- Most common mistakes in real estate sales transactions
Most common mistakes in real estate sales transactions
When concluding real estate transactions, there are many aspects that need to be checked so that the transaction runs smoothly, and without any obstacles during the conclusion and execution of the transaction, subsequently, there would be no legal disputes between the parties to the transaction and no claims from third parties. Mistakes in real estate transactions can be made by anyone as there are many legal and technical aspects that need to be checked and kept in mind. The type of transaction (sale, gift, exchange, lease, etc.) also significantly affects the range of issues that may be important in a real estate transaction. This article describes the three most common types of mistakes when carrying out the real estate sales transactions especially focusing on the buyer’s protection.
1. A FAILURE TO EVALUATE THE LEGAL ASPECTS OF REAL ESTATE
When starting negotiations on a real estate sale transaction, it is important to examine not only the technical condition of the property, but also the legal aspects that may affect both the execution of the sale transaction itself and the rights of the new owner.
One of the first steps to take when starting to negotiate the sale of real estate is to check the land register data. In the Land Register, it is possible not only to verify the seller’s ownership , but also to check whether any prohibitions or encumbrances (protection zones and prohibitions, prohibitions on expropriation without the consent of third parties, such as mortgage creditors or lessee, etc.) and rights in rem belonging to a third-party are registered (for example mortgage, rental or lease rights, right of first refusal, repurchase and redemption rights, servitudes, etc.). It is also possible to check in the Land Register whether there are no recovery marks or claim securing marks registered on the real estate, which will be an obstacle to the sale of the real estate.
In addition, it should be noted that the data reflected in the land register does not always correspond to the actual situation. Separate protection zones may exist on the basis of law. Also, the land register data may not coincide with the data in the cadastral information system. Therefore, before purchasing the property, the data available in the cadastral information system of the State Land Service must also be checked, for example, regarding the boundaries and area of land plots, as well as the type of permitted use of the property.
Shared property of land and buildings
When purchasing an apartment property, non-residential premises or virtually any building or part thereof, it is important to check whether the real estate includes the land on which the building is located. It is quite typical that an apartment building is located on a land owned by another person, which is not bought with the building or part of it. Most often, in the case of split ownership of land and the building located thereon, there is a ‘forced lease relationship’ between the owners of the land and the building (including apartment owners) if the shared property is the result of a privatization process or in other cases exhaustively listed by law.
However, there are also more complicated cases when a building on a land owned by a different owner is built on the basis of a contract. In such cases, the status of the building as a separate object of property rights is limited in time. Currently, ‘the right to build’ is regulated by a special section of the Civil Law, which entered into force in 2017. However, there are properties where the buildings are built on a land owned by another person on the basis of a lease agreement concluded before the entry into force of the regulation on the right to build. Such cases may currently be legally unspecified, and in the event of a dispute, proceedings between the owners of the building and the owners of the land could result in the loss of the ownership rights of the owner of the building, establishing that the building has legally merged with the land property.
Establishing of existing, possible or necessary servitudes
A servitude is a right in respect of the property of another as it restricts ownership rights regarding it, with respect to utilization, for the benefit of a certain person or a certain parcel of land. The issue of servitude can be analyzed from two aspects. First, a servitude may be necessary to access the purchased real estate, for example, if the buyer wishes to purchase a land for construction, it needs to be verified that this plot of land can be fully accessed from public roads. If this is not possible, a servitude road is required to provide such access rights. The existence of an access road is also a condition for obtaining a building permit. If such a servitude is not registered in the land register and the plot cannot be accessed by public roads, the acquirer of the real estate will have to take a number of steps to register such a servitude in the land register, concluding an agreement with the owners of the adjacent plots or even bringing a respective claim to the court.
Secondly, the issue of servitude is also relevant to the contrary, where there is a right of third parties to use the immovable property to be sold or part of it for access and use of adjacent properties. Such servitudes may be entered in the land register, but not always. Therefore, it is necessary to inspect the real estate in person, as well as to check the spatial data available in the cadastral information system, which often allows to determine whether there is a risk of possible servitudes in favor of adjacent properties.
Legal status and permitted use
One of the first issues to be checked before concluding a purchase transaction is the permitted type of use of the specific property, which is specified in the municipal spatial plan, as well as in the local plan and detailed plan, if such are prepared. The permitted type of use of real estate will determine for what purposes the property can be legally used, for example, whether it is possible to build on the land, whether the premises are allowed to be used as residential space or whether commercial premises can be established, etc. It is also important to make sure that area close to water bodies is not considered to be a flooding area, which will significantly limit or ban such territories from being used for certain purposes.
It may be possible to change the permitted use of the building, premises or land. However, this creates additional costs and administrative burdens for the buyer of the property, as well as may prove impossible if the intended use of the property does not comply with the municipal spatial planning documents or technical characteristics of the property. When purchasing land for construction (or already built-up land or buildings), it is necessary to make sure that the planned or already built buildings comply with the building parameters (area, number of floors, etc.) specified in the municipal spatial plan or local plan.
Municipal spatial planning documents are publicly available and can usually be found on the website of each municipality. The permitted type of use of a particular property can be clarified by looking at the data of the land register and cadastre information system, as well as the current property cadastral survey file or inventory file.
