Purchase price under the Preliminary agreements

During the last couple of years the Bulgarian property market was extremely developed through the tendency of purchasing properties “off – plan” and, respectively, signing of numerous Preliminary agreements for construction and transfer of ownership of the real estate. Usually the parties sign one contract named in the most cases Preliminary Contract for construction and transfer of ownership of the real estate, where all the rights and obligations related with the construction of the particular site as well as with the followed conveyance procedure are settled in details. It is also popular that under the said agreements the sellers and the buyers arrange ONE PURCHASE PRICE considering the fact that the buyers are paying against the obligation of the seller to build the property and to transfer the right of ownership to the buyer after the property is completed.

Actually it should be known that the above Preliminary agreements include TWO INDEPENDENT CIVIL CONTRACTS regulated under the Bulgarian Law on obligations and contracts: A PRELIMINARY CONTRACT FOR TRANSFER OF OWNERSHIP AND CONTRACT FOR BUILDING OF REAL ESTATE.

The first one (Preliminary Contract for transfer of title) is usually concluded when the parties are not ready to sign the final contract for transfer of ownership in the form of Notary Deed because at the moment of its signing the property is still in process of construction or in cases when the Buyer has no financial resources to pay for acquiring the ownership and needs time for organizing the payment of the purchase price. The Preliminary contract for transfer of Title is regulated under Art.19 of the Bulgarian Law on obligations and contracts. The Preliminary contract for transfer of Title shall contain provisions concerning the material terms of the final contract ( the final contracts are always concluded in the form of the Notary deed). The specific point is that each party may bring an action before the court for enforcing of the Preliminary contract for transfer of the Title as final. In this case the notary deed shall be replaced by the court decision where the purchase price for transfer of the Title should be also specified. In relation with the above, the Preliminary contract for sale-purchase should contain provisions concerning the material terms of the final sale –the detailed description of the property, subject of the future transfer as well as the exact amount of the purchase price. The purchase price is a substantial element of the Preliminary contract as it is a regular sale – purchase contract which is always contract requiring a payment against acquiring of an ownership.

The second contract, namely the Contract for construction of the real estate, is a variety of the Contract of a manufacture regulated under Art. 258 – 269 of the Law on obligations and contracts. Under the contract of manufacture the contractor shall be liable at his own risk to manufacture something in accordance with the other party's order, and the latter - to pay a remuneration. Under the terms of the contract for building of the property, the builder shall be liable at his own risk to construct the property in accordance with the project and the building documentation approved by the municipal authorities of the Republic of Bulgaria. From the other hand, the assignor shall pay remuneration for performing the building works by the builder (the contractor). The said contract for construction of the property is also requiring remuneration against building and delivering of the property.

With a view of the above, the following general conclusions could be made:

The parties are signing Preliminary contracts because of the lack of preconditions for signing of final contract in the form of notarial act at the moment of negotiations between the Buyer and the Seller, namely – in the cases when the property is not completed and is not appropriate for transfer. Under the Preliminary contract for transfer of Title the parties agree about a purchase price which price should be paid by the Buyer and shall be implemented in the notary deed.

The final contract (the notarial act) could be signed only when the Contract for building of real estate has been executed. The execution of the contract means that the contractor (the builder) has fulfilled his obligation to construct the property in accordance with the approved project and observing the provisions of the Bulgarian legislation. The person ordering the work (the Assignor, Buyer) is also obliged to fulfill the obligation for paying of remuneration to the builder covering the labor, the expenses for materials, the state taxes and other expenses made by the contractor during the building process as well as the profit of the contractor.

In accordance with the above mentioned, the buyer who is also an assignor under the Contract for building of a property is paying for two benefits – from one hand the buyer is paying for completion of the property with the respective Habitation Certificate ( act 16) and from the other hand the buyer is paying for acquiring of the ownership of the same property. In the last couple of years the widespread practice is the Buyer and the Seller ( who is also a contractor, builder under the terns of the to the Contract for building of a property) to sign one Preliminary contract which in the most cases is namedPreliminary agreements for construction and transfer of ownership of the real estate, where the parties agree only about one price, named purchase price.

When the parties sign a notarial act for transfer of ownership, they must specify one purchase price – the price under the agreement for transfer of the Title.

However, the practice shows that with signing of the above mentioned mixed Preliminary agreements, named Preliminary agreements for construction and transfer of ownership of the real estate, the parties specify one total sum which in the contracts is named “purchase price”. Actually, this total price includes not only the purchase price for transfer of the Title over the property but also the remuneration of the constructor under the Building agreement, implemented also in the mentionedPreliminary agreements for construction and transfer of ownership of the real estate. Afterwards, the same total amount should be specified in the Notary Deed for sale-purchase and it serves as a basis for calculating the tax fee and the notarial fees. In principle it depends on the free will of the parties what purchase price they will decide to be included in the Notary Deed. However, the fact that the Pr. Contact does not divide the total price in two different payments - purchase price for transfer of Title and the remuneration of the constructor under the Building agreement, implemented in the same preliminary contracts, could create legal problems to the parties at the time of signing of the Notary deed. The problem could come from the fact the Buyer are bound to pay the notary expenses for transfer of the Title using as a base the purchase price for the apartment specified in the Preliminary agreements for construction and transfer of ownership of the real estate. As in the Preliminary Contracts there are no division of the price to two different prices-one for transfer of Title and the other containing remuneration of the builder, then the Buyer could be bound to pay notary expense and tax expenses over the total amount.

On the other hand, problems could occur in case when the Buyer decides to claim against the Builder –Seller and to enforce the Preliminary contact as final. In this case the Buyer could have problems as long as the court process is taking place because it will be difficult for the Buyer to calculate from the total amount, specified in the Preliminary Contract the price for a acquiring of the Title ( purchase price) and the remuneration of the builder and the expenses under the building relations, implemented in the preliminary contact.

 

This article was created by Valova&Angelova law firm.