SALE AND PURCHASE OF REAL ESTATE IN ESTONIA

 

A lot has been written about the basics of real estate transactions. Unfortunately, stories still emerge in the media where forgetting these basics has led to very unfortunate consequences for one of the parties involved. To minimize the number of such stories in the future, we offer here an overview of the most important things to keep in mind if you are about to engage in a real estate sale or purchase transaction.

 

Notarial Form is Mandatory

 

It is essential to remember that real estate (immovable property) can only be sold, gifted, divided, or encumbered with a property right in a notarial form. An average person might juxtapose form with content and might then associate it with the conventional wisdom that content is more important than form. However, a contract’s form requirement is quite different. If this form is violated, the content becomes irrelevant because a contract that does not comply with the form requirement is void. A void contract has no legal effect from the start, and you cannot demand the transfer of ownership based on such a contract.

 

The form requirement applies not only to the transfer of ownership but to all conditions of the sales contract. For example, if a notarial sales contract specifies one price, but a different price is agreed upon privately, the privately agreed price is null and void, and the buyer must only pay the price stated in the notarial contract. That said, certain pre-contractual information (such as details provided in a sales advertisement) has been considered in court practice an agreed-upon characteristic of the real estate. This is mostly relevant in a case where dispute arises over the quality of the sold property or its conformity with the terms of the contract.

 

The mandatory form requirement serves several purposes, but one of the most important is to ensure that real estate transactions are well thought out and that the notary can explain to both parties the rights, obligations, and risks associated with the transaction. Therefore, if you plan to transfer real estate, contact a notary who will ensure that the contract is lawful and valid.

 

 

Preliminary Contracts and Reservation Agreements

 

A simple written agreement also cannot obligate anyone to conclude a real estate sales contract on some future date or when certain conditions are met. While a rental agreement with a purchase option concluded in a written form may be valid for a car, it is not valid for real estate. Such a preliminary agreement would be considered an attempt to bypass the notarial form requirement.

 

The "obligation to enter into a contract” should not be interpreted narrowly here. The Supreme Court has ruled that any agreement intended to indirectly pressure parties into a real estate transaction is void. This includes agreements that impose financially detrimental consequences if the property is not acquired or sold. For example, a penalty that a buyer must pay if they refuse to buy the real estate exerts undue pressure, making the buyer feel compelled to complete the purchase. Such a penalty clause is therefore invalid.

 

Sometimes real estate transactions use reservation agreements. However, such an agreement, in a simply written form, cannot actually obligate a party to buy or sell the property. The reservation fee should only be related to reserving the property and must not form part of the purchase price. Additionally, the fee must be reasonable. For instance, if a two month reservation fee for a simpler apartment is €8000 and is non-refundable if the contract is not concluded, this would be a significant amount for the average person. As a result, the buyer may feel pressured to complete the purchase to avoid losing the money, making this a (void) preliminary agreement than a true reservation agreement.

 

It is, of course, possible to conclude a preliminary agreement too, but it will only be valid if executed in notarial form. If your planned real estate transaction is not a typical sale-purchase, for example, if you have a specific solution in mind regarding the transfer of ownership or the purchase price, it would be wise to consult a lawyer.

 

Characteristics of a Real Property and Hidden Defects

 

Another topic that frequently arises in the media is legal disputes over defects in real estate. Understandably, every seller wants to get the best price for their property, which can lead to a tendency to highlight only the positive aspects and conceal any flaws. However, this can result in costly disputes.

 

The real estate must meet the conditions and have the characteristics stipulated in the sales contract. In the absence of specific agreements, the property must be of at least average quality, with quality being compared to similar properties. Naturally, the average quality of a new apartment differs from that of an old farmhouse. It’s also important to note that opinions on quality are inevitably subjective. For example, an elderly gentleman may consider it normal that one must wear a sweater and hat during winter in an older summer home, whereas a young family might not share this view. Regardless of the average quality, the property must be fit for its intended use. Therefore, even if a defect is typical for a property of a certain age, it may still not meet the contract terms if it cannot be used for its intended purpose. Using a residential property for its intended purpose means the presence of basic living conditions.

 

 

Although each breach of contract must be assessed individually, court practice provides useful guidance. For example, courts have ruled that:

• Defects in an apartment are not limited to the real part (the apartment in itself) but also include the co-owned parts (e.g. hallways and roof) and the overall living environment (e.g., neighbors).
• The heating system in the apartment must be functional and provide a livable temperature without consuming an unreasonable amount of energy. The system must also be safe to use.
• If the real estate is located on residential land, building a residence should be possible and not subject to unreasonable burdens.
• An apartment property is unsuitable for ordinary use if it is burdened by significant debt or lacks a functioning apartment association.
• In the case of a renovated building, the buyer can expect that the property has no defects and that no additional costs will be necessary to ensure livable conditions.
• Basic living conditions, at the very least in new buildings, include water supply, sewage systems, adequate daylight, and the absence of permanent or significant noise, vibration, or unpleasant odors.
• The building must comply with its plans and documentation (although deviations are not necessarily defects if the building still meets construction and fire safety standards).

 

If the buyer has inspected the property, this should be noted in the sales contract. It is assumed that the buyer has agreed to any visible defects observed during the inspection, and these do not need to be listed separately in the contract. However, this applies only to obvious defects, not hidden ones. Obvious defects are those that can be detected during an external inspection of accessible and visible parts of the property. The buyer is not required to involve experts or conduct an especially thorough examination. If a defect is not obvious, it is considered hidden, and the seller is responsible for such defects.

 

A contractual provision limiting liability in the sales contract may not necessarily protect the seller, for example when selling the property under terms such as "sold as-is" or "the buyer is aware of all the property's characteristics." Any agreement to limit or exclude liability is void if it applies to intentional misconduct or is otherwise unreasonable. Such an agreement can only cover obvious, not hidden, defects. It is better to be specific in these cases: for example, "the roof leaks and there is mold" or "the heating system is worn out and poses a fire hazard when in use."

 

In conclusion, it is advisable to clearly describe the property's defects and condition in the contract. It is wise to be conservative with praise and honest about the defects. The buyer retains the right to choose the legal remedy for defects. This means that instead of canceling the contract due to defects, the buyer may choose to demand compensation from the seller to cover the cost of repairs. It would indeed be unfortunate if a significant portion of the sales price had to be returned to the buyer for them to repair their new property.

 

Summary

 

A real estate sale is a typical and routine transaction. In Estonia, more than a hundred real estate transfers occur daily, and they are part of any notary's daily work. However, for a buyer or seller, it is often a significant and expensive transaction, one that may be done only once or twice in a lifetime. Seemingly minor issues or small mistakes can lead to very unpleasant consequences. In this overview, we highlighted only a few risks, primarily related to residential properties. Separate challenges arise in the sale and purchase of agricultural and forest land, commercial buildings, or in cases where the property is co-owned or part of joint property.

 

If you are preparing for a real estate sale and potential risks are causing you concern, it is wise to consult an expert who can help mitigate the risks associated with the transaction. The lawyers at Lepmets & Nõges law firm are happy to assist you in this process.