This modality has commercial advantages, but also carries risks.
With the lack of supply of houses for sale and the prices of used properties on the rise, the purchase of houses which are in construction or in a plant stage is an increasing trend in Portugal. To meet this demand, promoters have been responding with new projects and there are many projects to be marketed before they are completed. But if buying a house in planning stage or under construction has advantages from a commercial point of view, this type of real estate business also has risks (which can be high). We explain which in this article, as well as the legal form and formalities to follow in the conclusion of contract promise of purchase and sale (CPCV) of future goods to avoid problems.
This phenomenon is largely due to the scarcity of new housing supply, which in turn puts additional pressure on the great demand that exists for these properties. This is why there is increasing availability on the part of traditional buyers/investors to be a party to these operations, which present a higher associated risk.
New ventures for sale before they are built - what do promoters and buyers earn?
Promoter
The advantages for the developer who sells the future properties are evident: by placing the property on the market at an early stage of its construction and receiving in advance a significant part of the final price, the developer will have access to a capital that can be used to finance the works, and also the added advantage of having access to financing without the costs that the use of a bank loan entails (fees, interest and taxes).
It should also be noted that the sale in plant or under construction also implies a reduction of the risk in placing the property on the market by the developer, preventing the developer from keeping his capital "stuck" to the work between the date of completion of the works and the date of purchase of the property by the buyer.
Buyer
For the buyer this type of business also has some advantages, namely: the risk associated with these transactions causes the price of these properties to be lower compared to the acquisition of properties whose work is completed.
The fact that the payments for the work is phased may also represent an advantage for the buyer who is sometimes also offered the possibility of making some decisions in the construction of the property, and can customize it (for example, in the choice of certain materials and finishes, colors to be used, brands of built-in appliances, etc).
Finally, the course of time and the completion of the various phases of construction work lead to the risk associated with this type of business gradually decreasing, which, linked to the intended valuation of the real estate market, leads to the contractual position itself being considered an 'asset' business object.
The risks of this business
However, there is a clear risk in the context of a promise contract for the purchase and sale of a future immovable property compared to the conclusion of the "traditional" real estate promise contract, which is that there is no property underlying this transaction that serves as collateral for payments made by the promite buyer.
Contrary to what happens in other legal systems where this risk is sought by establishing the obligation to conclude insurance contracts that guarantee payments made by the promitent buyer, in Portugal it is not mandatory or customary to resort to these mechanisms, which makes it possible to mitigate the risk of the buyer by contractual stipulations, such as the provision of the phased payment and by meeting certain objectives in the construction phases, such as the completion of excavations and the start of the foundations of the property.
The contract-promise of buying and selling (CPCV) in the portuguese legal system, the law expressly provides for the possibility of a promise concerning the conclusion of a onerous contract for the transmission or constitution of a real right over building, or autonomous fraction (such as the right to property). The law expressly provides that in this type of contract the future property may be:
• Already built;
• Under construction;
• Unbuilt.
The document that supports the promise will only be valid if it contains the following:
(1) document signed by both parties (in the case of a bilateral promise, since in the case of a unilateral promise a situation in which the signature of the promitent seller will suffice), being required,
(2) face-to-face recognition of signatures,
(3) certification, by the entity carrying out that recognition, of the existence of its licence for use or construction.
If the above-mentioned formalities are not complied with, the law stipulates that the contracting officer who wishes to transmit or constitute the right (typically the promoter) may invoke the omission of these requirements only where the latter has been wrongly caused by the other party (buyer).
This provision seeks, in the words of the Supreme Court of Justice, to defend the interest of the promitent-buyer, who sometimes, however less warned in matters of a legal nature, may be frustrated about the business he has done in the best of good faiths.
Finally, the Interpretation of the Supreme Court of Justice of the legal provisions relating to this type of contract resulted in greater protection of the promitent-buyer in so far as that court ruled in its judgment of standardisation of case-law that, in addition to the principal-buyer being entitled to rely on the imperfection of the business for lack of the respective formalities of law in the proper instrument - unless it has contributed to it directly, also the omission of the formalities provided for cannot be invoked by third parties or recognised of its own public.