THE ROLE OF THE PRELIMINARY CONTRACT IN PROPERTY TRANSACTION PROCEDURES
December 1, 2016
In present days, where the real estate frauds are among the most common ones, securing the interests of the parties on a real estate transaction is mandatory. In this case concluding of preliminary contract plays a key role in protecting the interests of both parties.
Since every individual case has its own specifics, the parties could get a consultation from property professional. There are many examples in the practice where the parties used to conclude preliminary contracts, prepared by real estate agents – but it has to be noted that the brokers intermediate on property transactions usually are not solicitors respectively do not have the competency to prepare a proper contract to protect the interests of the opposite parties.
Very often in Bulgaria a real estate agent gets commission by both parties, so it is impossible for him/her to protect opposite interests. This as well is not their obligation though – the role of the property broker is to find and offer a suitable real estate, not to perform legal analysis of the ownership.
The preliminary contract is a type of contract, signed by the parties who intend to conclude the final contract for property transfer and it has no title-transferring effect. Since the most popular deal is the contract for sale and purchase of real estate, with the present article we would like to point attention towards the basic moments when signing preliminary contract for purchase/sale of real estate.
The preliminary contract should be concluded in written form, where the major agreements about the conditions of the sale should be implemented in – i.e. description of the parties, the subject of contract, specifics of the property, the price, etc.
The role of the preliminary contract is to guarantee the interests of both parties: For the seller – that he/she has the contract as a legal reason to receive the sale price and for the buyer – the contract entitles them to receive title, once they pay the total purchase price to the seller. This guaranteed right to the buyer rises from the legal option in art.19 al.3 of the Contracts and Obligations Act entitling the regular party (which has fulfilled their own obligations per the concluded preliminary contract) to lodge constitutive claim at the court for declaring the signed preliminary contract as final one.
In case of positive court decision, the final contract will be considered as concluded on the date on which the court decision has entered in force. The court practice consists of examples where the title transfer could be postponed until the claimant (i.e. the buyer) pays the total purchase price, if he/she has not done it already.
Except the amount of the sale price, the conditions for payment and the description of the real estate, usually there are other obligations with important role in the conveyance process. For example, the obligation of the vendor to inform the buyer with the history of ownership of the real estate, as well with the registered circumstances in the Land Register (i.e. if there are any legal burdens, mortgages, following title deeds or claims/. In this way it becomes clear for the buyer or their property conveyancer if the seller is the actual owner of the property, if the buyer will acquire proper title right, if any third parties have placed any pending pretentions about the property, etc.
On the other side, the buyer could oblige to pay part of the purchase price before signing of the final contract (which is the usual practice here). Usually the parties agree that the buyer has to place a deposit (called “advance payment” or “down payment”) on signing the preliminary contract, which sum then shall be deducted from the total amount of the purchase price when paying the due balance on signing the final contract (the Title Deed).
In the preliminary contract the parties could establish the concrete moment when the possession will be passed towards the buyer; also who will cover the property transfer expenses, which party will cover payment of any unpaid utility bills, etc.
An important clause is the one stating the deadline for concluding the Title Deed. Usually the parties agree also on the exact hour and about the figure of the notary public who will witness the deed. Where if the final contract does not get signed due to the guilt of one of the parties, for the other party rises the above detailed right to lodge claim per art.19, al.3 of the Contracts and Obligations Act.
Winning this lawsuit means that the court decision will have the role of Title Deed – i.e. the ownership will be transferred towards the buyer, and he/she will be obliged to pay the total purchase price (if not done it already).
On the base of our experience as real estate lawyers we can conclude that the most common risks in property transactions are acquiring real estate with legal burdens on it, for which problems the buyer had no idea, or acquiring real estate from non-owner. In these cases the preliminary contract could be used as a method for eliminating such risks – via obliging the seller to remove any registered burdens or to guarantee freeing the premises from residents on rent, and including penalty clauses to secure the performance of the above listed obligations, etc.
There are also other options given by the nature of the preliminary contract for securing the interests of the parties. In case that under the clauses of the preliminary contract the possession will be transferred towards the buyer before the moment of signing the final contract, and the parties later do not reach this moment due to one or another reason, then the buyer could pretend he/she has acquired ownership on the base of prescription (yet after expiration of the minimum time periods for prescription).
Under the provisions of the Property Law and the practice of the Supreme Court in these cases the legal effects are equivalent to conscientious possession, but with the only difference that it had to be exercised at least for ten years in a row. So if the buyer has paid the purchase price, has possessed the real estate for a period of ten years manifestly and constantly, he/she could refer to expired time period that enables prescription, during eventual disputes about the title rights on the property.
Concluding of preliminary contract dough is no guarantee that the vendor will not decide to transfer the real estate towards third parties. So there is a risk the promisor (i.e. the seller) to transfer the real estate to third party even if his/her obligations per the signed preliminary contract have not been fulfilled. In such inconvenient hypothesis the creditor (i.e. the buyer) could lodge claim for revoking of this deal (the so-called “Pavlov” claim) per art.135 of the Contracts and Obligations Act, where to win it he/she has to prove that the third party knew about the existing preliminary contract.
The above listed shows that the preliminary contract is a beneficial step in the conveyance procedure and it delivers clearness in the relations between parties, giving them guarantees that their interests are covered.
If you plan to perform real estate purchase or sale and need legal help for it, our legal team of Bulgarian conveyancers will be happy to share their experience with you and to assist you.