Nowadays it is almost impossible to carry out a contract for purchasing of a real estate without signing a preliminary contract thereto. This method is necessary, since the Bulgarian real estate law in contrast to the German one does not regulate the principles of separation and abstraction and this is the reason why the obligational regulations of the contract cannot be incorporated fully into the notary deed, which only regulates the property transfer.
In this article the purely legal aspects of the preliminary contract for purchase of a real estate in Bulgaria are discussed and practical tips are given to people and companies, including in view of the judicial practice concerning disputes, which have occurred during the process of the deal.
The purchase of a real estate usually consists of two phases:
- Signing of a preliminary contract between the parties;
- Closing of the deal with a notary deed;
The essential and main difference between the two contracts occurs in the achieved effect. While the preliminary contract regulates and secures in a definite way the purely obligational legal aspects of the deal – i.e. the agreement for the purchase price, the purchase conditions, deadlines, rights and obligations of the parties - the main contract achieves the so-called “transfer effect” - the purely formal property transfer from the seller to the buyer.
It is important to be considered, that in Bulgaria the signing of a preliminary contract does not establish a property right for the buyer. The latter is established just after the closing of the deal through a notary deed, respectively after the court decision for conclusion of a final contract enters into force.
I. Legal provisions regarding the preliminary contract
Article 19 of the Bulgarian Act for Obligations and Contracts regulates the institute of the preliminary contract. In contrast to the final contract, which requires a notary certification, the written form is sufficient for the preliminary contract. The preliminary contract shall include arrangements regarding the essential terms of the purchase – i.e. the purchase price, the payment conditions and the deadlines for signing the final contract. The "written form" of a preliminary contract is usually understood as the reproduction of the parties’ intentions on paper bearing their signatures. Given the rapid development of digitalisation in all areas of communication and through all means of communication, which has increased especially in times of the post-2020 global pandemic, the question undoubtedly arises whether, in the case of an electronic exchange of letters and the payment of a deposit, it can be assumed that the written form is observed for the validity of the preliminary contract. Practically, the agreement on the main content of the contract can be made in an electronic correspondence and then the emails can be reproduced on paper. However, they do not have the characteristics of a private document if they do not bear the signature of its issuer. According to the Electronic Documents and Electronic Notarisation Services Act, the written form is observed if an electronic document that contains an electronic statement is signed with a qualified electronic signature (QES) is issued. It is also possible for a simple electronic signature to be regarded as a handwritten signature if the parties have agreed to that. These rules do not apply to transactions for which the law requires a qualified written form, therefore the final contract can never be concluded in this way.
During the issuing of the notary deed and the transfer of the property the seller shall prove before the public notary his\her property right over the real estate. Such a requirement does not concern the preliminary contract. It does not matter whether the seller is the owner of the real estate or not by the time of signing the preliminary contract. The latter is not binding for the legal effect of the preliminary contract. The preliminary contract represents a promise for selling of a real estate. A frequent legal construction is the responsibility of the seller to acquire/establish a real estate and afterwards to transfer it during the fulfillment under definite requirements and after the receiving of a definite price from the buyer. This is the most frequent case at the so-called contracts for construction order, where a person (seller/construction/contractor) undertakes to build a real estate, by which in most cases the property right should be transferred after the commissioning of the latter through the acquiring of Act Number 16 and the signing of a notary-certified final contract.
The preliminary contract for purchasing of a real-estate shall be valid just in case the real estate is individualized in details. According to the mandatory case-law of the Supreme Cassation Court, an explicit requirement in a preliminary contract appears to be the individualization of the real estate by describing its surface and the rooms inside, but also the description of its borders, since “the surface represents only a function of the real estate borders”. For example, a preliminary contract for purchase of an apartment shall specify the apartment’s number, the garage, the surface, the floor on which the apartment is located, the description of the rooms, the common parts of the building as wells the neighbors. The above-mentioned preliminary contracts for "off-plan sales" deserve increased attention. Since at this stage there are no cadastral numbers, tax valuation, etc., construction has not yet begun and subsequent changes to the approved construction documents are possible, often only a brief description of the object without information about the neighbours and other necessary details is given. If the vagueness in the description of the object in the preliminary contract is so substantial that a reasonable conclusion for the will of the parties and the individualisation of the real estate as a single, independent object of property right, which differs from other similar objects by its own parameters, can’t be established, this can lead to problems for a successful claim under Art. 19(3) of the Bulgarian Act for Obligations and Contracts for conclusion of the final contract.
II. Why a preliminary contract should be signed?
The preliminary contract incorporates purely practical qualities, which are revealed during the process of purchasing of a real estate. Most frequently, the signing of a preliminary contract leads to the extraction of the offer for the real estate from the real-estate market. For this purpose the buyer pays a definite percentage of the purchase price (mostly 10 % of the total price) in advance, for which the contract parties have agreed to in most cases, though not always, as a deposit (in the practice often called renunciation money) according to Article 93 of the Bulgarian Obligations and Contracts Act. In case the seller does not fulfill his/her obligation to transfer the real estate with a notary deed, the purchaser is entitled to claim the double refund of the deposit.
