Acquisition of Off-Plan Property

After several years of crisis, the real estate market in Bulgaria has begun its road to recovery.

In particular, due to the increased demand for residential units and office spaces on the one side, and on the standstill of real estate development on other, a need for new and quality units in larger Bulgarian cities – where most real estate deals are concentrated – has appeared on the market. This has led to the increased demand in Bulgaria for off-plan properties – real estate properties for which the construction process is already in preparation or ongoing.

The Benefits of Acquisition of Off-Plan Property

The benefits of off-plan properties for developers relate to the possibility of a decrease or full elimination of the necessity for external financing, as well as of securing the sales of the properties at a very early stage by signing preliminary agreements. For buyers, the main benefits are: (i) the usually significantly lower prices for the properties, and (ii) the flexible acquisition patterns offered by the developers (e.g. payment in instalments corresponding to the construction stages).

The Risks for Buyers

The apparent advantages of off-plan property’s acquisition are opposed by significant risks for the buyers, often relating to: (i) the timely completion of the construction; (ii) the compliance of the construction with all requirements of applicable law; (iii) the solvency and continued existence of the developer until the finalization of the construction process; and (iv) the transfer of the ownership title to the constructed unit as stipulated in the preliminary agreement.

Important Documents to be Checked

The purchase of off-plan properties requires a complicated transaction structure. The buyer should sign a preliminary agreement with the developer, which simultaneously covers the conditions for the future purchase and assigns the construction process of the future unit to the developer. Furthermore, the preliminary due diligence process should address not only the ownership and construction rights of the developer, but also construction documentation such as the investment project, construction permit, and construction deeds (where the construction process is at an advanced stage).

The investment project has to be duly approved by the competent authority – usually the chief architect of the municipality/ city district in which the project is located. Approval of the project means that it complies with the requirements of the general development plan and the applicable statutory construction parameters.

The construction permit has to be duly issued by the competent authority – again the chief architect of the municipality/ city district – and also has to have entered into force. The date of entering into force is critical due to the limitation periods which begin running from that date: three years for the beginning of the construction process and five years for the completion of so-called "rough" construction.

The developer has to further provide the buyer with a table for the formation of the price and the built-up-area. This document will provide the buyer with an idea about the full built-up area and the common parts belonging to the future apartment/office, etc.

Where the construction is already at an advanced stage, a certificate for completed "rough construction" and a deed for this stage will be available. Once the relevant certificate is issued, the developer may start transferring the ownership rights to the future units.

The most important document, certifying the finalization of the construction and its compliance with statutory requirements, is the exploitation permit.

Mitigation of Risks

First, buyers should check the market reputation of the developer to determine how many projects he has completed successfully and whether he is/was involved in relevant litigation proceedings. Developers often set up new companies for individual construction projects to protect the rest of their on-going business and properties from any claims related to the particular development being considered. In such cases, it is highly recommended for the buyers to request additional security from the developer against payment of the instalments. The careful drafting of the preliminary agreement and delaying payment of the prevailing part of the purchase price as late as possible are also essential. A common practice is paying part of the purchase price after the provision of the exploitation permit or even after the expiration of a certain period thereof. However, buyers should aim for the earliest possible transfer of the ownership title to the construction unit. Finally, buyers should request copies of all applicable construction documents, which will benefit them in potential claims within the constriction guarantee periods.

This article was originally published in Issue 3.2 of the CEE Legal Matters Magazine