The latest in real estate: Preliminary contracts 'In Red'

In recent months, a concerning trend has been observed because of rising inflation and sharp changes in prices of construction materials, labor, fuel, and energy.

Construction companies have been unilaterally deciding to increase the agreed final prices of preliminary contracts for the purchase and construction of real estate (so-called 'In Green' preliminary contracts) without having the right to do so.

In the event that buyers refuse to pay an addition to the sale price, the selling construction companies refund the money received under the contract and in some cases even pay the stipulated penalties, all with the aim of terminating the preliminary contract with the respective buyer and selling the real estate to another party at a significantly higher price.

Obtaining such a price is guaranteed given the current levels of real estate prices, which have multiplied compared to prices from just two years ago.

In this way, numerous buyers who sign preliminary contracts before their sites have been built, turn out to be deceived in their expectations of acquiring real estate at the price agreed upon prior to the completion of construction. This situation is particularly dramatic when the expected real estate will represent a sole residence or will be bought solely as an investment.

A specific reason for the described acts of selling construction companies is the remedy adopted stipulating amendment of prices in public procurement contracts due to inflation, which came into effect on August 5, 2022. By virtue of the new provision of Article 117a of the Public Procurement Act (StateGazette, No. 62 of 2022), for the first time, the contracting party was granted the right to unilaterally amend the price of a public procurement contract as a result of inflation, where the prices of essential goods and construction materials that form the value of the contract have significantly increased, pursuant to a specific methodology adopted by the Council of Ministers.

In spite of the fact that this provision is not applicable in relationships between private parties where there is no public procurement, construction as a type of activity is influenced by the prices of construction materials and labor in both cases, which prompted construction companies of private real estates to "come up with" ways to address the problem in the absence of explicit contractual remedy.

The reasons for this situation are multiple and complex. On the one hand, it is due to inflation and volatile prices of construction materials, labor, energy sources and fuels. On the other hand, it is based on the relatively long period of about two years between the signing of the preliminary contract and the fulfillment of the planned construction, in the course of which, circumstances inevitably change.

Additionally, the fact that property rights are not transferred on the ground of the preliminary contract allows the seller, being the owner of the real estate, to dispose of its ownership in favor of a third party at any time.

Needless to say, construction companies' willingness to maximize profit while minimizing risks together with buyers' lack of understanding of the matter when signing in a rush preliminary contracts under the pressure of expiring terms based on the legally unclear "stop deposit" clauses, also play a role.

Last, but not least, it is worth mentioning the lengthy period required to resolve disputes in court(which fall under the so-called "economic intolerance" cases under Article 307 of the Commerce Act), together with the relative uncertainty dictated by the inconsistent case law in similar cases.

We should not forget the sharply rising demand in the real estate market, which has enabled selling construction companies to impose the conclusion of preliminary contracts predominantly in their favour without sufficient guarantees for buyers. All under the assumption that there will be enough willing buyers to immediately agree to sign the preliminary contract as it is proposed.

However, buyers should be aware that 'In Green' preliminary contracts are one of the most complex transactions in the legal world because they usually combine two agreements- a purchase-sale agreement and a construction agreement - with all their peculiarities and consequences which should not be overlooked. It is necessary to consider and anticipate not only the typical risks associated with the history of ownership, legal succession, and encumbrances but also the specifics of the construction process, exploitation entry, and warranty periods for the completed construction.

In addition, adequate remedies should now be considered in the event of a unilateral termination of preliminary contracts, which would serve as an obstacle for sellers to dictate recurringly the amendment of conditions until the fulfillment of the concluded contracts.

In view of all the above and in order to avoid a situation in which a preliminary contract already concluded 'In Green' subsequently turns out to be a useless piece of paper glowing problematically 'In Red', the purchase of real estate should always be legally consulted with qualified lawyers with appropriate experience in the field.