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Preliminary Contract

 

In this article we discuss the legal nature of the Preliminary Contract in relation to purchasing property in Bulgaria. Starting with covering its definition, the form it should take, its enforceability and what it should contain.

Definition. For the purpose of this article, we shall give you a conditional definition of the Preliminary Contract. It is a bilateral agreement between two parties - seller/s and buyer/s, by way of which both parties agree that at a future point in time, the seller/s shall transfer the ownership in the property to the buyer/s. This definition can be found in the very name of the contract - Preliminary. Therefore, the first important point to note is the Preliminary Contract does not transfer ownership!

In Bulgaria, ownership in real estate is transferred by way of a Notary Deed in the standard case of purchase. The Preliminary Contract only binds the parties to sign a Notary Deed for transfer of ownership at a future point in time.

Necessity. Many different reasons necessitate the signing of a Preliminary Contract. The most frequent reason is that the property, which is the subject of the sale, does not exist yet, but is to be created or constructed (the so-called "off-plan investment") and thus the ownership can only be transferred, once a physical building exists.

In other cases, the seller needs time to obtain certain documents - sketches (land registry plan), tax evaluations etc., or to settle some legal dispute in relation to the property for sale. Likewise, the buyer may need some time to gather enough funds to pay the total purchase price or requires additional time to obtain an investment survey on the property. However, the signing of the Preliminary Contract decides that at some point in time, both parties may wish to bring the transaction to fruition.

Enforceability. The most important characteristic of the Preliminary Contract is that it gives each party the opportunity to execute a final contract, i.e. the Notary Deed for the sale/purchase of the property in question.
Furthermore, in the absence of a Notary Deed, the sellers may request that the court finalise the Preliminary Contract in other words, get the court to declare that the Preliminary Contract substitutes the Notary Deed. If this occurs, the purchase-sale process will have been completed and the ownership transferred from buyer to seller.

It is important to emphasise that if the seller decides to transfers the rights of the property to a third person who is a buyer in good faith, then the rights of the first buyer under the Preliminary Contract do not have priority over the second bona fide buyer.

The implementation of the Preliminary Contract determines it's most important features and the obligatory elements, which make it valid:

1. Written form: To ensure that the Preliminary Contract is valid, there is a mandatory requirement that it is in written form. It must also be signed by both parties. In the past, we have had clients, who believed themselves to be legally bound by a Preliminary Contract on the basis that they have received a draft-contract, which had been offered for approval and signing, or a contract, which had been signed by the seller only.

2. Significant elements of the final contract (or the Notary Deed): The Preliminary Contract must contain all the essential elements for the drawing up of the final contract called the Notary Deed. If these elements are not present and the issue comes to future litigation, the court would not be able to pronounce the preliminary Contract as valid or legal. There must be a precise description of the mandatory elements for the final contract written into the Preliminary contract. These are:

1 full details of the seller and the buyer;
2 full and precise description of the real estate, just as it would be described in the final contract;
3 price of the property;
4 Terms and additional conditions (if any) for the conclusion of the final contract.

Note: The precise description of the above elements allows the parties to express their wishes, which will make it possible for the court to interpret the contract and ascertain your will. The court will interpret the contract to overcome any shortcomings in the description of the above elements. However, beware that your wishes may not be interpreted correctly. Therefore, it is always important to express your wishes precisely in the Preliminary Contract.

Three further major errors exist in the field of Preliminary Contracts:-

1. The reservation form is not a Preliminary Contract. The payment of a reservation deposit is usually imposed by the real estate agents. This way they attempt to bind you to proceed with the deal, but this does not make it a Preliminary Contract. Even if the reservation form gives a full description of the property and the buyer, it still does not constitute a Preliminary Contract and it will not contain a term or date for finalisation (don't confuse it with the term for signing the Preliminary Contract).
2. When you sign the Preliminary contract you have still not bought the property - it is not yours. This is the most common mistake committed by the foreign buyers who say, "I bought a property" prior to the actual finalisation with a Notary Deed.
3. The property, detailed in the Preliminary Contract, may not actually be rightfully owned by the Seller! This is not an obligatory requirement. If the seller undertakes to sell someone else's property, then the Seller also has the obligation to obtain the ownership of the property, subject to contract, prior to the final transfer.

Roumen Petrov and Asja Mandjukova, GPNG Law Firm, Sofia