In case the buyer is unable to pay the rest of the purchase price within the agreed period, the seller shall retain the deposit. In case the buyer is not able to pay the whole purchase price, a payment by installments can be arranged within the preliminary contract and in this way time can be acquired for obtaining of the rest of the price. In lots of cases, the buyer sets the preliminary contract as a basis for the negotiations for granting of a mortgage-secured loan to pay the purchase price. On the other hand the banks grant this loan under the requirement that they will be registered on the first rank position as a mortgage to secure their claim.
A key part of the preliminary contract for the sale and purchase of immovable property is constituted by the guarantees agreed between the parties regarding the legal status of the property and the fulfilment of the obligations undertaken. These determine the conditions under which the transfer of ownership is to take place, as well as the consequences of any deviation from the agreed terms. Usually, the seller undertakes to transfer the property free from mortgages, attachments, registered claims, established rights of use and other third-party rights, unless specific circumstances are expressly set out in the contract and accepted by the buyer. To verify these circumstances, it is agreed that an up-to-date certificate of registrations, annotations and cancellations relating to the property shall be provided prior to the conclusion of the final contract. In addition, obligations may be imposed on the seller not to dispose of the property in favour of third parties, not to encumber it with new charges, and to notify the buyer of any disputes or claims arising in relation to the property. Depending on the terms agreed, provisions may be made to postpone the final transaction until the identified encumbrances have been removed, to withhold a corresponding portion of the sale price, or to grant the buyer the right to terminate the contract under the agreed conditions and in accordance with the applicable legal requirements.
A widespread practice in the purchase of real estate is the payment of the so-called "stop deposit" - the payment of a certain amount of money to oblige the seller to wait and not offer the property to other interested parties for a certain period of time. No form is required to enter into such an agreement, yet a written agreement is often signed. It is important to note that this agreement is only organisational in nature and usually does not contain all the essential terms of the final contract. This agreement cannot be considered a preliminary contract.
III. Default, Claim for conclusion of a final contract
Most often, the parties agree in the preliminary contract on a date and time to appear before a specific notary public to conclude the final contract. For one reason or another, in many cases the final contract is not concluded. This most commonly occurs when the buyer has failed to raise the balance of the purchase price, or the seller fails to appear at the agreed time and place, as well as when the property turns out to be encumbered with liens on the date of the notarial certification. In such cases, it is important for the party in good standing to request that the notary draw up a statement of findings, setting out that the relevant party appeared and was prepared to fulfil their obligations regarding the final notarisation of the transaction (the buyer appeared and was prepared to pay the balance of the price, or the seller appeared and produced the relevant documents required for the drawing up of the notarial deed).
In this case the non-defaulting party possesses two options. The first option allows him/her to invite the defaulting party to fulfill his/her contract obligations by granting him/her a reasonable term to do it. In the invitation it shall be specified, that in case of a default within the granted terms the contract will be considered annulled. In case of annulment of the contract, the non-defaulting party could claim the refund of the paid amounts, and if some of them were explicitly agreed as a deposit - to claim their refund in a double amount.
The second option entitles the non-defaulting party to submit a claim under Art.19, Para. 3 of the Obligations and Contracts Act, for conclusion of a final contract. The claim for conclusion of the preliminary contract as the final contract expires after the general five-year limitation period according to Article 110 of the Bulgarian Act for Obligations and Contracts. Since each party to the preliminary contract is both creditor and debtor in the claim for the conclusion of the preliminary contract to the final main contract, the limitation period runs for both parties. In most cases the claimant is the buyer, who has paid a certain percentage of the purchase price, but the seller has later refused to transfer the property right for the real estate. In such court procedures the claimant has to prove that he is the non-defaulting party under the agreement. Mostly the statement protocol, issued by the public notary, serves as a proof, that the claimant has fulfilled his/her obligations according to the preliminary contract.
In such court procedures under Art. 19, Para. 3 of the Obligations and Contracts Act is due a court fee in the amount of 4%, calculated over ¼ of the tax evaluation of the real estate (which means 1 % of the total tax evaluation). Here, it should be noticed, that the claim under Art. 19, Para. 3 of the Obligations and Contracts Act shall be registered within the Real-Estate Registry of the Registry Agency. The registration has a public and announcing effect for any third parties. A state fee in the amount of 0.1 %, calculated over ¼ of the tax evaluation of the real estate - at least in the amount of BGN 10, shall be paid.
The Bulgarian court rules the conclusion of a final contract, respectively transfers the property right of the real estate, after getting assured, that the seller is the real owner of the real estate. The court decision includes the requirement, an evidence regarding the payment of the notary fees, the fees according to the Municipal Taxes and Fees Act, and the fee for the registration of the transfer in the Registry Agency, to be presented. The court orders an imposition of a distraint over the real estate, in order to secure the execution of the above payments. The distraint gets deleted as soon as the payments are done.