Taking counsel: Notarial certification of preliminary real estate contracts

  • 2006-09-07
  • By Anne Haller
Due to the recent boom on Estonia's real estate market, the issue of formatting preliminary contracts, under which parties undertake to enter into a sales contract of property, has become increasingly important. For several reasons 's e. g., uncertainty of financing issues 's the sales contract of property is often not concluded at the same moment an agreement in principle for obtaining the property has been reached.

Still, some sort of certainty is needed on behalf of both parties, and therefore the sides often conclude a preliminary contract in written format, determining the buyer's right to obtain a property at an agreed price, and the seller's obligation to sell the real estate at that price. In order to confirm the buyer's intent to obtain the property, a buyer's obligation to make an advance payment is often prescribed in such preliminary contracts.

Ironically, concluding a preliminary contract in written format is right where the problems begin. According to the Law of Obligations, a preliminary contract must be notarized. Pursuant to the general part of the Civil Code Act, upon failure to comply with the format provided for a transaction by law, the transaction is void.

Here's the rub: As real estate prices rise, concluding a void preliminary contract in order to obtain property at some time in the future often ends in the seller returning the advance payment to the initial buyer and selling the allocated real estate to someone else at a much higher price. As the preliminary contract is void upon failure to comply with the notarized format, the buyer has no other option than to pay a much larger sum to obtain property comparable to the one set as an object of the initial preliminary contract. Also, as a rule, the buyer has no effective legal remedies to use against the buyer in order to claim compensation for losing the opportunity of obtaining the real estate for a lower price.

The subject of the format of preliminary contracts in the real estate market was recently discussed by the Estonian Supreme Court. The dispute was initiated by a buyer who had paid an advance payment that the real estate developer was reluctant to return. The preliminary contract was concluded in written format, but somewhat surprisingly the courts of first and second instance paid no attention to this fact. The Supreme Court stressed that in cases when the preliminary contract comprises the seller's obligation to sell the property to the buyer, the buyer's obligation to buy the property and the provisions according to which the advance payment is not returnable if the contract is not concluded, such a contract must be handled as a preliminary contact for the sales of the real estate and shall therefore be notarized.

Only in cases when the contract is really aimed at reserving the property'si.e., to the seller's obligation not to sell the property'sto any third person for a specified period of time, such a contract may be viewed as a contract for a reservation of the property and may be concluded in unattested written form. The Supreme Court also noted that when interpreting the aim of such contracts the amount of payment made according to the contract must also be considered.

It remains to be seen whether such a ruling on behalf of the Supreme Court has any effect on the current practice of concluding preliminary contracts on sales of property in written format or not. Nevertheless, it gives hope that potential buyers of real estate can stand up for their legal rights more often than they maybe have used to so far.

Anne Haller is a lawyer at Teder Glikman & Partnerid, a leading Estonian law firm, and a member of Baltic Legal Solutions, a pan-Baltic integrated legal network of law firms including Kronbergs & Cukste in Latvia and Jurevicius, Balciunas & Bartkus in Lithuania.