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Termination of Preliminary Agreements

In 2007/2008 many foreign investors signed Preliminary agreements for off-plan purchases of real estates mainly in the Bulgarian resorts Bansko, Sunny Beach and Pamporovo. The subjects of the agreements are usually properties in the process of construction.

Most of the properties should have been finished in 2009/2010 (according to the plans of the developers and to the final date of completion mentioned in the contracts). However, it is 2013 and very few of the constructions are complete by means of the agreed terms. The main reason is the global financial crisis and the decreasing interest by foreign buyers. As result the complexes in the resorts remain unfinished on stage Act 14 or Act15 (for more information about these acts see our article "Acts and protocols issued during the construction process" published on our web site: www.nyd-law.com) and the developers could not confirm when they will be able (financially and technically) to finish the buildings.

Our practice shows that in most of the cases the Bulgarian developers stopped any communication with the buyers and refuse to sign additional agreements with new completion dates or/and paying the penalties for delay. Many of the developers are pursued by the banks with legal cases for non covered financial debts or bankruptcy by the banks-creditors.

The question is: what about these agreements,the rights and the money of the foreign buyers?
If your situation is similar or the same as the above our advice is the Preliminary agreements is to be terminated as soon as possible. It is because, on one hand, the paid money under the Preliminary contracts will not be returned by the developers by out-of-court agreement, which means that the buyers must handle legal cases in the court. On the other hand, the buyers have a limitation period for exercising their rights for termination of the agreement and for bringing the claim to the court.

Please see in short the procedure for termination of the Preliminary agreement under the Bulgarian legislation:
- According to Art. 87 of the Obligations and Contracts Act - the preliminary agreements must be terminated out of the court. It is usually done with sending a Notary invitation with a precise statement for termination of the agreement and asking for a return of the money paid within a specified deadline. The agreement shall be treated terminated by means of receiving the Notary invitation by the seller (developer).

- If the seller does not proceed with returning the money paid under the Preliminary agreement, and the deadline set out in the Notary invitation is expired, you must start immediately a court case for returning the money and paying of compensation, penalty as well as for recovering of the paid state fees, attorney fee, etc. If you delay with starting the court case, you take a big risk because after receiving the invitation the developer could dispose with his assets and you will not have a chance to receive your money back.

- When you start the court case, it is good to use some of the seller' s properties or other assets as secure of your claim. It could be done even before bringing the claim to the court. You should notice that usually the court is determining a monetary guarantee of 10% over the price of the claim which shall cover the damages of the seller if the claim is disallowed. The final aim of the secure procedure is to protect your interest as a seller' s creditor and to prohibit making deals with this property. If you use a real estate as secure of the claim, the bailiff imposes a real burden over the selected seller' s property that is registered in the Land registry. Once a final judgement of the last court instance is issued in favour of the buyer, the buyer (through the bailiff) could start a public sale of the troubled property in order to receive the money subject to the claim. It is the longest way for collecting the money but it is certain that the buyer has a guarantee to receive the money.

- The court case could take 2- 3 years until a final court decision is issued. The reason is the three-court judicial system in Bulgaria and the very slow moving of the cases. During the process it is possible the developer to be announced in insolvency or to be liquidated, or the property to be transferred to other investors, etc. All this reflects an unpleasant task ahead for the buyer' s claim, persistence for undertaking fast measures and adequate legal actions on the buyer 's side.

- After finishing the court case an executive procedure is usually initiated. The procedure is carried out by the bailiff (private or public). The aim of the procedure is to collect the money due to the creditor. All kinds of assets could be subject to the executive procedure – bank accounts, immovable property, takings, stocks, etc. If some property is used as secure of the claim before bringing the claim into the court, the bailiff is using this property. At the end the bailiff prepares a final distribution of the collected money between all creditors joined to the executive procedure. It is important to note that some creditors are treated as privileged creditors by law (the state, the banks, the creditors with mortgages, pledges, etc.). The state is treated always as joined first creditor. Respectively, the privileged creditors receive first the money collected during the executive procedure; the other, non privileged creditors receive money if any remain finally. That ' s why it is important some debtor's assets to be used as secure of the claim initially.

Considering the long, clumsy procedure for collecting the money, the buyer could not be sure that there will be any assets of the seller at starting of the executive procedure that could serve for returning of his money. However, it is absolutely necessary legal action to be undertaken in respect of the Preliminary agreements, because it could occur that the limitation period for the claim is expired and it is too late for legal actions.

This article is written by "Valova&Angelova" Law firm  www.nyd-law.com