TALLINN, 10. November 2014 – The audit carried out by the National Audit Office indicates that local authorities have failed to guarantee to residents that property developers that have sold residential plots keep their promises to establish roads, green areas, utility networks and outdoor lighting in the areas they have developed.

Although it is local authorities that must establish public infrastructure, the law permits them to transfer this obligation to a developer by agreement with the latter. The National Audit Office is of the opinion that irrespective of such agreements, guaranteeing that the agreed infrastructure is actually built is a duty of local authorities.
During the completed audit, the National Audit Office analysed the activities of local authorities in situations where the local authority had made an agreement with a developer for the establishment of public infrastructure, but the developer did not manage to perform the obligations, which means that the people who had purchased homes were deceived, as they had expected the residential area to be connected to the rest of the world by a decent road and to have water supply and sewerage in the houses they purchased, and that the surroundings would look as promised before they bought the land.

 The key observations made by the National Audit Office are as follows:

 * Local authorities have not taken much interest in the performance of the agreements they have entered into with developers. The National Audit Office is of the opinion that sufficiently thorough supervision would have made it possible to find solutions when difficulties first started to emerge.
* The agreements prescribed various guarantees (e.g. contractual penalties) in the event of the developer’s failure to perform its obligations. In practice, local authorities have not implemented these guarantees.
* The knowledge that if a developer fails to build the public infrastructure the municipality or city has to build it itself is slow to spread among local authorities.
* Local authorities have only recently started dealing with these problems. Only some local authorities are planning funds for roads not established by developers and even fewer have actually built them. In the latter case, the local authority’s decision on which road to build often depends on whether the local residents themselves are prepared to invest money in the road.
* Local authorities used legally questionable solutions when looking for effective solutions to ensuring that the infrastructure building obligations that were transferred to developers are actually performed. However, the local authorities also complained that there are no clear guidelines on conduct. Another source of uncertainty for local authorities is that court rulings and the opinions of the notaries who advise local authorities have sometimes been different.
* The number of problematic residential developments may increase in the future, as local authorities have not assessed whether the detailed plans established in the previous decade are still relevant or whether they should be annulled. This means that if a developer decides to implement the plans after all, the problems described in the audit are likely to eventuate.

The National Audit Office advised the audited local authorities to review the detailed plans that have not yet been implemented and to consider annulling plans that are no longer relevant. The National Audit Office finds that there is no single instrument that would make it possible for local authorities to guarantee the performance of the obligations of developers in a manner that is completely free of risk, which is why the possibility that the local authority must perform the obligations itself in the end must be considered when an agreement is made with a developer.

In the case of existing problematic developments, the local authority has to look for solutions that primarily serve the interests of its residents. First of all, it is necessary to ascertain the needs of the residents, plan the order of the works and allocate the money. Residents should not have to spend decades waiting for a normal living environment due to disputes with property developers.

Background

The National Audit Office selected 30 areas of development from 12 local authorities nationwide where property developers had started selling residential plots but failed to either partly or fully keep their promises to establish roads, green areas, utility networks or outdoor lighting in the development areas. The average number of residential plots planned in one development area was 30. The smallest development areas had six and the biggest 80-90 new dwellings. Planning permission had been issued for more than half of the residential plots by the time of the audit; the remaining developments had not yet reached that stage.
The detailed plans of the problematic development areas in question were established from 1997-2008. Over 80% of them were established during the construction boom caused by economic growth, i.e. from 2002-2007. The audit revealed that developers have mostly not started to implement the detailed plans established in 2008 and later, where attempts were made to guarantee the performance of obligations with more detailed contracts. The problems described in the audit are particularly acute in local authorities situated near large towns and cities, which turned out to be in high demand as places of living during the period of rapid economic growth and which had enough free land to plan new houses. For example, 400 new development areas per year on average were planned with the detailed plans established in Harju County at the height of the property boom, the majority of which have yet to be built.

Toomas Mattson
Head of Communication Service, National Audit Office
+372 640 0777
+372 51 34 900

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• Posted: 11/10/2014 8:00 AM
• Last Update: 11/11/2014 3:16 PM
• Last Review: 11/11/2014 3:16 PM