Many buyers of property, particularly if they are not local buyers, are used to thinking that the purchase price of property in Latvia is basically divided into two parts that secure the transaction: the deposit or down payment, and the balance of the purchase price.
In many jurisdictions, failure to close the transaction on the part of the seller will result in the buyer having recourse through the courts to any damages for breach of contract, plus the return of the deposit. Alternatively, sometimes the buyer may be able to obtain an order for specific performance, compelling the seller to sell the property to the purchaser as contemplated in their agreement.
The prospect of having to face a protracted court battle over damages and costs may well be a disincentive to breach the contract. In this context, the deposit is often thought of as a mechanism to secure the purchase.
But does the deposit really secure anything other than an awkward two-way option? The answer is "usually not," and it will depend on the content of the documentation. Usually what is entered into is a deposit agreement, the name of which is often incomprehensibly and literally translated into the English language as "hand money agreement" from the Latvian term, "Rokas Naudas Ligums."
Such a deposit agreement will ordinarily provide that the buyer must pay the deposit to the seller by a certain date. Further, the agreement will typically require that the parties sign a purchase and sale agreement by some subsequent date. And the wording usually provides that if the parties fail to enter into the purchase and sale agreement due to the "fault" of the buyer, the buyer relinquishes his deposit. If the failure to sign is the fault of the seller, the seller is typically required to pay back to the buyer an amount which is twice that of the deposit. Under the law, theoretically the breaching party is also liable to the other for resulting damages.
There are a few troubling features of such standard documentation. The content of the purchase and sale agreement to be entered into at a later date may not even be disclosed at the point of signing the deposit agreement. This makes for an interesting undertaking on the part of both parties to sign the purchase and sale agreement. What if they cannot later agree over its details? Whose "fault" will that disagreement be? As you can probably appreciate, this is fertile ground for a future dispute.
If the parties find themselves in a rising market, and the seller suddenly sees that it can make more money by selling to someone else and repaying twice the amount of the deposit to the buyer, unless there is language in the agreement protecting the buyer from such outcome, there is usually nothing to stop the seller from backing out. And because the parties pre-set the remedy as being the return of the deposit times two to the buyer, there may be no recourse to specific performance or provable damages for breach of contract. The contract in such case is basically an option, exercisable at the whimsy of the seller (and the buyer too, but that is usually not an issue). Usually a buyer is a buyer because he wants to close the transaction. But how does the buyer protect himself from being nothing more than an option grantor to the seller?
One way is to draft the deposit agreement in such a way that it compels the seller to close the transaction, including damages for failure to close. In other words, take what is de facto option language out of the deposit agreement. This may or may not be difficult depending upon the flexibility and bargaining strength of the counterparties.
Another way is to make the deposit amount substantial. The effectiveness of the disincentive to breach is inversely proportional to the degree of modesty in the deposit amount.
The use of escrow agents at every step of the way where money is passed is also helpful, though it may not be much relief to the buyer where the seller exercises its option and pays back the deposit times two.
All of this means that the buyer should have full documentation from the seller, including but not restricted to the purchase and sale agreement, floor plans, and any building management agreement, before signing any deposit agreement. To help avoid disappointment and losses, legal advice should be sought in the drafting of the transaction documentation and conveyancing process.
Valters Kronbergs is managing partner of Kronbergs and Cukste, a member of Baltic Legal Solutions, a pan-Baltic integrated legal network of law firms which includes Teder, Glikman & Partnerid in Estonia and Jurevicius, Balciunas & Bartkus in Lithuania, dedicated to providing a quality 'one-stop shop' approach to clients' needs in the Baltics.
