Updated: 2022.07.18.
The most important issue before concluding the real estate sale & purchase agreement is to regulate cancellation and financial responsibility which often tests the buyer’s and the seller’s intent to cooperate and make a deal. Who is responsible if the buyer is not getting a loan? Can the buyer cancel the deal and get back the deposit if the legal status of the real estate was the bank’s main reason to decline the buyer’s application for a loan? If the local government commences proceedings regarding unauthorized construction how the buyer may protect herself in advance from a compulsory demolition?
Even if the buyer and the seller trust each other they still ought to implement stipulations regulating the above risks because if the deal fails for any reason paying back even a part of the purchase price may impose an unbearable burden (especially when the seller already used the first part of the purchase price to pay back his loan and clear the title deed.
The financial responsibility of the person who cancels the deal is established by the deposit which is usually contained by real estate sale & purchase agreements in most cases. The buyer usually pays the deposit simultaneously or previously to the signing of the sale & purchase agreement (the process is detailed in this article). The deposit functions not only as a first part of the purchase price but a “penalty” of cancellation: if it was given by her, the person who is responsible for cancellation loses the deposit, or she has to pay it back two times if she received it. Therefore if the deal fails we must ask the following question first: who is responsible for cancellation?
The person who is responsible for cancellation is the party in whose interest the reason of cancellation has arisen. For example, reason of cancellation has arisen in the seller’s interest if she finds another buyer who is willing to pay more for her real estate and she cancels her previous deal with the earlier buyer. In contrast, reason of cancellation has arisen in the buyer’s interest if her application for a loan is declined and unable to pay for the real estate from her own funds.
Sometimes it can be disputable that in whose interest the reason of cancellation has arisen. Therefore it is recommended for the parties to specify certain reasons of cancellation in their real estate sale & purchase agreement (i.e. when the buyer’s application for loan is declined or if the seller undertakes to previously upgrade the real estate but fails to perform – only limit is the parties’ and the countersigning lawyer’s imagination for coming up with reasons of cancellation). The parties may stipulate that in these cases none of the parties are responsible for cancellation and the deposit should be paid back, no penalty. The more reasons of cancellation in the sale & purchase agreement, the less probability of a long and costly court proceeding where they have to prove their right since the sale & purchase agreement explicitly governs responsibility matters regarding these cases. Such reason for cancellation is when the seller fails to handover the real estate in due time even tough it is her obligation according to the sale & purchase agreement. If the parties stipulate as such, the buyer can cancel the deal in these cases with claiming the already paid purchase price back along with the double of the deposit. However such cancellation may be restricted by the loaning bank if the buyer applied for a loan to buy the real estate.
Financial responsibility can be established not only for money been paid but also for money hasn’t been paid. This legal instrument is called cancellation penalty. The penalty is not a part of the purchase price and it is only “activated” when the deal is cancelled. Cancellation penalty should be paid by the party who is specified in the agreement as obligated and she should pay the penalty if the reason of cancellation has arisen in her interest. The penalty may impose obligation on only one of the parties. It may be reasonable to stipulate deposit plus penalty if there is extraordinary risk of failure on one party’s side.
There is a good example for the above situation. When the seller has to put the real estate through some kind of complex legal proceeding in order to settle the legal situation of the real estate before she receives the entire purchase price from the buyer. For example when the real estate is registered under several topographical lot number these registered numbers have to be merged or when the seller has to apply for a permission for further existence because her upgrade was unauthorized by the local government. It is recommended to consider the notions written at the first paragraph on deposit while also taking into consideration that cancellation penalty can be stipulated with and instead of deposit as well.
If your agreement is well-written and the reason of cancellation has arisen in the seller’s interest you can claim the deposit back two times. In practice, cancellation and claiming double deposit can lead to lengthy legal disputes and court proceedings. You may need a higher level of safety such as paying the deposit no to the seller’s bank account but to the lawyer’s escrow account simultaneously stipulating in the escrow agreement that the lawyer should only transfer the deposit to the seller if certain conditions were met.
In practice even a well-written agreement cannot spare you the time-cost which is needed to claim the deposit or the purchase price back since court proceedings are costly and take time. Therefore if the seller has to put the real estate through some kind of complex legal proceeding extending 6 months in order to settle the legal situation of the real estate or if she is required to upgrade the real estate which will extend 6 months before she receives the entire purchase price from the buyer it is advised to conclude a pre-agreement which contains a reason of cancellation on the side of the seller if she fails to perform her obligations in due time. It is recommended to combine these pre-agreements with attorney’s escrow which guarantees safety for both sides: it guarantees the seller that if she performs her obligations the lawyer (and the supervisory Bar) guarantees that the funds will be tranfered to her account and guarantees for the buyer that if the seller fails to perform her obligations she doesn’t have to go through lengthy and costly court proceedings to get the deposit back.
If the seller has to put the real estate through some kind of complex legal proceeding extending 6 months in order to settle the legal situation of the real estate or if she is required to upgrade the real estate which will extend 6 months before she receives the entire purchase price from the buyer, the best protection is granted by a reservation of title combined with attorney’s escrow. The reservation of title is registered on the real estate’s title deed. Therefore, it excludes the possibility that the seller sells the real estate to another buyer as long as the reservation of title is on the title deed. Reservation of title is on the title deed for as long as the parties stipulated.
Experience in cancellation matters is indispensable in order to determine the necessary level of legal safety. Assessing you case can reveal that which solution you need. For further information do not hesitate to contact me:
📞+36304572289
📧drszalai@drszalailegal.hu
After sending your data we contact you by phone or e-mail and give you a preliminary legal opinion and information on the common processes of similar cases and the foreseeable costs. First contact and consulation is not charged.