Buying a property under construction: the main risks for the buyer

Buying a property under construction, also known as buying “off-plan”, may secure a better price and the opportunity to choose a specific flat. In return, the buyer takes on risks that do not exist to the same extent with a completed property.

At the time the preliminary contract is signed, the flat may not yet exist as a completed unit. The buyer usually pays a significant part of the price in advance, while ownership will be transferred later. Months or years may pass between payment and acquisition.

The checks should therefore cover not only the future flat but also the land, the developer, the planning and construction documents, the financing of the project and the terms of the contract.

What are we actually buying “off-plan”?

A preliminary contract does not in itself transfer ownership. Under it, the parties undertake to enter into a final contract in the future on the agreed terms.

Until the building has been completed to the statutory structural completion stage (груб строеж) under Bulgarian law, the subject matter of a transfer may be the right to construct and own the future unit on another person’s land (право на строеж). Once completion of the rough construction has been certified in accordance with the procedure laid down by law, the constructed unit itself may be transferred. This distinction is set out in Article 181 of the Spatial Development Act.

For this reason, the buyer should be clear about:

• what right they are acquiring;
• at what stage it will be transferred;
• what part of the price will have been paid by then;
• how they are protected if construction is not completed.

1. Risk that the developer has no rights to the land

The first check concerns the ownership of the site. The developer may be the owner of the land, but it may also be building on the basis of a right to build created in its favour or of a contract with the owners.

The following should be established:

• who owns the land plot;
• whether there are any co-owners;
• whether the right to build has been duly created;
• whether it covers the specific future flat;
• whether there are any rights reserved for the owners of the land;
• whether there is a dispute between the owners and the developer;
• whether the seller may dispose of the unit independently.

It is not enough for the construction company to appear in the project’s advertising. The person who holds, or will acquire, the right to transfer the specific property must be a party to the preliminary contract.

2. Risk of mortgages and attachments of real property

The site or the right to build may be mortgaged to finance the project. The existence of a mortgage does not necessarily mean that the transaction is impossible, but it requires a mechanism, arranged in advance, for releasing the unit being purchased.

Before a contract is signed, the following should be checked:

• mortgages over the land and the right to build;
• attachments of real property;
• registered statements of claim (lis pendens);
• the rights of other buyers;
• the contracts and instruments relating to the project.

Where there is bank financing, there should be clarity as to the conditions on which the bank will consent to the discharge of the mortgage in respect of the specific flat. The developer’s oral promise is not enough.

Searches and certificates may be requested through the Property Register of the Registry Agency.

3. Risk of problems with the planning and construction documents

Before a substantial part of the price is paid, at least the following should be checked:

• the detailed development plan in force;
• the building permit;
• the approved building design (investment project);
• the title documents or the documents establishing the right to build;
• the protocol for opening the construction site;
• the existence of any appeals or disputes;
• the consistency between the design and the promised flat.

It is important that the building permit has become final and has not lapsed. It should also be established whether the building, the number of storeys, the designated use and the specific unit correspond to the approved design.

The marketing visualisation and the architectural design are not the same thing. What matters to the buyer is the approved design and the description of the property in the contract.

4. Risk of non-completion or significant delay

One of the most significant risks is that construction is delayed or not completed at all. The reasons may be financial difficulties, administrative problems, a dispute with the owners of the land, a lack of financing or the developer’s insolvency.

A check should therefore be carried out on the company itself:

• how long it has existed;
• who represents and owns it;
• whether it has previously completed projects;
• whether it publishes financial statements;
• whether it is subject to any attachments;
• whether it is involved in significant court proceedings;
• whether insolvency proceedings have been opened against it.

Successful previous projects are no guarantee, but a lack of track record or the use of a new company without significant assets increases the risk.

5. Risk of losing the sums paid in advance

In a purchase of a property under construction, the price is usually paid in instalments according to the progress of the project. If a large part is paid at the very beginning, the buyer is in practice financing the construction without necessarily having acquired a right in rem.

