or improper performance of the contract. This means that they are liable for their own acts or omissions if these breach the contractual provisions or the standard of due diligence required in this type of activity.

Exclusion of the contractor’s liability in a property flip agreement

Another key element of a flip agreement is the provision governing the scope of liability exclusions. As a general rule, the contractor is not liable for the investor’s actions vis-à-vis third parties, including entities involved in subsequent stages of the investment, such as construction contractors or service providers. Similarly, the contractor’s liability for physical and legal defects in the property being purchased, as well as for defects revealed during or after the completion of renovation works, may also be excluded, provided they do not result directly from the contractor’s culpable conduct.

Models of this type often also provide that liability under the warranty for building materials, fittings or equipment rests directly with their sellers or suppliers, even if the purchases are formally made by the contractor on behalf of the investor. In such cases, the contractor limits its role to organising the procurement process and undertakes only to take steps to enforce warranty rights on behalf of the client.

This model is supplemented by the requirement for the contractor to hold civil liability insurance, which serves as an additional safeguard for the investor’s interests in the event of any damage resulting from the improper performance of the contracted works.

The entire structure is designed to clearly separate investment risk (on the investor’s side) from operational risk (on the contractor’s side), whilst maintaining the contractor’s liability within the bounds of the standard of due diligence expected of a professional participant in the property market.

Termination of a property flip investment agreement

In investment agreements, it is crucial to strike a balance between the stability of the cooperation and ensuring that the parties have a realistic possibility of terminating it in situations justified on economic or legal grounds. For this reason, the mechanisms for terminating and rescinding the agreement may be structured asymmetrically, reflecting the different scope of risks and obligations of the parties.

The investor may therefore have a broad right to terminate the flip agreement at any time. However, exercising this right entails the need to settle the contractor’s work to date. In practice, this means that if the contract is terminated after the property has been purchased but before the renovation or modernisation works are completed, the investor may be obliged to pay remuneration. Conversely, if the termination occurs after the work has been completed but before the property is sold, this remuneration may increase. This mechanism serves a compensatory function and protects the contractor against loss of remuneration should the project be terminated at an advanced stage of implementation.

At the same time, the investor may be entitled to terminate the contract immediately in the event of gross breaches on the part of the contractor. This applies in particular to gross breaches of the law, gross negligence or carelessness, as well as unjustified cessation of performance of obligations for a period of, for example, at least one month. In such cases, if the contractor fails to remedy the effects of the breach or the damage is significant, the contract may be terminated without any obligation to pay remuneration to the contractor, which serves as a sanction and protection for the investor.

Similarly, the contractor may have the right to terminate the contract at any time; however, termination without valid cause may entail an obligation to pay compensation to the investor. This mechanism is designed to limit the risk of unilateral, unjustified termination of the contract by the contractor, particularly where the project is already at an advanced stage of implementation.

Regardless of how the parties’ obligations are defined, the entire structure of the termination clause should take into account the specific nature of property investments, where the continuity of operational activities and the protection of the economic viability of the project are of key importance.

Summary

A contract for the execution of an investment process (the so-called ‘flip agreement’) in the real estate market in Poland is a flexible legal instrument used in real estate transactions, which allows the investor’s capital to be combined with the contractor’s operational expertise. Its open-ended nature gives the parties considerable freedom in shaping the cooperation model, but at the same time requires very precise regulation of key risk areas – from the scope of obligations, through financing and settlement rules, to liability and mechanisms safeguarding the interests of both parties.

In practice, the success of an investment is not determined solely by the attractiveness of the property, but often also by the quality of the contract. Provisions relating to cost control, timely completion, settlement procedures and the transparency of financial flows are of particular importance. Equally important are incentive and safeguard mechanisms, such as a commission-based remuneration model, minimum return guarantees for the investor, or penalties for delays and breaches of contractual obligations.