Taking counsel: Professional preliminary contracts foster successful real estate transactions

  • 2006-08-09
  • by Nijole Vaiciunaite
When buying living space in a building under construction, it is better to sign a preliminary sale-purchase contract, which provides for the payment only after the dwelling has been built.

It is recommended to conclude a preliminary contract whereby a seller of apartments obliges to build a living space and later sell it to the buyer, whereas a buyer is obliged to pay for the apartment at a set price. There is also a second type of preliminary contract when a buyer funds the construction works and acquires the right of ownership to the living space after the full price is paid.

In cases where the apartment house building association is building an apartment house, the association's regulations should determine the type of preliminary contract. Although legal acts provide for three alternatives with regard to the right of ownership to the dwellings in the apartment house, quite often the regulations establish that the right of ownership belongs to the association's shareholders as of the day they paid for their shares; consequently the association is not entitled to register the rights of ownership to the house under construction as well as to the dwellings on behalf of the association. Therefore preliminary contracts referred to of the second type should be concluded with the shareholders.

Quite often a seller is unable to settle with the bank that is funding the construction of an apartment house until the buyer has paid the full price. In such cases, it is recommended to negotiate and agree with the bank that a buyer fully or partly pays for the dwelling directly to the bank, and the mortgage of the dwelling is removed from the register immediately after a full sum or part of it was paid to the bank. Still, some problems may arise when a buyer raises credit from the bank for the purchase of such a dwelling. In this case credit is usually granted when the apartment is pledged to the bank as collateral.

It is frequent that after concluding a preliminary contract a construction company receives credit from a bank and mortgages the land plot and the house under construction to the bank. In such situations, if any buyer does not settle with the construction company (and the latter thus owes the bank), the mortgage applies to the whole house. In order to remove the mortgage one has to go to court and argue that, according to the contract, a full price was paid and the mortgage on the dwelling must be removed from the register.

A preliminary contract should specify separate prices for a land plot and living space, as well as to relate payment terms on certain circumstances but not to concrete dates. For instance, this might be completion of a certain phase of construction, or conclusion of the main contract of sale-purchase. Otherwise, if the obligation to pay is bound to a concrete date, a buyer cannot be sure that something is done until the term of payment.

If the parties agree that the buyer pays a large sum before concluding a contract of sale-purchase, it is recommended to obtain a warranty regarding refunding by the builder in case a preliminary contract is terminated; for example, to mortgage a dwelling under construction in favor of the buyer.
A preliminary contract must indicate the existing restraints on the rights to the dwelling. Moreover, the contract must provide that at the moment of transferring a dwelling to the ownership of the buyer it will be neither mortgaged, nor leased or encumbered in any other way, and there will be no breach of public law or restrictions.

The contract should describe address, area and other characteristics of the living space under construction, as well as the procedure for changing them as precisely as possible. The plans of an apartment house and a dwelling, specifications of the construction activities that should be performed by the seller, also specifications of the materials and equipment that will be used by the seller, also a schedule of construction work is worth adding to the preliminary contract. It should be agreed to change plans of the house and the dwelling only upon the agreement of both the parties.

Finally, a preliminary contract and restrictions to mortgage, lease or to dispose of a dwelling in any other way specified in the contract are worth registering in the Real Property Register. It is not obligatory but this could be a reason for a notary to refuse approval of the sale-purchase contract of the same dwelling with another buyer.

Nijole Vaiciunaite is advocate of Jurevicius, Balciunas & Bartkus, a member of Baltic Legal Solutions, a pan-Baltic integrated legal network of law firms including Teder Glikman & Partnerid in Estonia and Kronbergs & Cukste in Latvia, dedicated to providing a quality 'one-stop shop' approach to clients' needs in the Baltics.