PRELIMINARY AGREEMENT – PRINCIPLES

Properly defined material provisions of an agreement have a significant impact on its validity. Material provisions of an agreement are those that relate to its most important issues (e.g. the sale price, the obligation to deliver the goods to the buyer, the determination of the subject and the price of rent, the determination of the legal act of order, the determination of the subject of the lease, etc.). The material terms of the agreement (subject of the agreement) should therefore be described extensively and as precisely as possible. Without these provisions it is impossible to recognise that a given agreement has been concluded at all, which in practice leads to its invalidity (e.g. the parties have agreed on the rent but have not indicated what the subject of the rental is).

In specific situations, the validity of the agreement shall depend on proper form. The law provides for a specific form for certain types of agreements. Thus, a special form (notarial deed,
signatures authorised by a notary public under the agreement) is reserved for agreements of considerable importance. For example, an agreement for the sale of shares in a limited liability company or the sale of an enterprise should be concluded
with signatures authorised by a notary public, while an agreement for the sale of a real estate should be concluded in the form of a notarial deed.
Without a specific form, the agreement is void.

If the agreement is not in the form of a notarial deed, then in case you do not buy the flat, for example, the deposit is lost, but the seller cannot claim conclusion of the final agreement (i.e. the sale agreement) in court. However, the unsuccessful seller may additionally claim compensation for the damage caused by the fact that he was counting on a sale agreement being concluded. There is no other effective possibility on your part if there is no agreement between the parties.

The agreement may not be withdrawn if no such right has been reserved in the agreement. Such an agreement can at most be either not performed or terminated by mutual agreement The parties’ agreement can include
ANY provision, e.g. a no-claims provision, as both parties must agree to the contents  of the agreement. If you have a right of withdrawal, the conditions that you must meet, e.g. payment of a cancellation fee, may be included.

In order to be effective, the conclusion of a purchase-sale agreement of ownership rights to real estate must be made in the form of a notarial deed. This is different in the case of a preliminary agreement, in which the parties merely undertake that a agreement for the sale of those rights will be concluded in the future. They then have a choice: the ordinary civil law form or the notarial deed form.

When to use the preliminary agreement?

A preliminary agreement is concluded by the buyer and the seller when, for some reason, the final agreement cannot yet be concluded. This may be due, for example, to the buyer’s lack of
funds and the need to take out a loan, the buyer’s desire to have “dibs” on a property that has not yet materialised (e.g. a house under construction), waiting for a plot of land to be allocated or the existence of entries in the land register that need to be removed.
What protection (guarantees that the transfer agreement will be executed) does concluding a preliminary agreement in ordinary civil law form give us? Unless otherwise agreed by the parties, the deposit paid by the party obliged to purchase the property will be lost to the party wishing to avoid the conclusion of the final agreement, and the seller who avoids the transfer of property rights may be required to return the same deposit in double amount.
With an agreement in the so-called “ordinary” form, we can successfully apply for a mortgage in the vast majority of banks.
Preliminary agreement in the form of a notarial deed – advantages and disadvantages. What do we gain (and what do we lose) by concluding a preliminary agreement in the form of a notarial deed? In general, we have a stronger agreement, capable of producing more legal effects (beneficial to us or not). The first basic fact is that by having a notarial deed we are effectively forcing the contracting party to enter into a final agreement, because if they would not do so we can go to court, which will issue a judgement replacing their declaration of intent). It takes some time, but additionally placing in the notarial deed (preliminary agreement) the so called “three sevens” (Article 777 of the Civil Code – voluntary submission to enforcement proceedings by contractors) accelerates achievement of the goal, i.e. obtaining payment of the price or taking possession of the real estate. However, we should remember that this is a double-edged sword, and if we wish to withdraw from the agreement, then the other party will be entitled to these additional coercive measures.
By concluding a preliminary agreement in the form of a notarial deed, we, as future buyers, may apply to the court for disclosure of our claim for the transfer of ownership right to
the real estate in the Land and Mortgage Register. If you make such a request to the notary, the notary will formulate the request in the notarial deed and the property. If you make such a request to the notary, the notary will formulate the request in the notarial deed and will perform the rest of the formalities. Will perform the rest of the formalities by himself. The procedure of disclosing our claim in the Land and Mortgage Register gives us a full guarantee of acquiring rights to a given real estate.
The advantage of the notarial deed also appears in the fact that it is drawn up by a professional.
The advantage of the notarial deed also appears in the fact that it is drawn up by a professional. If you use the assistance of a real estate agent to draw up the agreement, there is little chance of mistakes, but if you draw up the agreement yourself, it may have significant omissions or errors.  It is even worse for the buyer if he enters into a preliminary agreement on the seller’s form (e.g. a property developer) – such a document will primarily protect his interests.

