Purchasing Real Estate: Part 1

The Act on the Protection of Buyers of Apartments and Single-Occupancy Buildings (hereinafter referred to as ZVKSES) was enacted to protect buyers of real estate still under construction. A common practice among developers is to sign sales contracts for apartments or single-occupancy buildings before construction is completed to secure funding for their projects. The legislation primarily aims to manage risks associated with selling real estate before its completion. While this sales approach allows developers to obtain financial resources to complete their projects, it exposes buyers to risks since the future property does not exist at the time the contract is signed.

Key Risks for Buyers

When entering into contracts prematurely, buyers face several significant risks:

1. The risk that the developer will not complete construction due to financial difficulties.
2. The risk that the developer will be unable to issue the appropriate land registry permission required for the buyer’s ownership registration, often because the conditions for registering individual ownership rights in the land register are not met.
3. The presence of material defects in the property upon delivery.

The greatest concern arises if the developer becomes insolvent or even bankrupt. In such cases, buyers may not acquire ownership rights to the property despite having paid the purchase price.

Simultaneity of Performance as a Protective Mechanism

To mitigate these risks, the legislature has introduced the principle of simultaneous performance, which is mandatory and cannot be circumvented. This principle requires the seller to fulfill all obligations necessary for the transfer of ownership rights and property use before delivering the property and receiving payment from the buyer. These obligations include:

1. Delivering the property with the contractual specifications.
2. Ensuring the conditions for registering ownership rights in favor of the buyer.

Despite this strict rule, the law provides an exception for explicitly agreed-upon advance payments. However, such prepayments are permitted only if the seller provides the buyer with adequate security. This security can be provided in two ways:

1. By issuing a bank guarantee for the refund of the purchase price.
2. By establishing escrow services through a contract between a trustee notary, trustee bank, and the seller. This contract ensures compliance with legal requirements and specific conditions outlined in the escrow agreement related to the sale of all units in a multi-unit building.

When Does ZVKSES apply?

The provisions of ZVKSES apply to all sales contracts that meet the following conditions:

1. The subject of the contract is:
   1. A single-occupancy building, or
   2. An individual apartment within a multi-unit building.

2. The seller is acting as either a developer or an intermediary buyer.
3. The buyer is a final consumer and qualifies as a consumer under the Consumer Protection Act (ZVPot).

Additionally, ZVKSES also applies to:

1. Preliminary contracts where the seller and buyer agree to conclude a sales contract.
2. Any other legal transaction with the same legal consequences as a sales contract regarding the rights and obligations of the parties.

Conclusion

The provisions of ZVKSES must not be interpreted to exclude unfinished residential buildings from its scope. Such an interpretation would directly contradict the purpose of ZVKSES, which is to protect final buyers from risks associated with the developer’s failure to fulfill obligations. The act employs mandatory legal instruments to safeguard buyers against risks stemming from the developer’s financial incapacity to complete construction, non-fulfillment of the contract, and material defects upon delivery.

Sellers cannot circumvent the mandatory provisions of ZVKSES by structuring the sale of residential buildings as a combination of sales and service (construction) contracts.