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Taking counsel

  • 2005-12-14
  • By Arnis Esenvalds [ LOZE, GRUNTE & CERS ]
Should the down payment agreement prescribe a withdrawal option?

In this booming period of real estate purchases, often a down payment agreement is executed in order to secure the performance of obligations under a future purchase agreement. Actually, the down payment agreement reinforces the obligations of the future agreement, while if any withdrawal provisions are included, the result is the opposite. In fact, usually such a withdrawal option in a purchase/sale agreement is beneficial only to one of the parties.

The practice shows that, as a rule, the seller benefits more when obligations are terminated after the execution of the down payment agreement. The Civil Law prescribes repayment of a double-down payment to the buyer if the seller fails to perform the agreement after receipt of the down payment. If the option of annulling the agreement is not regulated by the agreement at all, then the down payment agreement, if it conforms to all requirements of the law, is considered executed, and each party may request its performance.

This leads one to conclude that if the parties have not included an annulment option in the down payment agreement, then neither party has the right to unilaterally withdraw from performing his obligations, and each party may request that the other performs the down payment agreement 's i.e., that it executed the purchase agreement pursuant to the material provisions agreed by the parties in the down payment agreement.

Theoretically, it is possible that the buyer wants to cancel the transaction; however, in practice usually the person who intends to buy the property is more interested in performance of the obligations and does not allow for the possibility that the seller might withdraw from his promise to sell the property 's simply by doubling the down payment.

Sometimes the down payment payer intentionally attempts to pay as large down payment as possible to reduce the prospective intention of the seller to withdraw from signing of the purchase agreement. However, if it is the buyer who fails to perform the contractual obligations, in line with the procedure prescribed by the Civil Law, he loses the down payment.

To sum up, usually it is more beneficial for the buyer not to include a withdrawal option in the down payment agreement, while for the seller, such an option and the respective withdrawal money (contractual penalty) represents the possibility to withdraw from the sale in case when, for example, a more advantageous sale transaction option emerges.