In recent years, buying off-plan property has become extremely popular. One way to document such a purchase is by signing a preliminary purchase agreement and then signing a final agreement upon completion of the building. The reason for using this particular method is that at the time of its conclusion, the building has not yet been constructed and therefore there is nothing to transfer.
What is a preliminary contract?
The preliminary contract is expressly regulated in our legislation and represents an undertaking by the parties to it to conclude a final contract. The final contract has the same subject matter and terms as the preliminary contract, unless the parties expressly agree otherwise. With the preliminary contract the parties undertake to conclude under agreed terms final contract within a specified period or upon the occurrence of certain circumstances.
The Obligations and Contracts Act regulates the form and necessary content of preliminary contracts. A preliminary contract for the conclusion of a final contract, which requires a notarial form or a notarized form, shall be concluded in writing. The preliminary contract must contain the essential terms and conditions of the final contract.
What is specific about a preliminary contract for the sale and purchase of real estate?
The most important feature of a preliminary contract for the sale and purchase of real estate is that it does not transfer ownership of the property. As mentioned above, the preliminary contract only represents an undertaking to conclude a final contract. When it comes to real estate, the preliminary contract only obliges the seller and buyer to transfer the property that is the subject of the contract. Even after signing it, the seller remains the owner of the property. A final purchase agreement in the form of a notarial deed must be concluded in order for ownership to be transferred.
According to the Obligations and Contracts Act, the preliminary contract for the sale and purchase of real estate must be concluded in writing and contain the essential terms of the final contract. Such terms are: identification of the property, price, deadline for concluding the final contract, and others at the discretion of the parties.
What risks does it entail for the buyer the conclusion of a preliminary contract for the sale and purchase of real estate property?
Due to the above-mentioned peculiarity, namely the fact that ownership of the property is not transferred, there is a risk and uncertainty as to whether the property will be transferred at all. Given that the seller remains the owner of the property, there is no obstacle to him selling the property to a third party if he acts in bad faith. Very often, precisely for this reason and knowing that the buyers under the preliminary contract have not yet obtained ownership of the property, sellers put pressure on buyers to negotiate terms different from those already agreed, such as an increase in price, an extension of the deadline for concluding a final contract, and others.
It is also possible for the seller to refuse to conclude a final contract. This poses a serious problem in cases of off-plan property purchases through a preliminary purchase agreement. The reason is that in almost all cases, upon conclusion of the preliminary contract, the buyer makes a payment, if not the entire amount, then at least the greater part of the agreed sale price. The seriousness of the consequences of such bad faith behavior on the part of the seller lies in the long period of time during which the buyer is deprived of both the ownership of the property and the amount paid.
In most cases, when concluding a preliminary contract for the sale and purchase of real estate, the price is paid either in installments or at least part of it is agreed to be paid on the day of the transaction before a notary public, which gives the buyer a certain degree of peace of mind and security. In quite a few cases, however, it is agreed that the buyer must first pay the full sale price and only then can the final contract be concluded. In these cases, the risk for the buyer is greatest.
What risks exist for the seller under a preliminary contract for the sale of real estate?
Of course, not only for the buyer there are risks in concluding a preliminary contract for the sale and purchase of real estate property. There are such risks for the seller as well, especially when he/she is a natural person, and not a company and mainly, when it is not a matter of purchasing property off-plan.
Again, in many cases, upon conclusion of a preliminary contract for the sale and purchase of real estate, the seller transfers possession of the property to the buyer before the final contract is concluded and ownership is transferred. In this way, the seller risks, in the event of bad faith on the part of the buyer to delay the conclusion of the final contract or to refuse to conclude it altogether, in breach of the preliminary contract, being deprived of the use of their property for a certain period of time.
How can the parties to the preliminary contract protect themselves?
Firstly, the strongest means of protection is to stipulate the occurrence and respective sanctions against such risks in the preliminary contract itself. It is extremely important that each party is aware that the preliminary contract, like any other contract, is concluded by mutual agreement between the parties and that any amendments to it are made in the same way.
Unfortunately, there is no preliminary protection against the risk of the seller selling the property to a third party after concluding a preliminary contract with the potential buyer.
Depending on the risks that have occurred, the methods of protection are different:
- In the event that, after concluding the preliminary contract, the seller transfers the same property to a third party, the buyer has the right to request a refund of the amount paid, as well as to seek compensation for non-performance and/or a penalty, where such has been agreed upon.
- If either party to the preliminary agreement refuses to conclude a final agreement, the other party has the right to bring an action in court for the conclusion of a final agreement. It is important to note that in preliminary contracts where it has been agreed that the final contract will be concluded after the buyer has paid a certain amount, it is a prerequisite for such a claim to be upheld that this obligation has been fulfilled. In other cases, the sale price shall be paid within two weeks of the decision coming into force.
- When ownership of the property is transferred to the buyer upon conclusion of the preliminary contract and the buyer refuses or delays the conclusion of the final contract, the seller has the option of requesting the court to declare the preliminary contract final and to forcibly remove the buyer from the property if the buyer is no longer interested in the sale.
In conclusion
The above makes it clear how important it is to consult a specialist in a timely manner to perform a preliminary review of the contract before it is concluded in order to protect the interests of the parties to the greatest extent possible. However, it is impossible to list all possible adverse situations exhaustively or to foresee them, so it is extremely important to take appropriate action in line with the needs and capabilities of the parties and the risk involved.
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The article was prepared by attorney Galina Cheshirova.
Silvia Petkova Sole Proprietorship Law Firm provides legal assistance in the preparation, review, and editing of preliminary contracts for the purchase and sale of real estate, as well as services related to checking the property for actual owners, encumbrances, utility obligations, etc.
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