Buying real estate under construction

Kauf von Immobilien im Bau

PRACTICAL PROBLEMS

First, it should be explained that the acquisition of the property is not completed by the conclusion and fulfillment of the sales contract, but by the registration of ownership in the land register. The entry is not automatic, as with the calculation of the land transfer tax, in this case the party has to submit the sales contract for implementation at the competent land registry office.

Some of the most common problems in practice arise when limited liability companies sell real estate to prospective buyers. These are mainly buildings under construction, where buyers actually finance the construction of apartments before they are built, and as a result the sellers can offer cheaper prices and more flexibility in the final stages of the construction.

In such cases, the signing of a final purchase contract and the transfer of usually takes place only after the completion of construction, and after the legal division of a house into apartments has taken place, which can take up to one year, in the meantime a preliminary contract is signed, without entry in the land register so it isn’t visible to third parties.

Limited Liability Companies are required to pay significant taxes on the property they sell, and occasionally, due to a poor business plan or some exceptional circumstances that could not be foreseen or avoided, construction companies cannot settle their tax liability. Since the owners of these limited liability companies are not personally responsible for the obligations of the Company, they generally have no legal interest in settling the debts, but allow the construction companies to go bankrupt and then all unpaid debts end together with the dissolution of the company.

In such situations it often happens after the transfer of real estate to the buyer and the coming into existence of a tax obligation, the transition of property is not yet completed and the seller is still the owner according to the land registry. The construction company then grants the tax office a lien for the tax obligation.

Due to the insolvency, the construction companies are simultaneously forced into bankruptcy and an insolvency administrator is appointed to conduct their business who has no knowledge of the sale of real estate.
A similar situation can arise not only with the purchase of a property from a construction company, but also if simply, due to the unprofessional execution of the sale, the property rights are not properly registered in the land register. In practice, it is often the case that after the conclusion of the sales contract, the payment of the purchase price, the payment of the transfer tax and transfer of the property, the buyer feels that the transfer of ownership has taken place automatically. In other cases, the buyer agrees that the construction company will take all necessary measures to complete the sale, but the seller, either due to negligence or ignorance, does not transfer ownership of the property in the land register to the buyer.

In all of these cases, buyers find out that they are not the formal owners of real estate, just before the forced sale, when after years of bankruptcy the construction expert comes to estimate the value of the property.
The consequence of the described development is that the buyer comes into a situation where they in the course bankruptcy proceedings end up having to buy their own real estate again or end up losing their property due to insolvency sales to third parties.

If the buyers have paid the property transfer tax timely and are in possession of the property, these kind of situations can mostly be prevented with professional legal assistance

In the case that the buyer has paid the property transfer tax, the tax administration is a wrongful purchaser of the lien, since they knew or should have known that the property was transferred, that is that the property was no longer the property of the construction company, and it is necessary to refer to this fact in order to obtain the cancellation of the lien.

Above all it is necessary to transfer ownership of the property from the insolvency mass of the bankrupt construction company, to the buyer on the basis of the concluded sales contract. This can usually be done by a simple request to the competent land registry, if it has not been more than ten years since the contract was concluded, or if more than 10 years have passed since the contract was concluded and the liquidator does not acknowledge the ownership rights of the buyer.

The safest way to avoid these potential problems associated with buying a property under construction, is to agree and include appropriate insurance funds that will be included in the land registry of the property in question. This way, the buyer’s investment is largely protected by the value of the property on which the building is built.