When specialising in property law, it is immediately clear that the considerable growth in the property sector has led to a proportionate increase in property law queries and briefs. One of the major issues in contention is always the rights and obligations of the parties bound by a promise of sale agreement, a subject I will be tackling in the coming weeks with a series of articles aimed at discussing the most significant problems that may arise and how these should be handled.
A promise of sale agreement (konvenju) is an agreement governed by Article 1357 of the Civil Code, whereby two parties bind themselves to buy/sell a particular property under the terms and conditions stipulated and agreed to between them.
While the conditions of a promise of sale agreement are more often than not standard, the law does not impose or limit what one can agree to, and therefore the parties are free to contract any conditions they deem fit and appropriate for their particular circumstances. Resolutive conditions in a promise of sale agreement vary, depending on the will and the need of the parties.
Common resolutive conditions include the transfer of the property in conformity with PA permits, the obtainment of a PA development permit, the obligation to transfer the property free and unencumbered or also the inclusion of a right or servitude over a third party property, such as the right of use of the roof. These are just a few examples since one can agree to any condition as long as it is legal.
However, what rights does the buyer have if the seller does not honour one of the conditions imposed on the promise of sale?
The most obvious option is to rescind the promise of sale agreement. Once the buyer’s obligation to buy was specific, his obligation remains applicable only if the property that is going to be sold conforms with what was agreed, and therefore the buyer may opt to refuse to buy the property. Should a condition of the promise of sale not be satisfied, then the property being sold is considered at law different to what was promised by the seller, and therefore the buyer has every right to demand the cancelling of the agreement.
One must always keep in mind that parties must enter into an agreement in good faith
Jurisprudence dictates that, if the seller did not honour any condition in the agreement, the right to rescind the promise of sale belongs solely to the buyer. The seller should not take advantage from his own shortfalls, and therefore in the event that a condition protecting the buyer is not satisfied, this is not used as a tool by the seller to refuse to sell the property.
However, even though the seller might not have observed his obligations, the buyer might still want to buy the property despite the fact that one of the conditions protecting him would not be implemented, and therefore the seller would not be in a position to sell the property under the terms agreed to in the promise of sale. Additionally, certain defaults could affect the value of the property, putting the buyer, who is not the party in default, at a disadvantage.
The buyer in such circumstances is safeguarded and has the right to demand that the sale goes through, albeit at a decreased price, which reflects the value of the property taking into consideration the consequences of the seller’s default. This option is based on article 1390 of the Civil Code, which states that if the buyer does not receive the good, in this case property, in conformity with what was agreed, he can among other options, demand a reduction in the price. This article is, through jurisprudence, also applied to promise of sale agreements, even though the sale would not have been concluded and no contract would be signed.
Court judgments on this matter are consistent, and state that once the seller is not in a position to transfer the property as promised, the seller is still bound to appear on a final deed of sale. However, since he is the party in default, the sale price must reflect the seller’s shortcomings and is therefore discounted by the court.
The difference in price has to be calculated by an architect and will based on the value of the property taking into consideration the omission, the expense necessary to remedy it, if possible, and this among other factors that are particular to each case.
A common example of the issue raised includes instances when the property is not built according to PA permits, and the seller, for a number of reasons, refuses to apply for the relative sanctioning or regularisation of the property. In such case, the seller’s default is not used to his advantage, and the buyer may opt to buy the property anyway, but at a reduced price, reflecting the property’s lack of conformity with the law. This action is only dependent on the seller’s failure to transfer a property in accordance with the conditions agreed to.
One must always keep in mind that parties must enter into an agreement in good faith, and therefore the seller is not just precluded from rescinding a promise of sale on the basis of a condition which was stipulated in order to protect the other party, but more importantly, the forceful sale with a reduced price effectively compensates the buyer for any default on the seller’s part.
Daniel Buttigieg is a senior associate specialising in Property Law and Dispute Resolution at Fenech & Fenech Advocates.
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