For whom such an intermediate contract is concluded, which risks are real and need to be paid attention to, and which are just myths, says Silvestras Sušickis, a lawyer from creative real estate projects and area planning company “Citus”.
The preliminary housing purchase and sale agreement, usually found in new construction projects, is an agreement between the seller (developer) and the future buyer, by which the developer undertakes to build and later, on the basis of a notarial contract, sell the housing to the buyer, and the buyer undertakes to purchase it and, after the preliminary agreement to pay an advance upon signing, and after the main one – the entire agreed price.
“From a legal point of view, the preliminary agreement is not special or complicated. However, given its financial scale and the fact that most buyers make one or more such transactions in their lifetime, they naturally have a number of questions. However, the need for such contracts is dictated by the circumstances of the housing market, and in some cases they are even favorable for buyers, if the latter do their homework carefully,” says Citus lawyer Silvestras Sušickis.
The housing market is dynamic, there are many changes in it – both in the areas of legal regulation, requirements and customer expectations, and the prices of works and materials – therefore, developers seek to manage the risks and financial flows arising for business in the most effective way. As a result, they usually start sales before the construction is finished, but with sufficient definition of the project – approved detailed project solutions, financing, deadlines, etc., the expert notes. And this principle is valid not only in Lithuania.
“The most important thing that is relevant for buyers is to capture the current price. Especially considering the fact that the demand for housing should grow. “Citus” analysts estimate that the number of buyers waiting for housing in Vilnius alone may reach 10,000, and when such a number of people decide to buy, prices will start to rise rapidly. Today, natural selection has taken place in the market, and some less experienced or uncertainty-tolerant developers have left it. However, it is still necessary to assess the reliability before concluding the preliminary contract”, emphasizes S. Sušickis.
How to ensure that the dream home will be the one we bought
As the Citus lawyer mentioned, we usually buy newly built housing before the construction process is finished and the property units have not been registered. We hope that the construction will be completed, completed on time and the housing will be as it was sold to us – as we saw it in the drawings, visualizations and project solutions.
“We buy a dream and give the seller a credit of trust.” There are no major risks of buying a cat in a bag, as there are many safeguards in place, from control and consumer protection mechanisms provided by law to risk management by partners in the process, such as mortgage banks. However, we have to make a responsible decision ourselves: choose housing from reliable, well-known developers who have been active in the market for a long time. Such companies protect their reputation, have a reliable financial background, so we will be guaranteed that everything will go smoothly”, emphasizes the expert.
The most important thing that is relevant for buyers is to capture the current price.
In any case, before signing the preliminary contract, the lawyer recommends carefully checking the named project number, area, number of rooms, floor and other characteristics of the house to be purchased – they must correspond to those specified in the project documentation.
Questions or doubts are often caused by the fact that the preliminary contract indicates the “preliminary” area of the future housing, which may change.
“I think each of us has assessed our needs and possibilities – what area we need and what we can buy. If the area of the completed housing would increase or decrease significantly, for example by 10-20 sq. m, that would be problematic. However, this moment should not be mythologized. In reality, such changes in the area of the future apartment are minimal, but the nuances need to be known and paid attention to,” says the Citus lawyer.
According to S. Sušickis, professional and responsible developers control these changes by carefully designing and not deviating from the approved project during construction. In qualitatively prepared preliminary contracts, buyers will always find a condition regarding the tolerance of a possible change in the area of the future housing – it usually reaches up to 2 square meters. m.
The area of the house under construction may change for several reasons: possible design changes during construction or practical aspects of construction. However, if the preliminary area de facto decreases or increases more than the tolerance limit specified in the contract, the buyer has the right to terminate the contract without any negative consequences for him. These provisions should be found in the preliminary contract and familiarized with them.
For the same reason – preliminary and the housing area, which may vary within the limits of tolerance – the preliminary contract also indicates a non-final, preliminary price. The most important indicator when buying a home is the price per square meter that we have agreed with the sellers, which we record in this contract. And after completion of construction and completion of cadastral measurements and recording of the final housing area, according to the agreed sq. m price will be calculated and the final price of the house.