Validity of the agreement

This is a crucial difference. A preliminary agreement in the form of a notarial deed is more valid than
a simple civil law agreement. This due to the fact that if one party fails to perform the provisions of the agreement concluded in the form of a deed, the other party may claim their rights in court. In such a situation of an agreement concluded in the form of a deed, the other party may claim their rights in court. In such a situation a party takes a legal action for a substitute declaration of intent. A final court judgement  replaces the declaration of intent of the evading party. In other words, it means that each party,  in a situation where the other party evades the conclusion of the final agreement, may take legal action and demand the conclusion of that agreement. This is why a preliminary agreement in the form of a notarial deed  is suggested to people who are determined to buy a given property. If, on the other hand, for some reason  the signing of the notarial deed transferring ownership is not possible, I suggest concluding a simple written agreement. In the case of such an agreement, if the final agreement is not signed, the parties are left with  the settlement of the deposit/ down payment and a possible claim for compensation. The scope of compensation may include reimbursement of expenses incurred in connection with conclusion of the preliminary agreement, e.g. costs of drafting the agreement, costs of travel to conclude the agreement, stamp duty and court fees.

Costs

In the case of a preliminary and notarial agreement, it is worth considering the costs of entering into both agreements. W przypadku umowy przedwstępnej notarialnej musimy się liczyć z taksą notariamusimy się liczyć z taksą notarialną. Depending on the arrangements, this is usually covered by the purchasing party . Depending on the arrangements, this is usually covered by the purchasing party. In the case of a civil law agreement, the drawing up of this agreement and the formulation of its content are the responsibility of the persons interested in concluding it.

Deposit vs. down payment

Both in a preliminary agreement in the form of a notarial deed and in a civil law agreement, there may be a deposit or a down payment. The notion of a deposit is regulated in the Polish Civil Code  and stipulates that if one party evades the conclusion of the final agreement, the other party may withdraw from the agreement and keep the deposit, and if the second party gave the deposit itself – it may demand twice as much. On the other hand,  if the agreement is terminated, the deposit should be returned. This principle shall also apply where  the non-performance of the agreement is due to circumstances for which both parties are responsible or for which neither party is responsible. If the agreement is fulfilled,  the deposit shall be credited to the party who gave it.
A down-payment, on the other hand, is an amount paid on account of future payments and does not, like a deposit, constitute a form of collateral for the performance of an agreement. It is a part of the price. A down-payment differs from a deposit in that it is a part of the price. A down-payment differs from a deposit because it is always returnable (unless the parties to the agreement decide otherwise). This means that if the agreement does not come to effect,  each party is obliged to reimburse the other party for the payment previously received.

Security

To sum up, a preliminary agreement in the form of a notarial deed and a civil law agreement are significantly different, and the choice of form may be important in determining the legal effects that the agreement will have in the future. This is why it is so important to carefully consider both forms  before deciding which one to choose.

A preliminary agreement should be concluded when, for some reason, the actual sale and purchase agreement cannot be signed.

Such reasons may include formalities related to the buyer obtaining a loan from a bank, the need to carry out inheritance proceedings after the deceased owner, filling in omissions in documentation, lengthy procedures related to the division of the plot. The purpose of a preliminary agreement  is for the buyer and seller to confirm that a future transaction will take place under certain conditions.

What to choose: a civil law agreement or an agreement in the form of a notarial deed?

