Quite often, developers offer investors wishing to purchase housing to enter into a preliminary agreement, during which the investor gradually pays the cost of the future apartment. After that, subject to the payment of the apartment price and the commissioning of the residential building, the main agreement, i.e. the apartment sale and purchase agreement, is concluded with the investor and, accordingly, the investor’s ownership of the apartment is registered.
In the following, we will examine the legal nature of preliminary agreements and the risks that may arise for the investor under certain conditions, as well as share some recommendations on how to mitigate the consequences of such risks.
According to civil law, namely Article 635 of the Civil Code of Ukraine, a preliminary agreement contains the parties’ obligations to enter into the main agreement within a certain period of time on the terms and conditions set out in the preliminary agreement.
Thus, given that the preliminary agreement is concluded with the intention of purchasing an apartment in the future, the preliminary agreement usually provides for:
- The timeframe for concluding the Main Agreement (apartment sale and purchase agreement);
- Characteristics of the object, i.e. the apartment, which will be the subject of the future sale and purchase agreement (address, floor, area of the apartment, number of rooms, etc;)
- The amount of the main contract (i.e. the cost of the apartment to be purchased in the future);
- Security for the conclusion of the main contract, here we mean the amount of the investor’s payments for the apartment It should be noted that such a condition could have been included in previous agreements before the entry into force of the Law of Ukraine On Guaranteeing Real Property Rights to Real Estate Objects to be Constructed in the Future, i.e. before 10.10.2022, but civil law provides for the possibility of concluding an additional agreement under which the investor will pay the cost of the apartment in the form of guarantee (security) payments.
- Other terms and conditions (the procedure for terminating the preliminary contract, the liability of the parties, etc.).
The ideal scenario, where the investor and the developer have fulfilled all their obligations under the preliminary agreement, the building has been commissioned according to the schedule, the main agreement has been concluded within the timeframe set out in the preliminary agreement, and the investor’s ownership of the apartment has been formalised, is not very common.
There is a high probability that the opposite situation will arise the investor will fulfil its obligations under the preliminary agreement or a separate agreement in terms of making payments, while the developer fails to meet the deadlines for putting the building into operation, the main agreement is not concluded within the timeframe stipulated by the preliminary agreement, and the investor’s ownership of the desired apartment cannot be registered.
We are interested in the likely consequences that may arise from the second example.
To consider them, we need to return to the legal regulation of legal relations under a preliminary agreement.
A preliminary agreement is an agreement where the parties undertake to enter into an agreement in the future (the main agreement) within a certain period (within a certain timeframe) on the terms and conditions set out in the preliminary agreement (Article 635(1) of the Civil Code of Ukraine).
In other words, the main agreement must be concluded within the time period clearly defined by the preliminary agreement.
According to the example we are considering, the main agreement was not concluded within the period stipulated by the terms of the preliminary agreement.
Therefore, we return to Article 635(3) of the Civil Code of Ukraine, according to which an obligation established by a preliminary agreement is terminated if the main agreement is not concluded within the period (within the time limit) established by the preliminary agreement, or if neither party sends the other party a proposal to conclude it.
In this case, the principal agreement is not concluded, and, accordingly, the parties’ obligations to conclude the principal agreement are terminated, including the developer’s obligation to transfer the apartment to the investor. Of course, the investor’s obligations under the preliminary agreement are also terminated, and the funds paid to the developer under the terms of the preliminary agreement or the terms of a separate agreement must be returned. However, it should be borne in mind that funds lose their value over time under the influence of inflationary processes, and the value of real estate may increase.
What should an investor do in such a situation?
First of all, before entering into a preliminary agreement and a separate agreement on the payment of security (guarantee) payments, carefully read their contents.
Pay attention to the term of the main agreement, the parties’ liability in case of failure to conclude the main agreement, the procedure for amending the preliminary agreement, and the procedure for terminating the preliminary agreement. These terms are extremely important, so we advise you to seek legal advice.
If it is obvious that the main agreement will not be concluded within the period stipulated by the terms of the preliminary agreement, you have not received an offer to conclude the main agreement, you have not received an offer to amend the preliminary agreement and the main apartment purchase and sale agreement has not been concluded through no fault of your own, we advise you to address the developer/seller, who is a party to the preliminary agreement, in writing with the following (at your option, in accordance with your expectations and based on the actual situation, the essence of the addresses may be different):
- with a proposal to amend the preliminary agreement in terms of the terms of the main agreement;
- with a proposal to conclude the main agreement (if there is such an obligation, the obligations established by the preliminary agreement shall not be terminated);
- demanding a refund of the funds paid and payment of penalties for violation of the terms of the main agreement by the developer in the amount stipulated by the preliminary agreement or a separately concluded agreement and demanding compensation for damages for unjustified evasion by the developer from entering into the main agreement.
- If your legal requirements are not met, you should immediately file a lawsuit with the court demanding the recovery of the funds and penalties paid by you under the preliminary agreement and compensation for damages from the developer.
Of course, there may be situations in which the developer, although violating the terms of the main agreement, will still enter into a sale and purchase agreement with you. However, in our opinion, it is still better not to get your hopes up and ensure that you have proper legal protection in a timely manner. After all, as we have all seen, the relevance of the ancient saying Si vis pacem, para bellum (If you want peace, prepare for war) has not been lost to this day.
If you need advice on legal issues or protection of your interests in court, the Smartsolutions team will provide you with professional assistance and assistance.
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