The subject of this article is the preliminary contract, which finds wide application because of its many conveniences and suitability to current social and economic relations.
Regulation of the preliminary contract
The basic substantive law of the preliminary contract is found in art. 19 of the Obligations and Contracts Act (OCA), and the Code of Civil Procedure (CCP). Pursuant to art. 19 of the LAC, the purpose of a preliminary contract is the future conclusion of a final contract in notarial or notary certified form, it being sufficient for its validity that it be in simple writing form. The preliminary contract must contain the essential elements of the final contract, namely the parties, the price and the subject matter (object).
In view of the development of technology and digitalization in more and more areas, it is quite possible to conclude a preliminary contract by exchanging e-mails, which can serve as proof of the concluded contract. The form requirement will be respected when the e-mails are signed with a qualified electronic signature (QES). When the letters are signed with an advanced electronic signature (AES) the form will be followed if the parties have expressly agreed to it. Otherwise, the AES doesn’t have the force of a handwritten signature.
Application field of the preliminary contract
The main application field of the preliminary contract is in the sale and purchase of property. Most often, the conclusion of the preliminary contract precedes the conclusion of the final contract, and in special cases a so-called conversion is also possible – if the contract of sale is null and void but contains the essential elements of the preliminary contract under art. 19, para. 1 of the OCA, it is converted into a preliminary sales contract if the parties so wish.
For the valid conclusion of a preliminary contract, the seller does not need to be the owner of the property, nor does such property even need to exist. The seller may undertake to construct the building and, subject to certain conditions, to transfer ownership of the building or of individual self-contained units within it to the buyer, receiving the price. By its nature, the sale of a greenfield site is a combination of a contract to develop a property and a transfer a title thereafter.
Requirements for the property subject to the preliminary contract
Another important aspect when concluding a preliminary contract for the purchase of a property is the individualization of the property. When the property is completed and ready for use, this issue is not of particular difficulty, since the complete individualization is that which is described in the previous documents of ownership of the property (e.g. deed), also referred to in art. 60 of the Cadastre and Property Register Act (CPR). Part of the required individualization includes identifier, type of property, address, etc.
The problem of individualisation is more serious when we buy a property in so-called ,,green sales”. This is caused by the lack of data about the property itself, such as an identifier, to be specified in the preliminary contract. A brief description of the property is usually sufficient, but the lack of a sufficiently detailed description of the property could make it difficult to uphold a claim under art. 19, para. 3 of the OCA for the conclusion of a final contract. In its case law, the SCC has held that in such cases the area, the premises, and the boundaries of the property subject to the preliminary contract must be described.
What are the advantages of concluding a preliminary contract?
In practice, the advantages are multiple.
One of them is the so-called ,,stop deposit”. It consists in the fact that after giving it, the seller undertakes to stop offering the property to other prospective buyers for a certain period of time. This ,, stop deposit” is most commonly understood as the deposit referred to in art. 93 of the OCA. It doesn’t need a specific form but is most often done by agreement.
The essence of the ,,stop deposit” also shows one of the other advantages of the preliminary contract, namely giving the buyer the necessary time to obtain the funds to purchase the property, which most often happens through a bank loan.
The bank will in turn grant a loan if it can establish a first mortgage. However, at the pre-contract stage, it cannot establish a mortgage as the property is not yet owned by the person applying for the loan. The preliminary contract is also suitable for the seller, who may need time to obtain the necessary documentation for the property and, in the case of a greenfield purchase, time to build it.
Options in case of non-performance. Action for declaration of the preliminary contract as final
The action for declaring the preliminary contract final is one of the great advantages of the preliminary contract. It will therefore be dealt with separately. Before proceeding to the claim for a declaration that preliminary contract is definitive, we will briefly explain the other options available to the parties under the preliminary contract.
The possibility of cancelling the preliminary contract
Most often, the parties agree on a date and time to appear before a notary. Failure by one of the parties to comply with this agreement is grounds for the annulment of the preliminary contract. This non-appearance, in order to be easily proven in a possible future trial, can be recorded in a statement of fact in which the notary describes that the party who appeared was ready to perform as well as the non-appearance of the other party.
The preliminary contract shall be terminated out of court. All that is required is a notice to perform from the prevailing party giving a reasonable period for performance, after which the contract shall be deemed to have been terminated. It’s also possible to terminate without giving a period of performance in certain special circumstances. The parties will have to return what they have given under the contract. IF the consideration is agreed as an earnest money, its return will be settled according to Art. 93 of the OCA, i.e. whether the return will be of the earnest money only or in its double amount will depend on whether the non-performing party gave the earnest money or received it. If it has received the earnest money and fails to perform, it is liable to double it. If it has given the earnest money and hasn’t performed, it shall forfeit it.
The other possibility that each of the parties to the preliminary contract has is the possibility to declare it final (art. 19 (3) of the OCA). Most often this request is made by the buyer of the property, as the seller doesn’t want to conclude a final contract. It is possible, although rare, that the request for the preliminary contract to be declared is made by the seller. The reasons for not concluding the final contract may be different. For example- the seller has found a new buyer who is willing to give larger sum. This right is extinguished by the general 5-year limitation period.
In order to grant the request under art. 19, para. 3 of the OCA, it is presumed that the party exercising the right of action must be in good standing. This can be proved with the statement of findings from the appearance at the notary. It should be taken into account that the necessity of the party seeking the declaration of a preliminary contract as final is not indisputable. This is evidenced by the pending interpretative case № 4 of 2020 of the Supreme Court of Cassation.
The state shall pay a fee for the claim under Art. 19, para. 3 OCA is 4 %, calculated on ¼ of the tax valuation of the real estate. The claim shall be entered in the Real Estate Register at the Registry Agency. The registration has a notice-protective effect, i.e. it protects the person who has registered his claim. This entry is also subject to a fee of 0.1%, which is calculated again on ¼ of the tax valuation of the property, but not less than BGN 10.
At the time of the judgment, the seller must be the owner of the property, a fact that is subject to verification by the court.
If the seller is not the owner, the court will not uphold the claim. The plaintiff must pay the costs of the transfer of the property. Until they are paid, the court orders that a foreclosure be registered on the property. A copy of the judgment shall not be provided to the plaintiff until the plaintiff proves payment of the costs of the conveyance and the taxes and fees due on the property.
At the time of the judgment, the seller must be the owner of the property, a fact that is subject to verification by the court.
If the transferor is not the owner, the court will not uphold the claim. The plaintiff must pay the costs of the transfer of the property. Until they are paid, the court orders that a foreclosure be registered on the property. A copy of the judgment shall not be provided to the plaintiff until the plaintiff proves payment of the costs of the conveyance and the taxes and fees due on the property.