A preliminary agreement may be signed either in a written form (civil law agreement) or as a notarial deed. Both are valid, but their legal effects are quite different. What is the difference? Both are valid, but their legal effects are quite different. What is the difference? If the preliminary agreement is concluded in the form of a notarial deed, in the event that one of the parties who have agreed to conclude the final agreement evades its conclusion, the other party may pursue the conclusion of the final agreement in court. If the preliminary agreement is concluded  in the form of an ordinary written agreement, in the event of evasion by one party, the other party may not pursue the conclusion of the actual sales agreement in court, but may only claim for compensation from the other party. If the sale does not take place due to a fault of the buyer,  the seller may keep the deposit, if any has been paid. If the sale does not take place due to a fault of the seller,  the buyer, if he has paid a deposit, may claim the double amount as compensation. If the contracting parties have stipulated a contractual penalty,  the injured party may demand its payment.

In conclusion, it can be said that although both agreements are valid, only a preliminary agreement in the form of a notarial deed guarantees that a sale and purchase agreement will eventually be signed.

However, it is important to remember that such an agreement involves costs and obliges both parties equally, one to sell and the other to buy the property.

Information that a preliminary agreement should contain

A preliminary agreement, in order to fulfil its role, should contain several important pieces of information:

Parties to the agreement

If the contract is signed between natural persons,  the names, surnames, dates of birth, parents’ names, residential addresses, identity document numbers and PESEL numbers must be provided. It is worth remembering  that in the case of married persons, both spouses should appear as the selling party, unless there is a property separation between them or the property was purchased before the marriage (it comes from the personal property of one of the spouses). If individuals are self-employed,  the name of the business and the NIP number should be given in addition to their names. Such persons should provide a copy of the business register certificate. In the case of companies,  it is necessary to indicate the name of the company, the address of its registered office, the KRS entry number and the person authorised to represent it.

Subject of agreement.

The agreement must specify the real estate to which the agreement relates, i.e. the type of real estate, its location (voivodship, poviat, commune, town, street), square footage, land and mortgage register number, number and type of rooms it comprises, including e.g. a basement or a garage.

Price and payment.

The parties should also stipulate  in the preliminary agreement the exact sale price and the method of payment (cash or bank transfer, own funds or bank loan) and specify the deadline for payment of the total amount or subsequent instalments.

Date of conclusion of the final agreement.

The date  of the conclusion of the final sale and purchase agreement should be specified in such a way as to be clear, preferably by indicating a calendar date. This is important  in the event that an agreement is not signed, as the one-year period during which compensation or an agreement can be sought from the other party in court will start to run from this date.

It should be noted that the legislator has provided for a rather short limitation period for claims under a preliminary agreement, which is only one year. Twelve months must be sufficient  both to claim compensation and to conclude the final transaction.

Essential elements in a preliminary agreement

Issues related to the conclusion of a preliminary agreement are regulated by the Civil Code. A preliminary agreement is an agreement under which one or both parties undertake to conclude a specific agreement (Article 389 of the Civil Code, hereinafter: the CC). The preliminary agreement should specify  the material provision of the final agreement.
The above provision means that the preliminary agreement to be signed by the parties is only valid if it contains the necessary provisions of such an agreement. Information regarding the necessary contractual provisions  can be found in the provisions of the Civil Code, which specifies what elements, for example, a sale or exchange agreement must contain. Therefore, if we are dealing with a sale agreement of a flat, the preliminary agreement must contain elements such as: the subject of the agreement and the sale price. Therefore, if the preliminary sale agreement does not contain  the elements indicated above, the preliminary agreement cannot be deemed to have been effectively concluded. In the preliminary agreement,  the parties write down the conditions that must be fulfilled in order for the final, agreement to be concluded.
It is also possible to conclude a preliminary agreement for the benefit of a third party, as emphasised in judicial decisions.

