During a boom period at a real property market in Poland, flats are being offered to potential purchasers when still on the drawing board. Thus developers suggest clients to execute preliminary agreements regarding a future purchase of a flat.
In a preliminary agreement (more about preliminary agreements you can read here) a developer and a purchaser undertake to execute in future (after having completed a building) a contract of establishment of a separate ownership of the premises and of sale. As a general rule, a payment of a future price takes place in advance, in installments (set out in a schedule) that are not connected with the construction’s progresses. This brings about that as a date of a final contract’s execution draws on, an robust majority of the price has already been paid to the developer’s bank account. When it comes to the building itself, well, it has either been built or it has not …. The reason I quote such an example is not to frighten anyone, far from it. Such situations simply happen, for various reasons and a lawyer’s role is to determine whether and on what conditions can the parties withdraw from an unsuccessful transaction and settle the amounts that were paid.
The Polish Supreme Court in its ruling from a few years back aptly held that a time limit for executing a so-called promised contract specified in a preliminary agreement was not its final time limit but solely a time limit for a fulfillment of an obligation whose lapse did not cause an extinction of an obligation to execute the promised agreement. Thus, as the preliminary agreement persists, it may of course be dissolved by the consent of the parties. However, the situation at issue is rather a disputatious one, where a party that considers itself the injured one will seek a possibility of an unilateral dissolution of a legal knot that proved unfavourable to it. In the face of a so-called hole in the ground that did not actually turn into the planned luxury apartment building, the parties to the preliminary contract unfortunately hit a surprising legal loophole.
If a developer and a purchaser of the flat did not provide for the mode of a unilateral dissolution of the preliminary agreement at its execution (which is quite a common occurrence) – solely the provisions of the Civil code can be relied on. The articles 389 and 390 of the Polish Civil code concerning the preliminary agreement do not touch upon a question of a termination of that agreement – they provide for its effects within the scope of a possibility of demanding that the promised agreement be executed, that of a prescription of those claims and of a liability for damages. Therefore we need to refer to the general provisions of the civil law regarding effects of a non-performance of an obligation. An analysis of those regulations leads to a conclusion that the legislator takes the ancient Latin principle that pacta sunt servanda (agreements must be kept) seriously and a withdrawal from a contract can only be permitted as an exception – where a contract has a mutual nature and where one of the parties commits what amounts to a qualified delay within the scope of its performance. Then the other party is allowed to indicate the former an appropriate time limit to carry out that performance along with a warning that should the time limit expire to no avail it will be entitled to withdraw from the contract (Article 491 of the Civil code).
Subsequently, there appears a question whether the preliminary contract constitutes a mutual contract. It had used to raise doubts that were cut short by the Supreme Court in its 2004 ruling stating that there existed no grounds to consider a bilaterally obliging contract to be a mutual one within the meaning of the Article 487 par. 2 of the Civil code. Without going here into a doctrinal justification of such a stand, it is enough to say that it is accepted quite commonly. This in turn means that parties to a preliminary agreement on the strength of law are not entitled to any device to terminate such a contract unilaterally.
Therefore, if a building was not completed within a time limit and a developer for such a reason defaults on its obligation to execute a promised contract and there exist no appropriate contractual regulations concerning such a situation, the purchaser cannot withdraw unilaterally from the preliminary contract. Only after the lapse of the time limit to execute the promised contract and following the prescription of the developer’s claim for its execution (1 year) may the unfortunate purchaser of the flat be entitled to a reimbursement of the means that were paid – on the basis of provisions on unjust enrichment (a mode of seeking potential damages from a developer is a little different but it is a topic for a separate article).
Given the above, I highly recommend to introduce to a preliminary agreement contractual clauses regulating conditions and a mode of its unilateral dissolution in case an investment does not go according to a schedule. Of course such provisions are usually a subject to tough negotiations and they need to be formulated properly, yet if one manages to hammer out an agreement with the developer within that scope then a legal situation of a purchaser in case of troubles with a scheduled termination of an investment will be considerably easier.
