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Facing problems with off plan property in Bulgaria?

In a press release, issued on 9 December 2009, Christophe Gater reviews what to do if you are facing difficulties with completing on, or repossession of, an off plan property purchase in Bulgaria.

Most foreign buyers have purchased properties in Bulgaria via off plan schemes. These purchases are typically based upon a contractual proposal for the delivery of a property in the future, payment is by way of instalments and these are often in accordance with the stage of build. The vast majority of such agreements will result in penalties for the developing company if they complete late and the risk of repossession for the owner if they fail to pay in full or on time. This article deals with issues arising from off plan purchases when a buyer hasn’t been able to raise the expected financing from either their own sources or via a Bulgarian mortgage. In particular it considers the routes of; remortgaging, reselling, renegotiating and repossession.

Bulgarian Mortgaging:
Many investors are not strictly cash buyers and have entered into an off plan agreements reliant on bank credit to compete the deal. In the current climate mortgages for foreigners are impossible in the tourist areas of the ski resorts and the Black Sea coast (for full information on this subject please refer to our Mortgages articles) as such you are very unlikely to complete and exchange on a property any time soon if you are absolutely reliant on a bank lending against the property. Your best bet is to reconsider either the source of funding or the agreement that you have in place with the developer.

Of the hundreds of cases we have witnessed throughout 2009, for those who planned to apply for a Bulgarian mortgage and have now realised that it is not possible, the most common solution has been to remortgage a UK property or release funds from savings / other assets. Sadly it is a myth that any UK bank will lend against a Bulgarian property, however releasing equity from a UK property by remortgaging to provide funds to complete an overseas purchase is still possible. If this is an option, you should consult an FSA qualified financial advisor.

What about Reselling? You might have had enough of the whole process, perhaps the investment is not turning out to be what you expected, maybe the developer is no longer building the same facilities that were marketed and you would rather just get out of the whole thing. Whilst this is technically / legally possible and under normal market conditions absolutely achievable, right now it is virtually impossible to sell heavily discounted finished and furnished apartments with proven rental history, let alone half built half paid for properties which are under disputed contract.

If we take the example of Bansko; developers are currently offering 30% off of pricelists and private individual resale apartments are discounted by as much as 60% from 2006 prices, even these offers are not attracting buyers and as such it would be pure luck to find a willing cash buyer who wanted your specific unfinished semi off plan apartment. The problem here is not the complexity or the legality of selling a property which is not technically yours yet, all that can be overcome with contracts, at this time it is absolutely about the lack of demand caused by the lack of credit and current lack of belief in property as a stable investment. When these two issues turn, the market will begin to move again, as such we can safely rule out resale as a realistic option in 90% of cases at the current time.

So what if you have an outstanding balance to pay the developer, there are no Bulgarian mortgages available, you don’t want to borrow against your UK property / don’t have one to borrow against and you can’t resell? Your only realistic option is to renegotiate as the alternative is to either lose the funds paid to date or face repossession if you are already the title deed holder.

Every case will be unique, however most will be either be A or B below:
A) the buyer is overdue making an instalment and hasn’t yet taken ownership / title deed, as such the terms and conditions of the preliminary contract, penalties, late fees etc still apply.

If you fall into this category then you are at risk of having the contractual agreement cancelled resulting in the loss of funds paid in thus far and / or penalties and late fees clocking up excessively. It is your responsibility to pursue the developer to achieve a revised mutual agreement geared towards you achieving ownership and reducing your overall risk.

In many cases a revised settlement will often pivot around two key elements; the contribution of a lump sum cash payment from the buyer to the developer, normally in the region of 10-15% of the purchase price, followed by smaller monthly instalments broadly inline with expected mortgage repayments, 300-700 Euro / month or so. These amounts continue to be deducted from the balance until such time that a mortgage becomes available. In either case, it is often a solution which keeps both parties content for a year or so thus giving the Bulgarian banks a reasonable amount of time to release new mortgages which can be used to conclude matters. Aspects such as the buyer’s usage and rental income in-between the renegotiated settlement and the final exchange of ownership will always be a matter of unique debate with the specific developer, however it is not uncommon for both to be granted under mutually beneficial agreements. All of this will typically be reflected in an Annex to the preliminary contract so that it becomes a formal extension to the original agreement.

It is important to ignore minor issues at this stage; mitigating circumstances such as completion delays, failed promises, unsatisfactory furniture and finishes etc are almost irrelevant if you have an unpaid balance more than 10% of the total. At the end of the day, if you haven’t bought the property in its entirety then it is not yours to complain about entirely. Whilst you might have valid points relating to the minor issues it is crucial that you leave these to later. It is better to focus on getting the major issue of the unpaid balance resettled and when you are in a position to pay in cash or via mortgage and exchange deeds, then debate the final amount and pay a sum that reflects and considers all of the circumstances.

B) the buyer has already acquired the title deeds but it carries associated conditions relating to the full and final settlement of an outstanding balance owed to the developer.

If you fall into this category then you are in a legally stronger position as you are already the owner. To retrieve funds the developer will have to act upon the conditions of the title deeds and force repossession of the property through the courts.

If you are facing repossession then like any legal challenge you should get independent advice from a professional consultancy or solicitor. First and foremost, the Bulgarian courts are full of such cases, any new addition will take at least 6-12 months to be considered and acted upon, as such it is not something that can happen overnight (at the current time) no matter how clear cut the case. Be in no doubt that if you do owe money and a condition of the deeds states that funds are due to a developer, then the repossession will almost certainly fall in their favour. This avenue should be treated with caution especially if used as a ‘delay tactic’ whilst raising finances elsewhere. In addition, ongoing legal cases in Bulgaria often involve the freezing of bank accounts and assets regardless of the legitimacy of the case. As such, if you are hoping that a looming repossession case will provide you with six more months of ‘free usage’ before you pay up, unfortunately it is likely that the apartment will be physically bolted shut and frozen as a saleable asset until the court settles the matter.

The procedure through the courts will not result in you simply ‘losing the apartment’ or the developer ‘keeping the apartment’, it will result in the forced sale of the property via auction. The funds raised from the sale will then be paid to the creditors; the government is always be the first in line to take any owed taxes etc, in this case the developer will be second creditor and any excess funds will be returned to yourself as the owner.

Be under no illusion that the whole process is hugely frustrating, wildly expensive and rarely according to any preset plan. You should take every measure to avoid having your property repossessed by the courts and as such renegotiation before this stage is absolutely the best course of action.

We have undertaken dozens of successful renegotiations so far in 2009, more so than ever before due to the unprecedented economic conditions. A good number of those cases would certainly have ended in court and considerable legal bills had it not been for a professional intermediary rebalancing the issues and finding a common ground. Some clients might wish to undertake this themselves, although without a deep knowledge of the Bulgarian property market, its laws, the strengths and weaknesses of the various developers, not to mention the language itself, it is an undertaking which is much less likely to succeed.

If you are being affected by the issues discussed above and think we can assist, please contact the author for a free 20 minute consultation; Christophe Gater, New Estate Finance