It is not possible to describe a real estate sales contract in a 1500-word article, but even to list the most important headings related to it would be a hopeless attempt. In this article we will do no more than highlight some of the topics of general interest in the field of contracts for the sale of immovable property.
Concept and main features of a real estate sales contract:
Here are the most basic cornerstones of a hungarian real estate sales contract:
- The seller undertakes to transfer the ownership and possession of the property.
- In return, the buyer must pay a purchase price.
- All this must be strictly in writing.
If the above minimum conditions are met, we are talking about a valid contract for the sale of real estate. No real estate sales contract is concluded in the following situations:
- If the parties discuss the above but do not put it in writing, there is no contract for the sale of immovable property.
- If the parties describe the above to each other in an email, the email alone does not constitute a written statement and the contract for the sale of the property is not concluded.
- If the parties agree to sell the property, but the agreement does not clearly state the purchase price or the property cannot be identified, the contract is also not concluded.
Content of the real estate sales contract?
The main feature of the real estate sales contract is that it is suitable for the registration of the buyer’s ownership. The law sets out the minimum requirements for this. Among the requirements of the law, I highlight the following as the most important.
The contract must include:
- data of the contracting parties;
- the capacity of the parties to the transaction (seller, buyer, giver, donee, etc.)
- the topographical number;
- the declaration of nationality of the parties;
- the so-called “registration permit”, whereby the seller unconditionally and irrevocably consents to the registration of the buyer’s ownership of the property;
- last but not least, the lawyer’s countersignature
Footnote: in the case of payment by instalments, the registration permit is not included in the sales contract but in a separate deed, which usually remains in the lawyer’s escrow until the full purchase price is paid.
Legal fees and contractual costs in Hungary
Although it may sound strange at first, the most common question about a contract for the sale of a property is the lawyer’s fees. You can find out more about our office rates here. If you would like to put the scale of our lawyers’ fees in a Budapest context, you can also read a more detailed article on the background of lawyers’ fees.
In addition to the lawyer’s fees, there are only minor costs on average. For example, the fee of HUF 6.600 for the land registry, the fee of HUF 3.000 for the request of the title deed, or the fee of HUF 2.250 for the request of a copy of the map, which is absolutely necessary in case of buying a house and a plot of land.
These costs are usually borne by the buyer. The parties’ business bargain sometimes involves the costs being shared between the seller and the buyer in some proportion or being borne by the seller.
Abstract of title
Data on Hungarian real estate is stored by the Land Registry in the Real Estate Register. Anyone can request an extract of this publicly accessible data by requesting the property register. Democratic access to the data is ensured by the fact that the title deeds can be downloaded electronically, even through the client portal. In addition, private individuals can currently retrieve two title deeds per year free of charge. In addition, the data can be accessed for only 3.000,-HUF.
The title deed consists of three parts, which are indicated by Roman numerals I to III on the title page. The first part contains the details of the property, the second part contains the rights registered on the property, while the third part is the so-called burden sheet, which, as the name suggests, records the encumbrances and facts registered on the property.
Obtaining the title deed is the first, essential step in preparing a contract for the sale of real estate. Without this step, it is strictly inadvisable to enter into any commitment with regard to the contract for the sale of real property.
Purchase offer/declaration of intent to buy
If the buyer expresses his intention to buy the property in a unilateral declaration, he is legally making a purchase offer. Over the last two decades, the legal concept of an offer to purchase has become an almost inescapable issue in the preparation of residential real estate sales contracts in the context of the involvement of real estate agents. Despite this, almost no one is aware that the acceptance of a purchase offer creates a contract for the sale of immovable property.
It is an absurd contradiction in the domestic practice of this legal institution that, in the absence of a purchase offer and the deposit of a certain amount of “deposit”, the real estate agent usually does not allow the seller and the buyer to enter into a meaningful negotiation. Although an offer to purchase could be a useful legal instrument, its role today is often limited to putting the estate agent in a position in the form of a monster called a letter of intent to purchase.
The star of internet searches is the down payment. Many people know a thing or two about it, but few understand how it works. The essential function of a down payment is to sanction the wrongful termination of a contract, not to compensate for the arbitrary termination of a contract.
