In this article we look at some of the specific danger areas of committing to buy a property from a developer ahead of it being available, as written by Ionel Vacarescu, a local Property lawyer who runs Vacarescu Law.
3 common issues our clients have experienced in the capacity of the Promissory Buyer (the property Buyer) when committing to a pre sales agreement for a new off-plan (not yet constructed) property.
1/ Losing the down payment
2/ Additional costs/implications generated by late property delivery
3/ Variance in physical property compared to the one described in the pre sales agreement
I am Ionel Vacarescu, real estate lawyer and, in this article, I have as goal to show you what you should do to manage these risks, before signing the pre sales agreement.
The decision of signing such a pre sales agreement deserves a close analysis of all the risks present in the contract – a decision with important financial implications. Always use an experienced Property Lawyer with a good reputation. (Editors note: we at White Mountain Property have used Vacarescu Law since 2014 with good results)
I frequently come across pre sales agreements drafted by the developers of real estate complexes who, when establishing penalties for non compliance, tilt the balance to the disadvantage of the potential buyer. Even more, the developers, at first, show themselves closed to negotiating the provisions of the proposed pre sales agreement, so … you must insist.
I experience cases in which the developers request buyers to sign pre sales agreements in which, although the developers take on a major obligation, the penalties for non compliance with the obligations are limited and merely symbolic.
Just to give some examples: small penalties of 2-4%/year from the down payment in case the apartment is not delivered in time, penalties of Euro 1.000 – 2.000 in case the developer no longer wishes to sign the sales agreement and even the lack of penalties all together in case the surfaces and finishes are not the ones chosen by the promissory buyer.
However, when talking about the penalties which the promissory buyers are expected to meet, things are totally different. For example, the promissory buyer is expected to pay an advance between 25 and 70% of the value of the property and lose between 5 0 and 100% of the down payment in case they can’t conclude the sales agreement.
The decision to sign and pay an advance belongs to the Promissory Buyer. He/she has the right to negotiate better provisions in order to obtain additional guarantees that the developer will comply with the obligations within the agreement.
So, after you are certain that the developer has the property you want including location, surface, finishes, structure, quality and other criteria which are important to you … the time to discuss and sign the pre sales agreement has arrived.
Dealt with superficiality by most of the potential buyers, this stage is as important as any other and even more, it’s a written conclusion of all that you’ve discussed and established with the developer. Once you sign the pre sales agreement, this has legal effects, meaning it’s no longer a simple shake of hands. Every party takes on penalties for non compliance.
In order to be ready for signing the agreement, you, as a potential buyer, have the right to request the developer, in order to read and check, the following documents:
- Pre sales agreement,
- Tile of property over the land where the building is being raised,
- Construction permit,
- The plan of the apartment,
- Land registry extract,
- Handover protocol (if the construction is finished).
- It’s also crucial to check the legal status of the developer, ongoing litigation (lawsuits regarding the construction permit are very important).
The most serious issues which might surface in this analysis stage are: problems with the ownership title over the land, the construction permit was declared void, other ongoing lawsuits which might affect the developer and also yourself.
Normally, it takes 2 – 3 days to check all these documents, alone or assisted by a professional.
I strongly advise against signing any agreements without these preliminary checks. As I stated above, the financial consequences can be harsh and for the long run.
If the document analysis checks all our boxes, and there are no issues to be addressed, you can move on to studying the provisions of the pre sales agreement.
There is no standard for the provisions such a pre sales agreement should have and generally these differ, as content and form, from one developer to another. So, according to each pre sales agreement, we can find more risks to cover and provisions to change. For this reason, I recommend reading each pre sales agreement separately. From my experience, I urge you to consider all issues, even if apparently these are unimportant.
Please keep in mind these 3 major issues I came across frequently and pay attention to these:
A/ Make sure that the penalty the developer takes on is at least equal with yours in case the sale purchase agreement won’t be completed, and the property won’t be handed over due to the developer’s fault.
B/ The Developer should promise to pay considerable penalties if the apartment isn’t handed over within the estimated time frame. While the Promissory Buyer is waiting to move in the new home (with the money for advance already paid to the developer), possibly paying bank interests and commissions for the money paid in advance and rent, the developer’s penalties can be as low as 2 – 3% per year from the cashed advance, which doesn’t even cover the real inflation rate in Romania.
C/ What are the penalties in case the developer doesn’t handover the apartment as agreed in the pre sales agreement? Examples of deviation include smaller surfaces, different partitions, smaller windows, fewer storage spaces, less ways of access, different fittings and finishes, lower quality kitchen & bathroom to the show home and the list can go on.
In summary I would like to bring awareness over the fact that some Romanian developers passed the “christening” of the first real estate major crisis, consequently knowing very well the risks of their business and have hired teams of lawyers to draft pre sales agreements which protect them. Even if most of them mean well, building residential parks is a complex project and few developers can deliver all the promises.
When and if you will find yourself in such a situation, the only thing that the developer and the lawyers will take into consideration is the signed pre sales agreement. This is your only real leverage.
The Promissory Buyers (you) have two options, which will have potentially very different outcomes:
- either they sign in a rush the pre sales agreement, without knowing the risks and without solutions for when problems rise, or
- they negotiate provisions which defend their interests and cover their risks if necessary.
If you are considering buying a new property, please seek the help of an experienced Property Law firm sch as ours to avoid regret and expensive mistakes.
Please share your experiences & views in the comments below….
Ionel Văcărescu, Real Estate Lawyer
(firstname.lastname@example.org, +40 722 372 669)