Additional provisions in the preliminary agreement

The parties concluding the preliminary agreement are entitled to introduce therein also additional, non-mandatory provisions, which give the right to withdraw from the agreement in the event of their non-fulfilment. However, the preliminary agreement must always contain mandatory provisions,  i.e. essential provisions of the agreement in question, which in the case of a sale agreement means stating the subject of the sale and its price.
It has been emphasised in the judicial decisions that due to the fact that conclusion of the final agreement constitutes a legal reason for the preliminary agreement, a defect in the final agreement renders the preliminary agreement invalid (Article 58 § 1 of the CC), as underlined, inter alia, by the Supreme Court in its verdict of 8 February 2007, ref. I CSK 420/06.CSK 420/06.

Consequences of the conclusion of an agreement by an unauthorised person

There are situations in which a flat sale agreement is signed by a person not authorised by the developer. If the person authorised  to conclude agreements with customers for the sale of premises does not confirm the validity of such an agreement, the customer has the right to claim compensation from the person not authorised to conclude agreements. The provisions of the Civil Code stipulate that  in the absence of confirmation, the one who has entered into an agreement on behalf of someone else is obliged to return what he received from the other party in performance of the agreement, and to compensate for the damage that the other party has suffered by the fact that he entered into the agreement without knowing that he was not authorised to do so or that his authorisation was exceeded (Article 103 § 3 of the Civil Code). In such a situation,  the provision of Article 415 of the Civil Code, which provides for an obligation to compensate for damage by a person who caused damage to someone through his or her fault, is also applicable. A person obliged to pay compensation is liable  only for normal consequences of an act or omission resulting in damage (Article 361 of the Civil Code). Unless otherwise provided by law or the provisions of the agreement,  damages shall cover the loss which the injured party has suffered and the benefits he could have achieved if the damage had not been caused to them.

Is it necessary to set a date for the conclusion of the final agreement?

The regulations provide that the preliminary agreement does not have to specify the date of the final agreement. If the date by which the final agreement is to be concluded has not been specified,  it should be concluded within an appropriate time limit set by the party entitled to demand conclusion of the final agreement. It may occur that each of the parties to the preliminary agreement set a different date for the conclusion of the final agreement  – in such a case, if both parties are entitled to demand the conclusion of the final agreement and each of them set a different date, the parties shall be bound by the date set by the party that earlier made a relevant declaration (Article 389 § 2 of the Civil Code).
The provisions also regulate the situation of the consequences of the failure of the parties to set a date for the conclusion of the final agreement. If no time limit for the conclusion of the final agreement  has been set within one year of the conclusion of the preliminary agreement, the conclusion of the final agreement cannot be demanded.
If the preliminary agreement contains a date for the conclusion of the final agreement, it must be specified precisely. This cannot be done through general provisions,  e.g. that the agreement will be signed ‘after the seller has prepared a set of documents necessary to draw up the agreement’, as this is formulated too generally and does not specify when and which documents are to be prepared by the party, as emphasised by the Supreme Court in the judgement of 4 December 2003, ref. no. II CK 3010/02.
If the preliminary agreement
fulfils the conditions necessary for the validity of the final agreement, the expiry of the time limit set forth therein does not cause expiration of the obligation to conclude the final agreement, as emphasised by the Supreme Court in its judgement of 27 January 2000, II CKN 707/98.

How can the conclusion of the final agreement be secured?

A commonly used assurance of the fulfilment of the conditions included in the preliminary agreement and of the execution of the final agreement is the inclusion in the preliminary agreement of provisions concerning a deposit.
In such a situation,
if a deposit was paid at the conclusion of the agreement  and the other party fails to perform the provisions of the agreement, the other party may, without setting an additional time limit, withdraw from the agreement and keep the deposit received, and if the other party paid it – demand a sum twice as high (Article 394 § 1 of the CC).

This means that in the event that the final agreement is not concluded through the fault of the buyer of the flat, the seller may keep the deposit received. On the other hand,  if the final agreement is not concluded through the fault of the seller, the seller must return the deposit to the buyer in the double amount.

The parties to a preliminary agreement may also regulate the issues concerning a deposit differently from the provisions of the Civil Code. The provisions do not specify  the amount of the deposit, which means that the parties to the agreement may set it at any amount. A deposit may be given  in a considerable amount, but it may not be higher than the value of the main payment under the agreement.

