Suggestions for securing claims to the transfer of ownership of existing and yet-to-be-built real estate

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Suggestions for securing claims to the transfer of ownership of existing and yet-to-be-built real estate

Richard Bock

Honorary Notary, General Representative of the Federal Chamber of Notaries of Germany for International Affairs

Berlin / Brussels, Germany / Belgium

The choice of my topic is based on two articles of the «Concept of Updating the Civil Code of Ukraine» which has been made available to the participants at today's meeting. This Concept has been perfectly elaborated for further discussion of the planned amendment. It made it much easier for me to dive into Ukrainian civil law, which I had merely known in its basic features so far and only regarding real estate law.

The first Article, Section 3.16, concerns a Real Right of Expectation. These are considerations to enshrine a right that does not yet fully correspond to the ownership of a classic right in rem, for example property. However, this new Right of Expectation is supposed to be a kind of right in rem, which is already largely substantiated and gives the holder powers that go beyond the mere claim to the transfer of the full right under the law of obligations.

The second article, Section 5.15, deals with the protection of claims under the law of obligations. In this respect, general collaterals, pledges, mortgages and retention as an encumbrance are mentioned.

My lecture concerns the question of the extent to which it is possible to implement in Ukrainian real estate law a legal institution allowing to secure claims under the law of obligations for the transfer of ownership or for the granting of other rights in rem to real property. In the first part of my presentation, I will start with the example of the purchase of an undeveloped or developed plot of land in notarial practice. In the second part, I will try to apply the suggestions arising from this example to the purchase of properties yet to be built. Finally, I will examine the impact of failures during the fulfilment of the purchase contract on the new legal institution to be created. estate law ukrainian

Securing the buyer's claim to the transfer of ownership of an undeveloped or developed plot of land.

According to Ukrainian property law, the conclusion of a purchase contract for a developed or undeveloped plot of land - I will refer to this as real estate - does not result in a change of ownership in rem, but only in the instance of a claim of the buyer under the law of obligations as regards the transfer of ownership. As I understand, in notarial practice in Ukraine, the parties usually conclude a preliminary contract first. Based on this preliminary contract, the buyer already pays a part of the purchase price. This creates a problem, namely that the buyer provides an unsecured advance to the seller. Actually, the advance is unsecured in two respects. Firstly, the seller could refuse to conclude the final purchase contract at all. Secondly, if he does conclude the purchase contract, the buyer nevertheless remains unsecured until the transfer of ownership in the land register. Unsecured means: the seller could sell the property several times and collect the paid part of the purchase price each time. He could become insolvent until the ownership is transferred with the consequence that the partial purchase price paid falls into the insolvency estate. Or he could die with the consequence that the heirs are not known or cannot be found and the money paid in as an advance is no longer available in the estate. It was also reported that in the event of the buyer's death, it is questionable whether, under Ukrainian inheritance law, the buyer's claim under the preliminary contract for the conclusion of the purchase contract passes to the heirs. However, this problem is not the subject of my lecture.

How can the buyer's situation be improved? One can imagine that the problem of the buyer's unsecured advance payment I have outlined, exists in all legal systems in which ownership does not already pass on to the buyer with the conclusion of the purchase contract, but only with the transcription in the land register. If one were to choose a legal regulation according to which ownership already passes on to the buyer upon conclusion of the purchase contract, one would have the same problem inversely, so to speak: in this case, the seller would have to fear that he would not receive the purchase price after the ownership had already passed on to the buyer. We would then have an unsecured advance delivery on the part of the seller.

If, therefore, as would be recommended from a legal and practical view, one decides to keep the previous regulation - transfer of ownership at the time of transcription in the land register - it would be necessary to create a security for the buyer for the time between the conclusion of the preliminary contract or purchase contract until the time of transcription of ownership.

Which securities would be appropriate? If we look at the securities listed in Section 5.15 of the Updating Concept to secure claims under the law of obligations, we have to conclude that these securities are not suitable for the buyer's claims of fulfilment based on purchase contracts or preliminary contracts. Pledges and mortgages can only secure payment claims. These may be primary contractual payment claims - for example for purposes of a loan reimbursement - or claims for damages due to non-fulfilment of other contractual obligations, but not primary claims for fulfilment of a purchase contract or a preliminary contract. To secure the buyer's claims under such contracts, it is necessary to have another means of security.

The German Civil Code (BGB) already provided for such a means of security in its original version from 1900, namely the so-called prior notice (Vormerkung). This legal institution is regulated in six short sections in the part of the BGB dealing with property law. Its legal nature is not defined. Initially, it is only a securing note in the land register. In terms of substantive law, it is a hybrid legal instrument with elements of real property law and the law of obligations, but it has no legal quality of its own. In practice, the prior notice is used as a special type of security instrument. It confers certain effects in rem on the claim arising from the transaction under the law of obligations, in particular vis-a-vis third parties not involved in the legal transaction.

Therefore, if a prior notice for the buyer is entered in the land register on the basis of a preliminary contract or a purchase contract, his claim to acquisition of ownership is secured with effect in rem, i.e. against any third party. Thus, the seller cannot sell the property to anyone else. Creditors of the seller who were not previously secured by a mortgage in the land register no longer have access to the property.

If the buyer pays the purchase price and the other conditions agreed in the purchase contract for the transcription of ownership in the land register are met, the buyer becomes the owner. No one can ever take this right away from him.

