Apartment producers often market the developments they are planning in advance to gauge demand. A prospective buyer who is interested in buying an apartment generally pays a reservation fee. Such reservations are not, however, binding on the buyer and the seller is not bound on the basis of advance marketing to actually proceed with construction.
- If a reservation is cancelled before the transaction has proceeded further, the reservation fee is refunded.
- If the transaction is concluded, the reservation fee must be considered part of the sales price in its entirety.
Sales price and debt-free price
In apartment transactions, sales price is indicated as both sales price and debt-free price:
- sales price = the sum paid to the seller by the buyer
- debt-free sales price = sales price + share of housing company debt allocated to the shares being sold
- In some newer developments, the shareholder has the option of redeeming the share-specific portion of the plot of land.
In such cases, the redemption price is indicated as a third price. Buyers can generally choose whether to pay off the housing company debt month by month as charges for financial costs paid to the housing company or make a one-off payment of their share of debt.
Familiarise yourself with the blueprints of the new apartment and the building plans for the area
A new apartment is often purchased when the building is still in the planning or construction stages. Therefore, prospective buyers should pay careful attention to blueprints and conceptual drawings.
In addition to the floor plan of the apartment, attention should be paid to preliminary plans for outdoor areas and the location of buildings to be erected in common areas. This helps you avoid unwanted surprises such as your yard having a view of the wall of the housing company's garbage shelter.
Buyer's position during the construction stage is protected by law
The protection stipulated in the Housing Transactions Act is mandatory whenever housing shares are offered for purchase by consumers during the construction stage. The arrangement protects the buyer's position e.g. if the founder of the housing company has financial difficulties leading to interruption of construction.
RS construction refers to housing companies which apply a specific system of protection for the legal and financial position of purchasers of shares as specified in the Housing Transactions Act. There are also apartments in the market which do not apply the RS system of protection. For those apartments, buildings must be approved by building supervision authorities before apartments can be marketed or sold.
Consumers who have purchased or are considering purchasing a share in a housing company currently under construction should pay attention to the following aspects. Most of this information is available at the keeper of the safe-keeping documents. The documents are kept at the bank with which security is lodged or at the State Provincial Office.
Has appropriate security been lodged?
Under the Housing Transactions Act the founding shareholder must put up security to protect the housing company and share buyers. The purpose of this is that in the event of the founding shareholder's bankruptcy, the security can be used to finish construction and repair any defects.
Do instalments correspond with the progress of construction?
The share buyer's financial position in the event of interrupted construction is significantly affected by the extent to which the instalments paid by the buyers and the progress of the construction correspond with each other. The law requires that they correspond to each other closely, but in practice there are often deviations from this rule. If instalments have been collected from share buyers to a disproportionate extent in the early stages of construction, the statutory security lodged for their protection may not cover all the costs of finishing construction.
Does the company have a construction observer and an auditor elected by share buyers?
Under the Housing Transactions Act, as soon as assignment contracts have been made out for at least one fourth of the company's apartments, share buyers must be given the opportunity to elect their own auditor and a professionally qualified construction observer independent of the developer.
The construction observer supervises that construction work progresses according to agreements, for instance whether the progress of construction is in line with the instalments of the sales price made by share buyers. The auditor's duty is to ensure that funds paid by share buyers through their instalments are used for the project for which they are intended.
Buyers may decline to hire professional construction observers in order to avoid extra costs. However, in case of problems during construction the construction observer's fee pales in comparison to the potential financial risks involved.
What kinds of loans has the housing company taken out and how many apartments have been sold?
When construction work is interrupted, another significant aspect from the buyers' viewpoint is the extent of debt taken out by the housing company which is not covered by sales prices paid during construction. The smaller the portion of apartments sold, the smaller the group that is liable to creditors for loans taken out.
Corporate loans often involve an initial phase where instalments only cover interest rather than pay off the debt capital itself. Share buyers should be prepared to increasing costs as debt repayment increases. Buyers should also take the following matters into consideration in advance:
- Am I able to pay off my own loan and the charges for financial costs payable to the housing company, which may increase to a significant extent later on
- Is there a chance that the portion of apartments in the housing company that are as of yet unsold will affect my personal financial situation and solvency later?
Buyer's rights in case of bankruptcy
According to the Housing Transactions Act, if a founding shareholder is declared bankrupt, the estate shall notify the shareholders without undue delay whether the estate undertakes to finish construction of the housing as specified in the sale contracts. If the estate does not undertake to fulfil the sale contracts, each shareholder is entitled to cancel his purchase. Those shareholders who do not cancel their purchase will immediately acquire power of decision within the housing company by virtue of the shares they have purchased.