Verification of the legality of construction and the structure being accepted for service
When purchasing structures or groups of premises, such as apartments, it is important to make sure that no illegal construction has been performed in the property by comparing the existing structures or premises with the land register and cadastral information system data, as well as the latest available cadastral survey file or technical inventory file. There are often auxiliary buildings built on land properties (such as a shed, garage, sauna-house etc.) without obtaining the necessary permits or consents. It may also turn out that a building permit has been obtained for the construction of the buildings, but the construction process has not been completed and the buildings have not been accepted for service by the respective construction board. Although it would likely be possible for the new owner to complete the started construction process, it may cause a variety of issues, for example, the building in fact built might not comply with the approved construction documentation. In certain cases it is also necessary to obtain the approval of the construction board or a building permit for the performance of repair work on buildings or premises.
2. MISTAKES IN THE PERFORMANCE OF RIGHT OF FIRST REFUSAL AND IN THE INVOLVEMENT OF THE SPOUSE
When concluding real estate purchase transactions, in certain cases it is necessary to inform third parties who may have rights to the specific real estate, or to obtain their consent to conclude the transaction.
Rights of the spouse
Although one person might be entered in the land register as the owner of real estate, if the seller as the registered owner is a natural person, it is necessary to find out if the seller is or has been married and if the property might be considered a joint marital property. In such case, a written consent of the spouse will be required for entering into the transaction and for registering the buyer as the new owner in the land register, and therefore the spouse might have to visit the sworn notary together with the parties. Information regarding the property being a joint marital property may be indicated in the land register, but not always. A sworn notary can check the potential joint marital property status by checking the Population Register data.
The right of first refusal of local governments
In the cases specified in the Law “On Local Governments”, when concluding a real estate sale transaction, the local government where the real estate is located has a right of first refusal. A local government may use its right of first refusal if the specific real estate is imperative in performance of the governmental functions. However, in cases specified by law, in order to register the buyer as the new owner of the property, the parties to the sale transaction may have to refer to the local government, which then issues a statement of waiver of the right of first refusal, if the local government does not use the rights to obtain the real estate.
The right of first refusal of the joint owners and other persons
The Civil Law stipulates that joint owners of the real estate have the right of first refusal in real estate sales transactions. According to the regulation of the Civil Law, the parties concluding a real estate sale transaction are obliged to provide all joint owners of the real estate with the signed purchase agreement. The joint owners have the right to notify the parties of the sales transaction about exercising their right of first refusal within two months from the date of receipt of the purchase agreement.
It should be emphasized that if the parties forget to notify the joint owners of the possibility to use the right of first refusal, the failure to notify has been deliberate, or the joint owners have been denied the right of first refusal for some other reason, all the offended joint owners have a right of redemption. The right of redemption allows the joint owner to recover the immovable property from the buyer by paying the purchase fee specified in the purchase agreement, as well as by covering the buyer’s expenses. In the event of a dispute, the joint owner may bring an action regarding the right of redemption against the buyer of the immovable property before court.
The right of first refusal and redemption may also belong to other persons to whom it has been granted. The granted right of first refusal and redemption are not always recorded in the land register. If such a record is made, the person in whose favor the rights of first refusal and redemption have been established will be able to exercise the redemption right against the buyer if the option of using the right of first refusal has been denied by the parties of the sale transaction. However, in case the rights of first refusal and redemption are not registered in the land register, the entitled person will be able to bring a claim for compensation of losses against the seller.
3. MISTAKES IN DRAFTING THE PURCHASE CONTRACT
Although the agreement of the parties on the essential components of the sale transaction – the object to be sold and the purchase price – is sufficient for concluding the purchase agreement, it is undoubtedly in the interests of each party to include in the agreement conditions for exercising and protecting their rights as well as possible mechanisms for the liability of the other party.
One of the most important issues to be included in the contract is the procedure of payment of the purchase fee and terms to prevent situations where the seller is left without the property and does not receive the purchase fee, or the buyer pays the purchase fee but does not receive the property. Nowadays the real estate sales transactions often include the use of a custody account held by a bank or a sworn notary for the transfer of the purchase price. Although these forms of payment cause additional costs, they provide protection for both parties in the execution process of the transaction. Another important aspect regarding the payment of the purchase fee, which the parties to the transaction tend to forget or do not know, is the legal prohibition to make payment in real estate alienation transactions in cash. This prohibition applies to both natural and legal persons, and it took legal effect on 1st of May, 2019.
For the protection of the rights of the parties, it is no less important to include in the contract crucial confirmations from each party, which allow to avoid disputes about composition of the property, status, existing or subsequently disclosed deficiencies and value. Potential disputes may also be avoided by formulating terms of the purchase agreement in a legally accurate and precise manner. Often the parties agree on the content of some clauses of the contract at the time of concluding the transaction, but because of the vague wording it leads to disputes in the future. It is therefore advisable to entrust the drafting of the purchase contract to an experiences and professional lawyer.
* publication is prepared for May 2021 edition in magazine iTiesības
** publication was prepared by Liene Pommere, assistant attorney of the Law Office RER Lextal