Protecting home buyer's rights during the period of construction

The so called 'RS system' in Finland is a system that protects the rights of home buyers during home construction and is a part of real estate regulation, which was developed by banks in the 1970s (RS = Finnish acronym for “recommended by financial institutions”) and the corresponding legally binding regulations are today a part of the Housing Transactions Act.

An RS-site is a housing company, which is linked to the protection system provided by the Housing Transactions Acts during the construction phase. If the homes do not have RS protection, the buildings must be approved by the building authorities before the homes can be marketed and sold.

The buyer is protected in the construction phase from insolvency of a founding shareholder of the housing company and from the increase (beyond the scope of the agreement) of liabilities which are being transferred to the buyer from housing company.

A founding member must ensure that the security documents for the housing company and construction project, such as the guarantee certificates, financial plans, property information and building permits and contract documents, are delivered to the trustee bank (a so-called RS-bank) or the Regional State Administrative Agency.

The trustee of the security documents must print the shareholder certificates in a printing institution approved for printing housing company shareholder certificates and store them.

The founding member and buyer of a share in the housing company must notify the trustee of the security documents of any transfers and collateral commitments that affect the share. The right for using the share for collateral or the rights from a transfer agreement is established once the collateral commitment has been delivered to the trustee of the security documents. The trustee of the security documents must register the received share transfers and collateral commitments.

To ensure the security of the financial situation of the housing company in accordance with the agreement, the founding members must draft a financial plan that states the maximum number of collateral assignments allowed for the property, among other things. The budget in the financial plan can only be exceeded due to a rise on building costs resulting from extraordinary circumstances.

A founding member must set collateral as required in the Housing Transactions Act for the housing company and shareholders.

A share in the housing company sold by a founding member cannot be collected for foreclosure debt of the founding member, even if the condition on withholding ownership rights of a founding member would be in effect. A debt based on a share transaction cannot be collected as a part of a foreclosure from a founding member's debt to the extent that the housing company is owed by the founding member as stated in Companies Act.

If a founding member’s assets are subject to foreclosure, the bankruptcy estate must notify the shareholders if the estate will commit to fulfilling the transactions for the shares that the founding member has not yet fulfilled. If the bankruptcy estate does not commit to the fulfilling the transactions of the shares, each shareholder has the right to dissolve their transaction. Voting rights for the shares of the shareholders who do not dissolve their transactions are transferred to the buyers of the shares effective immediately.

With RS-sites, the buyers have the possibility to appoint a monitor for the construction work and an auditor to represent them.

Bankruptcy during construction


Family A bought an RS apartment. Construction company finances faced uncertainties and ultimately resulted in bankruptcy. The construction was only half-completed, and A had naturally already paid half of the transaction price.  How does the RS system help in this situation?

Section 2 of the Housing Transactions Act was drafted specifically so that it would protect the buyer in this situation.

There are three types of protection:

Prohibition of front-loading payments, i.e. transaction prices can fall due only at the pace that the building is completed.  Therefore, buyers do not have to pay for more than what is completed.

Transaction price account, which must be used for all transaction prices and the RS-bank has the obligation to monitor that funds in the account are not used for purposes outside the scope of the project.

The collateral for the construction phase (must be at least 10 % of the total amount for the transaction prices of the apartments, when calculating the collateral, the amount that corresponds with 70 per cent of the debt-free price of the apartments shall be considered), which must be taken at the point when the apartments are offered for sale in the housing company.

E.g. Family A purchased housing company shares for EUR 100,000.00, which is 70 % financed through the housing company loan (EUR 70,000.00). The degree of completion of the site is 50 % and the builder files for bankruptcy. Family A has paid EUR 15,000.00 of their apartment to the transaction price account, which means EUR 15,000.00 of the transaction price is unpaid and a loan balance of EUR 35,000.00 remains yet to be taken out against it.  The goal is to finish the construction with these funds (EUR 15,000.00 + 35,000.00) in addition to the construction phase collateral, which equates to EUR 7,000.00 for the apartment. This is an optimal situation, as usually a company files for bankruptcy when the calculations have failed and the budget has been exceeded.

2. Construction mistakes, Construction company files for bankruptcy

Family B bought an RS-apartment. After the move, there were minor disappointments in the construction quality: trimming was not properly aligned, the flooring was uneven, etc. How does the RS system help in this situation?

- The greatest advantage of the RS-system in this situation is that the post-construction collateral and deficiency collateral, i.e. 10-year collateral have been deposited, which means that if the founding shareholder (construction company) refuses to pay for the repairs and becomes insolvent due to bankruptcy or another reason, the repairs can ultimately be handled using them. However, it must be noted that the deficiency collateral can only be used to cover such mistakes that have been detected after the annual inspection of the apartment and that could not have been detected in the annual inspection.