A deposit constitutes a payment given at the conclusion of an agreement.

Doubts therefore arise as to whether a payment given by one party to an agreement to another, but after the agreement has been concluded, can be regarded as a deposit. The Supreme Court  ruled on this issue in its judgement of 22 April 2004, ref. II CK 172/03. In this judgment,  the Supreme Court stated that the fact of giving a deposit after the conclusion of the agreement does not deprive it of the features of a deposit if the parties specified such character in the agreement, but only set a later date for its giving.
If the agreement is not performed
by one of the parties, then the party that has not withdrawn from the agreement may claim not only the return of the deposit in the double amount, but also compensation for non-performance of the agreement under the general principles of the Civil Code, i.e. compensation for damage in the full amount.

n some cases the deposit is returnable.

The deposit shall be returned and the party to the agreement may not demand from the other party to pay double amount of the deposit in the situation when:
– the agreement is terminated (this also applies when the agreement is terminated by the court);
– the non-performance of the agreement took place due to circumstances for which neither of the parties is responsible;
– the non-performance of the agreement took place due to circumstances for which both parties are responsible (e.g. both parties failed to meet the conditions for the conclusion of the final agreement included in the preliminary agreement).
If the agreement is fulfilled, the deposit shall be credited to the party who gave it.

Consequences of failure to conclude the final agreement

If a party obliged to conclude the final agreement evades its conclusion, the other party may demand compensation for the damage it suffered due to the fact that it hoped for the conclusion of the final agreement (Article 390 of the Civil Code). The parties may stipulate  the scope of damages differently in the preliminary agreement.

Evading the conclusion of the preliminary agreement means unjustifiably refusing to conclude the final agreement. Evading the conclusion of the final agreement  is a conscious act or omission aiming at an unjustified failure to conclude the final agreement, or at least accepting such an outcome. If the preliminary agreement satisfies the requirements  on which the validity of the final agreement depends, and in particular the requirements as to form, the entitled party may demand conclusion of the final agreement.

Claims under a preliminary agreement are statute-barred one year from the date on which the final agreement was to be concluded. If the court rejects the demand to conclude the final agreement, claims under the preliminary agreement shall become time-barred one year after the date on which the judgment has become final. If a party to a preliminary agreement refuses to conclude it,  the other party may demand the conclusion of the final agreement in court. In such a situation,  a court judgement declaring the obligation of the other party to make a declaration of will to conclude the final agreement results in the conclusion of that agreement and replaces it.

Very frequently, circumstances beyond the control of the parties occur after the conclusion of the preliminary agreement which prevent them from concluding the final agreement. Such a circumstance may be, for example,  the fact that one of the parties to the agreement did not receive a loan to finance the purchase of the property, despite the bank’s earlier promise. As emphasised by the Supreme Court  in its judgement of 7 April 2004, ref. I V CK, the fact that the plaintiff applied for a bank loan, but did not receive the money before the conclusion of the promised agreement, relieves her of liability for failure to perform her obligation to conclude the agreement.

Should tax be paid on a preliminary agreement?

The tax is payable on concluded agreements, such as an agreement to sell real estate. A catalogue of legal actions subject to tax on civil law transactions is provided in Article 1 of the Act of 9 September 2000 on tax on civil law transactions (consolidated text. Dz.U. of 2010, No. 101, item 649 as amended, hereinafter referred to as: u.p.c.c.) This is a closed catalogue,  which means that civil law transactions not included in Article 1 of the u.p.c.c. are not subject to this tax. Article 3, paragraph 2 of the u.p.c.c.  provides that if the conclusion of an agreement transferring ownership takes place in performance of an obligation resulting from a previously concluded agreement obliging to transfer ownership, the tax obligation arises at the moment of conclusion of the agreement transferring ownership. This means that  the conclusion of a preliminary agreement does not result in the obligation to pay tax on civil law transactions. Only the conclusion of the final agreement,  e.g. sale agreement, will result in the buyer being obliged to pay the tax on civil law transactions.

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