Corporate reorganisation as an alternative to bankruptcy
A founding shareholder may not always be declared bankrupt, and they may attempt to continue their operations e.g. through corporate reorganisation. This poses a tricky situation for the buyer. Due to appeals processes, bankruptcy and corporate reorganisation proceedings may remain pending for several months. During this time the entire project is at a standstill and there is no guarantee that it will ever be completed. The buyer does, however, have the right to cancel their purchase if material delays should clearly be expected in completion of the project.
Purchase transactions are binding
If construction of the building is completed, the seller contacts those who have paid a reservation fee. In transactions for new apartments, the next step is generally a binding purchase contract. The deed of sale must specify the basic information pertaining to the buyer and seller and, among other things, the following:
- the sales price and the debt-free price, if the two are not equal
- the payment plan for the sales price and other terms of payment
- the date on which the apartment will be completed and possession handed over to the buyer, or an estimate of said dates
- information pertaining to the keeper of the safe-keeping documents
- types and quantities of security and their date of release
- information on what the buyer must do to prevent release of security
- information regarding the buyers' right to elect an auditor and a construction observer
- information on the seller's obligation to arrange the one-year inspection.
Before concluding the transaction, make sure that the sales price of the apartment is only paid as the construction project progresses.
The final ten percent of the sales price do not fall due until after the buyer has had the chance to inspect the apartment for moving in.
Additional work and alterations are subject to separate agreement and payment
The sales price often includes certain options regarding the materials and colours used for wallpaper, tiling and the doors of kitchen cabinets. If the buyer wishes to alter these or agree on other alterations to the apartment, they are ordered from and separately paid to a contractor, usually one authorised by the seller.
Additional work and the price associated with it may be noted in the deed of sale. If this is not done, a written agreement including prices should be prepared for the additional work. Prices must be indicated inclusive of value added tax.
A buyer may not bring his own materials or contractors to the construction site without express prior approval from the seller.
Delays in handing over an apartment
In apartment purchases the date on which the apartment is handed over to the buyer is almost always agreed on beforehand. The date of completion may also be noted in the deed of sale as an estimate. In such cases, the deed of sale should also specify that the apartment will be handed over no later than 30 days after the estimated completion date.
If handing over the apartment is delayed to a significant extent from the agreed exact or estimated date of completion, the buyer is entitled to refrain from paying the next instalment of the sales price until the seller is able to provide sufficient evidence that a delay will not happen. The buyer's right to refrain from paying an instalment of the sales price is the same regardless of whether the date of completion was specified as an exact date or an estimated date. The delay is counted from the estimated date of completion and the 30 day extension does not apply to it.
The buyer may cancel the transaction on the grounds of delayed handing over of the apartment if the breach of agreement is material. A delay is considered material if the buyer has given reasonable additional time for completion and handing over the apartment still can't be done after that time. The estimated date of completion may be exceeded by 30 days before the buyer is entitled to demand cancellation of the transaction.
In some cases, the seller may ask for the buyer's stance regarding holding on to the agreement despite a delay in handing over the apartment. Such questions should be responded to. A buyer may not cancel a purchase transaction on the grounds of a delay if he has not responded to the buyer's inquiry.
The buyer may be entitled to compensation for damages incurred due to the delay.
>Defects and deficiencies
Inspections before moving and one-year inspections
Before the final instalment of the sales price is paid, the buyer must have the chance to inspect the apartment. This usually involves filling out an inspection form to record any defects and deficiencies.
- Any scratches, dents and wrong door knobs should be noted on the form. If this isn't done until later in the one-year inspection, there could be disputes over who is responsible for the defects.
- Defects detected in the inspection before moving generally need to be rectified before the apartment is moved into.
- The one-year inspection must be done within 12-15 months from the date the building supervision authority has accepted the building for use
In the one-year inspection, apartment owners are usually first sent forms for claiming defects, which are then returned to the seller. After this, the seller's representative visits the apartment to inspect the defects claimed.
All detectable defects must be claimed in the one-year inspection. If the apartment owner fails to do so, he may lose his right to claim them and have them rectified.
- The housing company claims defects in common areas and outdoor areas.
- The seller must prepare a log of the one-year inspection. Defects must be rectified under the defect provisions contained in the Housing Transactions Act.