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Commercial Property - Estonia

 

Under Estonian law, a preliminary contract for the transfer or sale of real estate must be concluded in notarized form. A contract concluded in simple written form is null and void, even if it is a preliminary contract.

 

However, obtaining an appointment with a notary public for certification of a preliminary contract may take several days or even weeks, during which time one of the parties may lose interest in the deal. As a result, real estate brokers and developers have invented new agreements to avoid the obligatory notarization.

 

One such invention is the booking contract. According to this contract, the seller must agree not to sell the real estate to a third party and the buyer must declare its interest in buying the real estate. In addition, the buyer must make an initial payment to prove its interest in the real estate (normally 10% of the total price). These conditions are known as ‘parties’ obligations’. As a result of such a preliminary contract, the real estate is ‘booked'.

 

Although the Law of Obligations Act does not directly provide for booking contracts, they are not automatically null and void. The principle of freedom of contract remains in force. Pursuant to this principle, in addition to the contracts directly provided for by the law, new types of contract may be created by the parties’ agreement.

 

In two recent decisions, the Supreme Court established and explained the nature of booking contracts.(1) The court stated that a preliminary contract for the transfer of ownership of real estate concluded without notarization is null and void. Nevertheless, a booking contract concluded in simple written form is not necessarily invalid. Seemingly, this is a favourable ruling for all interested parties, particularly real estate brokers and developers.

 

The Supreme Court emphasized the importance of analyzing the parties’ obligations as set forth in the preliminary or booking contract. It particularly stressed that a booking contract may provide only for a fee that is paid solely to book the real estate (ie, obliging the seller not to sell the object of sale to a third party for a certain period of time). In such cases, neither the seller nor the buyer can be obloged to transfer or obtain the property.

 

On assessing the parties’ obligations, the Supreme Court noted, among other things, that the nature and sum of the booking fee were important. First, such a booking fee must be reasonable from the point of view of the negative obligation to refrain from selling the property to a third party for a certain period of time. For example, a reasonable booking fee cannot be 10% of the total price of the property. Second, the booking fee may not contain a contractual penalty in case one of the parties does not finalize the sales transaction.

 

Therefore, according to the contract, the booker of the real estate may request that the seller not sell the real estate to a third party, but it cannot claim an exclusive right to obtain the real estate (such a right would be valid only in notarized form).

 

Under these circumstances, a booking contract that provides for parties’ obligations which can be agreed upon in simple written form does not secure many legal interests. In other words, it does not warrant that the seller will ultimately sell the real estate to the booker, nor does it warrant that the booker will ultimately buy the real estate from the seller.

 

For example, a seller may conclude 10 booking contracts for one apartment (if the stipulations of those contracts do not preclude it from doing so) and legally collect booking fees under all of the contracts, provided the apartment is not sold within the period of time set forth in the booking contract. If the sales transaction takes place after the booking period has ended, everything will be legally correct.

 

Thus, if parties want to secure their interests in connection with the transfer of ownership of real estate, they must conclude the contracts in notarized form. The Supreme Court has reminded both sellers and buyers that the name or title of the contract will not change the contents of the contract and the formal requirements must be derived from these contents. The contract foreseeing the transfer of ownership of real estate must be concluded in notarized form. Moreover, if the parties have agreed in simple written form that the seller will refrain from selling the real estate to a third party, as well as on sale and purchase obligations, then even the agreement on refraining from selling is null and void. Under such circumstances, the agreement on refraining is secondary and secures only the main obligations of the parties – to sell and buy the real estate. These main obligations can be validly agreed upon only in notarized form.

 

Thus, a valid booking contract may provide only for an obligation to refrain from selling the real estate to a third party for a certain period of time, in exchange for adequate compensation. The recent Supreme Court decisions have not principally altered the formal requirements of real estate transactions; however, they have specified the stipulations of the law in force.

 

International Law Office