“As I mentioned, the most important thing is to check whether the preliminary contract includes the price per square meter that we agreed upon when buying a home. If it is correct and we are satisfied with the possible error of the area, we will have recorded the actual price and know that we are in control of the budget for our dream home. This is very important in times of rising prices, as the likelihood of housing prices falling is extremely slim.
As they grow, it is important that the housing developer cannot manipulate the market situation, so we have to check whether there are any loosely interpreted clauses in the contract that are not favorable to us. It is also very important to choose a reliable developer who would not allow himself to try to take advantage of the situation”, reminds the expert.
The preliminary contract usually provides for an advance payment – its amount, payment term and other conditions. Most often, it is 15 percent. housing values, calculated based on its preliminary area, but this part can be higher. This is not only a legally required deposit of the buyer’s own funds if the house is purchased with a loan, but also a guarantee that the buyer is serious about his decision, so the developer can plan his financial flows for construction.
If we refuse to execute the preliminary agreement for reasons beyond the control of the developer, the advance payment or part thereof may be used to pay the default.
Why are the conditions of the countries different?
As a rule, the contracts provide for different responsibilities for the buyer and the developer (seller) for non-compliance. This, of course, can raise questions, so a lawyer from creative real estate projects and location development company Citus explains what these differences are based on.
“First of all, the different terms – for example, the amount of liquidated damages due to the termination of the contract, which can vary by two or more – result in different levels of risk assumed by the parties. The buyer who has concluded a preliminary contract, in reality, only risks the paid advance, which can reach, say, 10,000-20,000 euros. In the meantime, the developer assumes responsibility towards the project’s creditors, construction contractors, other property buyers, and the size of this responsibility is often not limited to 10 million. The amount of EUR”, explains S. Sušickis.
In order to manage the risks assumed, the developer thus secures the safeguards that the buyers will also comply with the provisions of the preliminary contract. This is especially relevant when there are more buyers in the market who tend to speculate on reservations.
However, these differences between the conditions of the buyer and the seller should not frighten, says the lawyer. The main goal of the developer is to build and sell the property, to make a profit and continue to invest, not to conflict with his clients and live off the fines. Therefore, they are used by reliable developers only in exceptional cases, when buyers maliciously violate the preliminary contract.
The last step, the notarized purchase-sale transaction
One of the main conditions of the preliminary contract is the deadline by which the developer will complete the housing construction work and invite you to sign the main contract. This clause, more or less defined, must be included in all qualitatively prepared preliminary contracts.
Home buyers are most afraid of the conditions of the expected extension of this term, according to which the developer can unilaterally extend it for some period of time.
“Such a condition is legal and reasonable. The development of a real estate project is a complex process that can be influenced by the bureaucratic mechanism, the activities of related institutions and services, and even the weather conditions necessary for the execution of one or another construction work. Sometimes there are unforeseen circumstances that can stop construction – for example, archaeological value is unearthed at the construction site and it is necessary to carry out certain investigations. Therefore, the possibility of extending the term is included in the contracts and helps to control the risks of the developers and the expectations of the buyers”, says the lawyer.
The “Citus” expert emphasizes that the extension of deadlines is expensive for the developer – it takes longer to pay obligations to the project’s creditors, employees, contractors, etc. Therefore, the cost of the project increases, so the developer is in no way interested in using this clause of the contract. However, it is again important to pay attention to how it is described: whether it is specified, under what circumstances, how many times and for what time the deadlines can be postponed.
“Detailed contracts will usually specify the technical circumstances when it is impossible to carry out certain construction works, factors, conditions and cases will be provided. It is more complicated with the bureaucracy, which is why the contracts include an uncertainty clause, because recently there have been especially many changes that have a significant impact on the development of projects, and sometimes some conditions are simply impossible to predict. In such cases, the communication of the developers is also very important – do they proactively, comprehensively and reasonably inform their clients, or do they value and protect mutual trust”, concludes Citus lawyer Silvestras Sušickis.
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2024-07-31 13:15:59
