What Are the 3 Major Risks When Signing Presales Agreements?
Losing the down payment, additional costs generated by moving in late in your new home and the discomfort of living in smaller surfaces than the ones established in the presales agreement are the most frequent risks which the Promissory Buyer (the Buyer) should manage when reading and negotiating a presales agreement for a new apartment which is still in the stage of project.
I am Ionel Vacarescu, real estate lawyer and, in this article, I have as goal to show you what you should do to manage these risks, before signing the presales agreement.
The decision of signing such a presales agreement should be taken carefully, after a close analysis of all the risks present in the proposed presales agreement. This is a decision with important financial implications for the long run.
I often come across presales agreements drafted by the developers of real estate parks who, when establishing penalties for noncompliance, tilt the balance to the disadvantage of the potential buyer. Even more, the developers, at first, show themselves closed to negotiating the provisions of the proposed presales agreement, so … you must insist.
I saw many cases in which the developers propose to the potential buyers to sign presales agreements in which, although the developers take on a lot of obligation, the penalties for noncompliance with the obligations are limited and merely symbolic.
Just to give some examples: small penalties of 2-4%/year from the down payment in case the apartment is not delivered in time, penalties of Euro 1.000 – 2.000 in case the developer no longer wishes to sign the sales agreement and even the lack of penalties all together in case the surfaces and finishes are not the ones chosen by the promissory buyer.
However, when talking about the penalties which the promissory buyers are expected to take over, things are totally different. For example, the promissory buyer is expected to pay an advance between 50 and 90% of the value of the apartment and lose between 70 and 100% of the down payment in case he can’t conclude the sales agreement.
The decision to sign and pay an advance belongs to the Promissory Buyer. He/she has the right to negotiate better provisions in order to obtain additional guarantees that the developer will comply with the obligations within the agreement.
So, after you are certain that the developer has the apartment you want as location, surface, finishes, structure and other criteria which are important to you … the time to discuss and sign the presales agreement has arrived.
Dealt with superficiality by most of the potential buyers, this stage is as important as any other and even more, it’s a written conclusion of all that you’ve discussed and established with the developer. Once you sign the presales agreement, this has legal effects, meaning it’s no longer a simple shake of hands. Every party takes on penalties for noncompliance.
How should you approach the developer and what should you do before signing a presales agreement?
In order to be ready for signing the agreement, you, as a potential buyer, have the right to request the developer, in order to read and check, the following documents:
Tile of property over the land where the building is being raised,
The plan of the apartment,
Land registry extract,
Handover protocol (if the construction is finished).
It’s also crucial to check the legal status of the developer, ongoing litigation (lawsuits regarding the construction permit are very important).
The most serious issues which might surface in this analysis stage are: problems with the ownership title over the land, the construction permit was declared void, other ongoing lawsuits which might affect the developer and also yourself.
Normally, it takes 2 – 3 days to check all these documents, alone or assisted by a professional.
I strongly advise against signing any agreements without these preliminary checks. As I stated above, the financial consequences can be harsh and for the long run.
If the document analysis checks all our boxes, and there are no issues to be addressed, you can move on to studying the provisions of the presales agreement.
There is no standard for the provisions such a presales agreement should have and generally these differ, as content and form, from one developer to another. So, according to each presales agreement, we can find more risks to cover and provisions to change. For this reason, I recommend reading each presales agreement separately. From my experience, I urge you to consider all issues, even if apparently these are unimportant.
Please keep in mind these 3 major issues I came across frequently and pay attention to these:
Make sure that the penalty the developer takes on is at least equal with yours in case the sale purchase agreement won’t be signed, and the apartment won’t be handed over from the developer’s fault. In the presales agreement I’ve checked, I noticed a tendency in which the developer takes on small penalties for noncompliance whereas the promissory buyers take on penalties which are 10 times higher;
The Developer should promise to pay considerable penalties if the apartment isn’t handed over within the estimated time frame. While the Promissory Buyer is waiting to move in the new home (with the money for advance already paid to the developer), probably paying bank interests and commissions for the money paid in advance, rent between Euro 500 – 1.000, the developer’s penalties are between 2 – 3%/year from the cashed advance, which doesn’t even cover the real inflation rate in Romania;
What are the penalties in case the developer doesn’t handover the apartment as established. Real cases: smaller surfaces, different partition, smaller windows, less ways of access, different finishes and the list can go on.
In the end I would like to bring awareness over the fact that many Romanian developers passed the “christening” of the first real estate major crisis, know very well the risks of their business and have hired teams of lawyers to draft presales agreements which protect them. Even if most of them mean well, building residential parks is a complex project and few developers can deliver all the promises.
When and if you will find yourself in such a situation, the only thing that the developer and the lawyers will take into consideration is the signed presales agreement.
The Promissory Buyers (you) have two options: either they sign in a rush the presales agreement, without knowing the risks and without solutions for when problems rise, either they negotiate provisions which defend their interests and cover their risks if necessary.
What’s your option?
Real Estate Lawyer