PRELIMINARY AGREEMENT FOR REAL ESTATE UNDER CONSTRUCTION: THE RISKS

October 16, 2024

The purchase and sale of off-plan property includes a contract for construction

Thousands of transactions for the purchase and sale of real estate in recent years are “off-plan”: the house of the apartment is under construction. Sometimes sellers /investors, individuals who received compensation/ offer on the real estate market objects that have not even reached the “first sod”, but only have a notary deed, a building permit or even only an approved architectural project. Some proposals are at an even earlier stage: a land property /plot, regulated land property/ is offered, with an option to build a building on it according to an already prepared project or at the request of the buyer.

Settlement of legal relations in the above-described cases involves a higher than usual risk. If a ready-made apartment or a built house is bought, the relationship between seller and buyer ends with the transfer of ownership. The parties conclude a final contract in the form of a notarial deed soon after signing the preliminary contract. This is not the case with preliminary contracts for the purchase of a “off-plan” property: their execution usually takes years. The buyer receives a notary deed only years later. A number of pitfalls and dangers are often hidden in the clauses of the offered standard projects – both for the seller and for the buyer. In this article, we will pay attention to exactly what the risks are when buying a new construction property.

There are many reasons why a large number of buyers prefer a newly built property. The first is that they will be the first residents of the house/apartment; they will live in a new and clean place; the home will not be depreciated and therefore they will not have to make major repairs. Often the “old” construction requires a major renovation, and the price includes furniture and finishing works that are not to the taste of the buyer.
The significant risks of a “off-plan” purchase are primarily for the buyer. He invests a serious amount of money up front and has to wait for the property to be built and transferred to him with a notarial deed. Therefore, in this article we will highlight several main points that are essential when buying a property “off-plan”, whether it is a house or an apartment.

1. What is the purchase of a property under construction

When buying real estate, the parties settle their relations by concluding a preliminary contract for the purchase and sale of real estate. With it, they undertake to conclude a final contract for the purchase and sale of the property and agree on the essential terms of the transaction. In case of non-performance by one of the parties, the defaulting party may file a claim under Art. 19, para. 3 of the Contracts and Obligations Act and to ask the court to declare the preliminary contract final.
By entering into a preliminary contract for the purchase and sale of real estate that is under construction, the parties also enter into a construction contract at the same time: a contract for the construction of a building. Parties to this contract are the same seller and buyer, but they have the quality of assignor /future buyer/ and contractor /investor, personally or through his subcontractors – construction companies/.

This second treaty – although part of the general text – is not preliminary, but completely final. With it, the seller /investor, builder/ undertakes to build a building and only then to transfer to the buyer the right of ownership of the home, subject of the preliminary contract. This contract is effective throughout the relationship between the parties, and remains valid even after the completion of construction. It regulates warranty periods, stages, payments, degrees of completion, and all other features of construction.

In summary: the contract signed by the parties for the purchase and sale and construction of a “off-plan” property has a hybrid nature. It includes clauses relating to the process of construction and completion of the property and clauses relating to the transfer of ownership by notarial deed.

2. Legal analysis of the property and survey of the builder/investor

When the buyer intends to acquire real estate – new construction, he should be aware of who he is buying from. It is important to know who the builder and the investor are, because these persons are responsible. Separately, it is good to study how many buildings the particular seller has built, in what period, with what materials, what are the reviews about him, what is his name in society and in construction circles, is there any evidence of legal proceedings against him, etc.
The history of the property to be built, as well as the history of the land on which the building will be built, must be studied. All notarial deeds in the history of the property are examined.
Questions such as: who is the owner of the property, from whom the property was acquired, whether there are entries, markings and deletions on the lots of these persons, what notarial acts and other acts are entered, are investigated separately. Separately, the construction documentation should be analyzed: the bona fide seller provides full access to the design visa, the approved architectural project, the building permit. If the construction has started, a protocol for the construction line and level, as well as other documents related to the implementation of the construction, is provided. If the building is sold in rough construction, then documents such as the certificate under Art. 181 of the Territory Development Act, acts and protocols drawn up during construction, including act 14 and 15 are also very essential.

3. The Terms

One of the most important stipulations for the buyer under a contract for the sale and construction of real estate is the term. Caution is required on the clauses for transfer of possession, construction and completion of the building with Use Permit/Certificate, conclusion of a final contract in the form of a notarial deed and final payment of the price.

Often, recently, sellers run away from the obligation to put the building into operation by a certain date. Therefore, they do not specify any deadlines in the contracts. Instead, the sentence “The seller undertakes to submit an application to DNSK /NAG in order to obtain a use permit/certificate for putting into operation”, depending on the category of the building.
For the buyer’s interest, it is not important who files when. He needs suitable housing approved by the institutions for use. Therefore, he should insist on an exact deadline.
One should also watch out for pitfalls in the contract clauses. Often they allow the investor to excessively extend the lead times. Thus, sometimes we come across clauses that below 5 degrees Celsius it is not possible to build. In other treaties, high winds are cited as an excuse for delay.

4. Penalties

The inclusion of obligations in a contract, without their performance being attached to a (financial) sanction, turns the contract into a “desire”. It does not protect the buyer’s investment in any way. The same happens if the penalties are unilateral – only borne by the buyer.
That is why the penalties stipulated in the contract are important for the buyer. Often they are so vaguely and nebulously described that, if needed, there is no way to actually implement them.
The precise wording of penalty clauses is of significant benefit to the buyer. In recent years, investors have often fallen into a frenzy. Others decide not to transfer ownership because they have found a buyer at a higher price. These risks should be analyzed and anticipated.

5. Other important points

The above-mentioned important points are by no means the only ones that the buyer should pay attention to before signing a contract. Also important are the stage of completion, possible equipment/furnishing activities, as well as in terms of advantages or extras that are promised to the buyer in order to convince him to buy the property. Alas, often subsequently these works are not realized.
Some properties are located in a gated complex and in parallel with the signing of a preliminary contract, the texts of accompanying documents such as rules for the internal order, maintenance contract for common parts, allocation of use should be specified. Of particular importance is the approved architectural project, the explanatory note to it /part of the architecture/, the area distribution table – these documents should be provided at the earliest possible stage. Also important are the conditions for paying the price with a bank credit, specifying the documents required for the transaction.

In our practice in the last nearly 20 years, we have encountered an extremely wide variety of preliminary contracts. Some of them are for purchase and sale “off-plan” – apartments, houses, villas, office buildings, others – for completed properties. Given that the implementation of these contracts usually lasts for years, this requires the creation of a transparent and stable legal relationship between the parties. Their correct compilation is extremely important in order to protect your interests and legal rights.

In case you need legal assistance when buying real estate in construction, please write to us at office@lexsofia.com. Or contact us directly.

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