If the developer becomes unable to pay its debts, the buyer may be left with only a monetary claim under the preliminary contract. Recovering what has been paid may then prove difficult.

It is safer for payments to be tied to objectively verifiable stages, for example:

• transfer of the right to build;
• completion of the rough construction;
• signing the statutory completion and acceptance document known as Act 15;
• authorisation for the building to be brought into use;
• transfer of ownership;
• handover of possession.

The contract should provide for a sufficient part of the price to remain outstanding until the seller’s main obligations have been performed.

6. Risk of substandard construction or departures from the agreed specification

Promises such as “luxury finish” or “high-end materials” are difficult to enforce if they are not made specific.

A detailed technical specification should be attached to the contract, setting out:

• the materials for the façade and the common parts;
• the type of window and door frames and of insulation;
• the heating and the installations;
• the degree of completion of the flat;
• the floor coverings and sanitary ware, if included;
• the characteristics of the lifts;
• the infrastructure and landscaping.

It is necessary to provide for how defects are established, within what period they are remedied and what the seller’s liability is in the event of non-performance.

7. Risk associated with the preliminary contract

Preliminary contracts are usually drafted by the developer and primarily protect its interests. The buyer is not obliged to accept the proposed wording without changes.

Particularly risky are clauses that:

• allow unlimited extension of the deadlines;
• release the developer from liability for almost any delay;
• provide for heavy penalties for the buyer only;
• permit unilateral changes to the design;
• allow materials to be substituted without criteria;
• oblige the buyer to pay the full price before acquisition;
• restrict the buyer’s right to terminate the contract for breach;
• do not provide for the repayment of sums paid;
• entitle the developer to mortgage the property without conditions;
• do not specify a final deadline for commissioning;
• do not provide for contractual penalties for delay by the developer.

Penalties for delay should be real, not symbolic. It is also advisable to provide for a final deadline after which the buyer may terminate the contract and recover what has been paid, together with the agreed contractual penalty.

What should the contract contain?

A contract for the purchase of a property under construction should, as a minimum, provide for:

• precise identification of the future property;
• the price and payment schedule;
• the stages and deadlines of construction;
• a final deadline for commissioning;
• the point at which ownership is transferred;
• an obligation to transfer free of encumbrances;
• a mechanism for discharging the mortgage;
• a technical specification;
• permissible deviations in floor area;
• rules in the event of changes to the design;
• contractual penalties for delay and non-performance;
• a right of termination;
• a time limit for refunding the funds paid;
• warranties for the construction works;
• the time limit and procedure for handover of possession.

General promises made in marketing materials or in conversations with an estate agent do not have the same protective value if they are not included in the contract or its annexes.

How can the buyer reduce the risk?

The most important practical measures are:

1. Checking ownership and the right to build before paying a reservation fee.
2. Searching for encumbrances on the land, the right to build and the project.
3. Reviewing the building permit and the approved design.
4. Checking the developer, its previous projects and financial position.
5. Paying instalments according to actual progress, not only according to calendar dates.
6. Retaining part of the price until commissioning and handover of the property.
7. Contractual penalties and a final deadline for completion.
8. An independent snagging inspection before handover of the flat.
9. A legal review of the contract by the buyer’s lawyer, not only by the developer’s legal adviser.

Conclusion

Buying a property under construction is not necessarily dangerous, but it requires more thorough preparation than buying a completed home. The main risk stems from the fact that the buyer pays now but expects to acquire a completed property, fit for use, in the future.

The buyer’s protection depends on three things: the developer’s rights to the land, its ability to complete the project and the content of the contract. The earlier these are checked, the greater the possibility of limiting the risks.

If you are considering buying a property under construction, we can carry out checks on the developer, the ownership and the planning and construction documents, as well as review or negotiate the preliminary contract on behalf of the buyer.