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.
Another essential characteristic of the preliminary contract for purchase of a real estate in Bulgaria are the security measures, which the contract parties agree inside. With this regard the seller usually is obliged to obtain a certificate for encumbrances for the real estate - mortgages, distraints, registered claims, justified right of use etc. - by the day of the signing of the final contract. In case this requirement is not fulfilled, this serves as a reason for annulment of the contract by the other party.
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
Mostly, the contract parties agree within the preliminary contract for a day and time, on which they would visit a specific public notary office for finalizing the deal. For different reasons the signing of a final contract does not often take place. The most frequent reason for this is the impossibility of the buyer to obtain the rest of the price or the absence of the seller in the definite day and time. In such cases it is important, that the non-defaulting party requires from the public notary the issuing of a statement protocol, in which it is ascertained that he/she is present at the notary’s office and is ready to have the final contract executed (the buyer is present and is ready to pay the rest of the purchase price or the seller is present and has brought the documents which are required for the issuing of the notary act).
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.