Conversely, the prior notice loses its protective effect if the buyer's claim under the purchase contract lapses. For example, if the seller withdraws from the purchase contract due to non -payment of the purchase price. The legal fate of the prior notice is therefore inseparably linked to the claim under the law of obligations. We use the term «accessoriness» for this. Consequently, accessoriness also means that the prior notice shares the fate of the claim to transfer of ownership under the law of obligations upon the death of the purchaser. If this claim passes to the heirs, they automatically inherit the prior notice as well.

The registration of a prior notice in favour of the buyer immediately after the authentication of the purchase contract is common practise for us. The buyer can waive this, which is rare and only occurs if there is a pre-existing personal relationship of trust between the parties.

What happens to the prior notice if the buyer does not pay the purchase price and the seller withdraws from the purchase contract? The prior notice loses its effect, as I have explained, and must be deleted from the land register. For this purpose, the notary usually provides for a power of attorney in the purchase contract.

Protection of the buyer in a purchase contract on a flat yet to be built by the seller.

The legal position of the buyer is particularly at risk when concluding a purchase contract on a flat yet to be built. The uncertainty is twofold if the purchase price is paid in full or in part immediately: firstly, there are the same risks as I have described for the purchase or preliminary contract in relation to an existing property (developed or undeveloped), i.e. multiple sales, insolvency of the seller, etc. But beyond that, there is also the risk that the seller does not build the sold flat at all, builds it differently or does not build it completely.

The safest option for the buyer would be for the parties to first enter into a preliminary contract, whereby the buyer agrees to purchase and pay for the property upon completion. The schedule for the purchase of developed real estate I have just presented to you would then apply.

Economically, however, this security concept does not work out. The seller needs the buyer's funds during the course of the construction of the flat. Otherwise, they would have to pre-finance the object of purchase through a bank loan, which is unlikely to succeed.

In these cases, too, the conclusion of a purchase contract and the registration of a prior notice for the buyer serves the mutual interests of the parties. The only difference to the contractual arrangement for the sale of an already developed plot of land is the fact that the buyer does not pay the purchase price immediately in one sum after registration of the prior notice, but in instalments according to the progress of construction. The instalments specified in the purchase contract must correspond to the state of construction. Their amount is regulated in Germany by a corresponding consumer protection regulation.

I was told that there is actually another register in Ukraine for properties under construction in addition to the real estate register. Irrespective of whether this continues to be the case or whether the two registers will be merged at a later stage, there is no legal reason against a statutory regulation which permits to enter for the time being a prior notice in the register for properties under construction.

Contracts of this kind, which are called property development contracts in our country, involve a high-risk potential for the buyer. In property development contracts, the acquisition of ownership by the buyer must be secured by prior notice and the compliance with a legally prescribed payment schedule must be agreed in order to avoid damages. For reasons of uniformity of the entire transaction, i.e. the building obligation and the obligation to transfer the ownership, and for reasons of consumer protection, both have to be authenticated by a notary. Property development contracts concluded in private are null and void.

In the construction industry, not everyone likes this, even in our country, although people have been used to it for many years. Ultimately, the consumer protection rules and their reliable enforcement through notarial authentication also serve the construction industry. In fact, they help to clean up the market by excluding market participants who are engaged in unfair practices. Consumer protection regulations in property development contract law have been in force in our country since 1982. And there have been no notable cases of damage so far.

The effect of the prior notice in the event of disruptions in the fulfilment of purchase contracts.

Finally, I would like to comment on the effect of the prior notice if the fulfilment of purchase contracts is compromised. I mentioned at the beginning that the acquisition of ownership, which is secured by prior notice in the land register, can no longer be thwarted by anyone, except, of course, by the buyer themselves. So, no one can take that right away from him.

What does that mean? Let me summarise the most important effects of the prior notice in four points:

It is true that the seller can in principle conclude further purchase contracts for the same property. However, such purchase contracts cannot be executed because the prior notice has a blocking effect.

The prior notice actually prevents the seller from encumbering the property afterwards with mortgages after the moment when the application for registration of the prior notice was filed with the land registry.

The prior notice is insolvency-proof. This means that a possible insolvency of the seller after the filing of the application for the prior notice with the land registry does not have any consequences on the execution of the purchase contract.

The prior notice impedes any exploitation of the plot of land by creditors of the seller, who apply for the registration of a security mortgage on the sold property based on an enforceable judgement after the application for registration has been filed in favour of the buyer with the land registry.

For the sake of completeness, I would like to add the following:

Apart from claims to the acquisition of ownership, claims to other rights in rem to real estate, for example a claim to the registration of a usufructuary right, can also be secured in the land register by prior notice. The registration has a so-called rank-preserving effect. This means that if the reserved right is registered later, it is given the same rank in the land register as the prior notice had initially, i.e. it is not given rank after the rights registered in the meantime.

Closing remarks.

I'd like to close my lecture by returning to the legal nature of the prior notice:

According to some commentaries on the BGB, the prior notice is a hybrid right. I do not share this opinion. Although this fact is certainly correct from the legal point of view, it does not adequately describe its function. I would prefer to describe the prior notice as a preventive legal instrument. It secures the purchaser who acquires prop erty or another right against damages in the course of the settlement of the transaction under the law of obligations and guarantees contractual fulfilment. In the framework of the notariat, the prior notice is the most important legal instrument to ensure trouble-free and damage-free real estate transactions. In this way, it serves the interests of citizens, especially consumers. The prior notice relieves the courts and thus the state budget, and it strengthens social stability and peace.

Coblenz/ Berlin, 30th September 2021

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