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GUIDE TO THE PRELIMINARY CONTRACT OF PURCHASE & SALE OF REAL ESTATE

In the real estate field, we often hear about preliminary contract, but what is it and how is it structured?

The preliminary real estate sales contract, also known more simply as compromise, is a legally binding agreement, with which the seller and the buyer mutually undertake to conclude a real estate sale, establishing the terms and conditions.

Its role is that of a ‘promise’ between the parties and represents the intermediate step between the purchase proposal and the final agreement (i.e. the final deed or notary deed) by which the actual transfer of the property (or other real right) from the current owner to the buyer is arranged.
It is not mandatory to stipulate this, except in the case of the purchase of under construction real estates, but it is nevertheless useful to clarify all aspects of the purchase in detail.

When does the preliminary contract come into being?

The first step from which everything begins is the formulation of the purchase proposal. This one in fact has the role of preceding the preliminary contract by including the buyer’s expression of interest, i.e. the intention to purchase the property under certain conditions. The proposal differs from the preliminary contract in that it binds only the part signing it (the buyer) until it is accepted by the seller. The preliminary contract, on the other hand, is binding on both parties, buyer and seller.

At this point it is necessary to specify a very important aspect: as soon as the purchase proposal is accepted by the seller, signed by this last one and the proposer is informed of this event, we are already in front of a preliminary contract of sale. Often, however, in order to consider the most diferent requirements of the parties, a new preliminary contract is signed, more specific and articulated, which replaces or supplements the purchase proposal.

Why is the preliminary agreement important?

The preliminary agreement is extremely important for three main reasons:

1. It allows the buyer and seller to get the time to provide the necessary documentation for the deed;
2. Both parties are protected, as the consequences in the event of non-performance by the buyer or seller are set out in the agreement;
3. It binds both the parties for the time needed to resolve any situations that do not allow the immediate sale. For example, for the buyer, the search for financing and for the seller, the delivery of a new home.

What are the essential elements of the preliminary contract?

Here below a little sum up of the elements included in the contract:

• identification of the object of the contract with the specification of the cadastral data;
• indication of the agreed price;
• agreed terms of payment;
• established delivery date;
• any third-party rights over the property or other special clauses.

The preliminary contract must have the same form as that prescribed by law for the final contract, under penalty of nullity. Therefore, the preliminary contract must be drawn up in writing: public deed (therefore drawn up by a notary) or private deed.

How are the terms of payment determined?

Usually, the person proposing to buy a house pays the promisor seller a deposit, a sum of money intended to symbolise his commitment to purchase the property. The deposit has two different functions, depending on whether one chooses for a confirmation deposit or a penitential deposit.
The first one has the purpose of reinforcing the parties’ commitment to the contract. In fact, should the buyer wish to withdraw from the commitment he would lose it, whereas if it was the seller who withdrew he would have to pay double. Alternatively, the defaulting party may demand performance of the contract. The penitential deposit offers more flexibility, allowing both parties to withdraw from the agreement in return for specific economic penalties.

The amount of the deposit is determined by the parties on the basis of an agreement between buyer and seller. As a general rule, however, it is usual to provide a sum between 10% and 30% of the total price of the property, depending on the specifics of the transaction.

A further possible option – than the deposit – is the down payment, a sum paid by the potential buyer as an advance on the sale price, which, however, since it does not have a guarantee function, is the least used option.

The down payment, in fact, in the same way as the deposit, is an advance payment of a part of the price, so as to give a guarantee to the seller of the buyer’s will to conclude the contract. If, however, the contract is not concluded, the parties will not be economically bound to each other and the down payment will have to be returned.
The deposit, on the other hand, unlike the down payment, is placed as guarantee for both the seller and the buyer.

Registration and transcription of the preliminary?

Speaking of transcription and registration of the preliminary contract, attention must be payed, as these are two complementary and not alternative measures.

Registration is mandatory by law for tax purposes and consists in submitting the preliminary agreement to the Revenue Agency for payment of the related taxes. The preliminary contract must be registered within 20 days of its signature, otherwise, if the preliminary contract is drawn up with the intervention of a notary and thus in the form of a notarised private deed or public deed, the notary himself will register it within 30 days.

Transcription, on the other hand, represents an important instrument of protection for the purchaser because it has a ‘reservation’ effect and make invalid any deed signed subsequently, preventing sales to third parties or the registration of mortgages and foreclosures. Transcription is a protection option that can always be activated, through the intervention of the notary.

Conclusions

The purchase proposal and the preliminary contract are two fundamental as well as rather delicate steps in buying and selling a property. Considering that the purchase of a house often constitutes a one’s most important investment we advise you to rely on our agency to be followed step by step. You can be fully protected and to face your transaction with the utmost serenity and security.