27.6.2016

Precontract of real estate sale

A precontract of real estate sale means specifically that it is a preliminary contract for a real estate sale. Parties want often to make sure with the help of precontract that they both will commit to the conveyance in a situation where making of a deal is not yet possible for some reason or other. For example conditional commitment to a real estate sale might become appropriate if the land use planning is not ready yet or the financial arrangements are not settled.

Code of Real Estate 2:7 includes rules and regulations about the form, duration, contents and validity of a precontract. Code of Real Estate 2:8, which concerns compensation when withdrawing from the sale, supplements the regulation.

It’s important to notice that according to Code of Real Estate 2:7 precontract of real estate sale must follow the same Code of Real Estate 2:1 formalities like any other real estate conveyance. Therefore the precontract is valid only if: it has a written form; seller and buyer or their representatives sign the precontract; and notary confirms the precontract when every signatory is present. Also in precontract there needs to be the purpose of conveyance, alienable real estate, seller and buyer as well as selling price and other substitute or basis on which those are determined. If those formalities that Code of Real Estate 2:1 sets to a precontract would not be required, it would be possible to evade the specified form of a real estate conveyance.

According to Code of Real Estate 2:7 in a precontract has to be mentioned the day when the final sale shall be done at the latest. This regulation tries to prevent an indefinite period of continuous interstitial spaces in real estate ownership. If not otherwise determined, the contract is valid five (5) years from the day the contract has been concluded. The validity of a precontract can also be longer than 5 years if the parties have specifically agreed about it in the contract. Also all those conditions shall be mentioned in the precontract whose fulfillment triggers the sale

A precontract binds only the contracting parties (inter partes) but it’s important to notice that precontract can be made either the way it’s binding both or the way it binds only the other party. When the precontract binds both parties, both sides have right to demand the other party to accomplish the deal. If the one party refuses to fulfil the contract, the other party can demand with a suit to fulfil the contract the way the terms are written in the precontract. In these cases the party has also a right to compensation, when breaking the precontract causes damages. Precontract that is binding only the one party obligates only him/her whereas the other party has so called option, i.e. he or she has a right to choose whether he or she wants to complete the sale or not. This kind of condition can be added to a land leasing contract for example where a tenant is given a right of redemption for leased land when specific requirements will be met.

A future buyer will not get any rights to the real estate only under the terms of the precontract. Real estate’s proprietary right, usufruct and disposition rights remain at the vendor for the moment. Therefore the real estate can also be taken in execution for the seller’s debt and it belongs to his or her bankrupt’s estate. The seller can also establish a right of lien in his or her real estate and other special rights that bind the buyer after the sale has been accomplished. It is also important to notice that the seller is even entitled to sell the real estate to someone else than the contracting party even though it is violating the precontract. In this situation the third party is not obliged to surrender possession of the real estate even though he or she would have known about the precontract. However, in this case the seller has to compensate the damages caused to the party of the precontract.

The amount of damages caused by violating the precontract is often difficult to determine. Thus in the precontract will often be added a clause about contractual penalty, which defines the amount of compensation which the refusing party has to pay in case of non-conclusion of the sale.

In practice the formalities of the precontract are often left uncompleted which means that the precontract is invalid. In this case the precontract includes formal error and you are not able to add for example a contractual penalty clause in the precontract. However, you need to notice that a precontract that includes formal errors might have judicial relevance when it comes to liability of damages. Code of Real Estate 2:8 includes a norm that regulates the other party’s refusal because of the formal error of the precontract that he or she has referred to. According to this regulation the refusing party has to compensate to the other party fair costs that resulted from placarding, visiting the estate and other necessary measures that belongs to the sale.

Down payment is commonly used in the precontract of real estate sale. The deposit is pledged as security for the sale in case the depositor will not fulfil his or her commitments. If the sale realizes the deposit is part of the selling price. And if a buyer candidate withdraws from the sale the party that suffered the loss is allowed to retain compensation from the deposit according to Code of Real Estate 2:8. The part of the deposit which exceeds the true costs shall be returned to the buyer candidate.

Consequently the precontract of a real estate sale forms a special intermediate state in the legal relationship between the buyer and seller. When concluding a precontract it is very important to comply with the strict formalities because otherwise the contract loses the meaning the contracting parties have.  Also it is important to register the contractual penalty clause in the precontract in order to avoid expansion of possible conflicts.

 

 

© 2022 Asianajotoimisto Lindblad