Understanding Preliminary Sale and Purchase Agreements in Hungarian Real Estate Transactions

Visa application and approval process in light if a preliminary sale and purchase contract

A preliminary real estate purchase contract (in Hungarian: "előszerződés") is a mutual agreement between the buyer and seller that they will finalize a real estate sale at a later date, or once certain conditions are met. This type of contract is commonly used when the full terms of the purchase have not yet been finalized, but both parties wish to secure their intention to buy or sell.

For buyers interested in Hungary’s Golden Visa program, which can include property investment as part of the residency application process, a preliminary contract can be especially useful. In essence, a preliminary contract ensures that even if either party later decides against the sale, the court can enforce the final contract based on the agreed-upon terms, providing security for the buyer’s investment and the Golden Visa eligibility requirements.

Table Of Contents

When Is a Preliminary Contract Useful?
What Constitutes a Good Preliminary Contract?
Preliminary Contract and Earnest Money
Risks of a Preliminary Contract
Conclusion

When Is a Preliminary Contract Useful?

A preliminary contract is often made when:

The buyer and seller have not yet agreed on all the terms, or cannot yet sign a contract - but the seller insists on receiving a deposit.
The property requires a thorough technical inspection and legal due diligence, which may take time, and the seller demands a deposit for their cooperation.
If the seller plans to sell at a later date, the preliminary agreement binds them to the sale, providing extra security for the buyer.

Preliminary Contract vs. Letter of Intent

A common question that arises is the difference between a preliminary contract and a letter of intent ("szándéknyilatkozat"). A preliminary contract binds both parties to a future sale and lays down essential terms, whereas a letter of intent merely indicates an intention to purchase but does not create enforceable obligations.

Preliminary agreements are valuable tools in Hungarian real estate transactions

What Constitutes a Good Preliminary Contract?

A well-drafted preliminary agreement should include:

Parties' details: Full names and addresses of both buyer and seller.
Property details: A comprehensive description of the property, including any associated buildings like garages or storage units.
Encumbrances: Any existing charges or liens on the property.
Purchase price: The agreed-upon price or a clear method for calculating it, along with payment deadlines.
Final agreement date: The date or conditions for signing the final purchase agreement.
Deposit: The amount of the deposit (foglaló) securing the final agreement.
Date and place of signing: The date and location where the preliminary agreement is signed.
Warranty: Ideally, the seller's warranty obligations regarding the property's condition should be included.

It's also advisable to address the seller's liability for the property's condition. If the seller wishes to exclude any warranties, it's better to clarify this in the preliminary contract rather than after.

While not legally required, consulting a lawyer specializing in real estate is highly recommended

Preliminary Contract and Earnest Money

The earnest money, or "foglaló" acts as a security for the transaction. Should the final purchase not proceed, the fate of the deposit depends on which party is responsible. If neither party is at fault, the deposit is refunded. If the party who gave the deposit is at fault, they forfeit the deposit. If the receiving party is at fault, they must return double the deposit.

Traditionally, the deposit is around 10% of the purchase price. Given the financial implications of the deposit, consulting a lawyer is highly recommended to ensure that the terms are fair and clear.

Legal Requirements and Practical Aspects

A preliminary contract must be in written form. However, it does not require notarization or witness signatures to be valid. Nevertheless, most contracts include two witnesses who attest to the authenticity of the signatures, which can provide additional security if a dispute arises later.

Understanding the associated risks and seeking professional legal advice are crucial

Risks of a Preliminary Contract

One major risk of a preliminary contract is that it does not appear on the land registry. This means that the property owner could potentially sell the property to another buyer, in which case the preliminary contract becomes unenforceable.

Another risk is setting unrealistic deadlines, which can lead to serious legal consequences if the final agreement is not signed in time.

For buyers, a significant danger is that they cannot secure ownership based solely on a preliminary contract. Therefore, it is crucial to agree on precise terms and conditions in the preliminary contract and to carefully assess any scenarios that might lead to the sale falling through.

Disclaimer

While this blog provides general information, consulting with a legal expert is always recommended for specific advice tailored to your situation.

Conclusion

In summary, while a preliminary real estate purchase contract can provide assurance to both parties and help secure a transaction, it carries inherent risks. It does not grant full protection since it is not recorded in the land registry. Therefore, it is crucial for both buyers and sellers to seek legal counsel and ensure that all terms are clearly outlined to avoid misunderstandings or legal disputes.

If you are navigating a real estate transaction and want to secure your rights properly, a well-drafted preliminary contract, backed by legal advice, is your best safeguard.