Once you know the basic characteristics of a down payment, you can confidently answer the most frequently asked question about a down payment: down payment or earnest money? A down payment should be calculated according to which party, or both parties, is liable for the failure of the contract. Earnest money, on the other hand, is returned to the buyer unconditionally in the event of the contract being broken.
It is important to clarify the conceptual confusion, because the pre-contract is the subject of many misleading lay discussions on real estate sales contracts.
A preliminary contract is nothing more than an agreement between the parties to enter into a contract with each other at a later date. In no case does the mere fact that the parties wish to settle a down payment, the buyer takes out a loan or the property is encumbered require such a preliminary contract.
Right of pre-emption
The co-owners’ right of pre-emption is a common feature of real estate sales contracts. Under the Civil Code, the co-owners have the right of pre-emption if the property is in undivided joint ownership. The owners of separate condominiums may be granted a right of pre-emption in the condominium articles of association.
The right of pre-emption means that the seller must communicate the purchase offer received from the buyer, which he intends to accept, to those entitled to pre-emption. If any person entitled to pre-emption accepts the offer in writing, the real estate purchase contract will not be concluded between the seller and the buyer, but between the seller and the person entitled to pre-emption.
Payment of instalments can be made in cash or by bank transfer. In Hungary we always prefer the latter. In the case of instalments paid by bank transfer, no further receipt is required between the parties. If necessary, both the bank sending the money and the bank receiving the money can provide credible proof of the amount credited.
The correct timing of the purchase price is an essential issue for both parties. Ideally, once 10% of the deposit has been transferred, the remaining full amount will only be transferred when the property is transferred. However, since contracts are not concluded in a laboratory, the above rule of thumb is often violated. However, as a point of comparison, it is always worth bearing the above guideline in mind.
Transfer of the possession of the real property
The purchase price instalments must be properly scheduled, not only in terms of amount, but also in terms of timing. The most important element of this dance is that the payment of the full purchase price should always coincide with the handover of the keys. For all practical purposes, the delivery of the last instalment leaves the buyer unprotected against any breach of contract by the seller, so a transfer of possession even 1 day after the full payment is not an acceptable condition. The reverse is also true. No matter how nicely the buyer asks to move in before payment, it is advisable for the seller to wait until the last instalment has been paid before taking possession of the property. Disrupting the dance puts the seller in the reverse vulnerable position already mentioned for the buyer.
In the past few year’s low interest rate environment, taking out a bank loan is an almost inevitable part of a property purchase contract.
Subject to current legal restrictions, the amount of the home loan cannot exceed 75 or 80 percent of the market value of the property covered, depending on income.
All commercial banks expect bank-specific provisions to be included in the real estate sales contract. For a lawyer who has seen a real estate sales contract up close, this is a routine task.
Since everyone takes out a loan to buy, it is not surprising that the vast majority of properties for sale are mortgaged by banks. As a buyer, there is no reason to be alarmed by mortgaged property, you just need to choose a lawyer with experience.
The basic requirement is that the buyer does not pay the amount required for the discharge of the real property to the seller, but directly to the bank, according to the requirements in the certificate issued by the bank.
Interest on late payment, late penalty
The basic buyer commitment in a real estate sales contract is to pay the purchase price on time. One of the most basic legal instrument to encourage compliance with the payment deadline is the interest for late payment.
The seller is obliged to hand over the keys to the property to the buyer at the same time as payment of the full purchase price. Failure to fulfil this obligation in accordance with the contract may result in a penalty of a fixed daily amount of a few thousand forints.
Cancellation of a real estate sales contract
Every real estate lawyer‘s nightmare. The legal instrument of cancellation is ultima ratio. It is only dropped when no compromise can bring the parties to a common ground. Cancellation is a unilateral statement to terminate the contract. Contrary to a common misconception, such a statement can only be made by the contracting party against whom the other party has committed a breach of contract.
The consequence of cancellation is that the contract is terminated as if it had never been concluded by the parties. The seller repays the instalments received, the buyer returns the property to the seller.
If I take our Office’s practical experience as a starting point, we are talking about theory or isolated exotic cases rather than tangible, everyday practice. In the case of residential property sales contracts, the repayment of even an installment of the purchase price would be a practical obstacle in the event of a buyer’s withdrawal. The seller usually immediately transfers the amount to another home and the average Hungarian family does not have three forints of savings, let alone millions of forints, to mobilise in this extreme situation.
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