Have You Carefully Read Your Off-Plan Property Purchase Agreement?
Although off-plan property sales remain the most sought-after option in Luxembourg, their growth is slowing. This type of transaction raises questions about costs, deadlines and the guarantees offered to buyers. To avoid unpleasant surprises and additional payments, it is important for purchasers to seek legal advice from the contract drafting stage.
A VEFA (vente en l’état futur d’achèvement), or off-plan property sale, is governed by the Luxembourg Civil Code and refers to the purchase of an apartment or house from a property developer before construction has been completed.
“It is a contract under which the seller transfers to the purchaser their rights to the land and ownership of any existing structures. The purchaser progressively acquires ownership of the property as construction progresses and is required to pay the purchase price in accordance with the advancement of the works,” explains Marie Bena, Partner at Brucher Thieltgen & Partners.
The seller, for their part, is required to complete the construction within a specified timeframe and retains responsibility as project owner until the works are formally accepted.
The End of Off-Plan Property Sales?
In Luxembourg, this type of transaction is widespread, as newly built properties remain predominant in the real estate market. However, the market is currently experiencing a slowdown.
“The recent bankruptcies of major property developers have highlighted several issues relating to off-plan property sales. These concern not only the conditions under which such contracts are concluded but also the guarantees available to purchasers, who may not have taken the time to carefully read their contracts before signing them. As a result, some buyers find themselves facing unfinished properties, delivery delays and rising construction costs due to inflation in building material prices.”
For these purchasers, obtaining financing has also become more difficult due to rising interest rates.
A Contract That Requires Careful Examination
An off-plan property sale is generally preceded by a reservation agreement involving the payment of a deposit, which is, in principle, refundable if the project does not proceed. The VEFA contract itself must be executed before a notary and is therefore subject to specific legal requirements.
“The contract can only be concluded once the necessary administrative authorisations have been obtained and must be accompanied by architectural plans and detailed specifications. It must include a description of the property, the purchase price, the payment terms and any possible price adjustments, the delivery deadline and the guarantees provided to the purchaser. If these mandatory details are missing, the contract may be annulled, provided that the property has not yet been completed.”
Payment is one of the key considerations in any property transaction. In a conventional property sale, the full purchase price is generally paid at the time of sale, namely when the contract is signed.
In the case of a VEFA, however, the purchaser is required to pay the agreed price progressively as construction advances.
“Payments are therefore made in instalments, subject to statutory limits based on the different stages of construction. Two important obligations should be emphasised. Under no circumstances may a property developer demand payment for work that has not yet been carried out, as doing so constitutes a criminal offence. Consequently, the payments made by the purchaser cannot exceed the value of the construction work already completed.”
The purchaser, in turn, undertakes to pay the instalments corresponding to the completed works.
Providing Guarantees to Future Property Owners
Under a VEFA contract, property developers are also required to provide guarantees designed to protect purchasers.
The first is the completion guarantee.
“When a developer is no longer able to complete the construction project, the guarantor will pay or make available to the purchasers the funds necessary to complete the works. The purchasers must, of course, pay the remaining instalments, as well as account for amounts already paid for work that has not been carried out.”
However, the completion guarantee has its limitations. It only covers the completion of works specified in the contractual specifications and therefore does not extend to additional works requested by purchasers.
The refund guarantee, meanwhile, applies in the event of termination of the contract, either before a notary or, more frequently, through judicial proceedings.
However, the purchaser will only be reimbursed for amounts corresponding to the works provided for in the contractual specifications, excluding any additional works.
Advising and Supporting Property Buyers
Faced with these complex situations, Brucher Thieltgen & Partners provides assistance at two levels.
Firstly, the firm advises and supports purchasers during the negotiation of VEFA contracts and throughout the transaction. Secondly, it represents clients in the event of litigation.
“One recurring issue concerns the final 5% of the total purchase price, which becomes payable when the property is fit for occupation. If the purchaser is dissatisfied with the works during the completion inspection, they can normally place this amount in escrow pending the seller’s completion of the necessary remedial works.
However, some developers have repeatedly made the handover of keys conditional upon payment of this final instalment, even though the purchasers are already the legal owners of the property.
Once the full purchase price has been paid, purchasers lose an important means of leverage,” concludes Marie Bena.
For further information, please do not hesitate to contact:
Marie Bena, Partner : marie.bena@btplawyers.lu