Understanding the content and legal value of a sales agreement

Last update 25.09.2018

Once the potential buyer has found a building (flat, house or land), they will have to take a number of steps and sign various documents in order to become the owner. One of the documents that the potential buyer will be required to sign is commonly referred to as a "sales agreement" (technically, a 'promise-of-sale agreement').

Since it is a genuine contract, a sales agreement signed by both parties is final and binding. It requires the signatories to conclude the sale at a specified price. The sales agreement may be registered and a notarised authentic deed will be prepared to formalise the sale.

Since this private document constitutes a genuine commitment, it is very common to include suspensive conditions (for example, the agreement comes into force only if the potential buyer is granted a bank loan to finance the purchase of the building). 

"A sales agreement constitutes a sale": this well-known expression means that a sales agreement becomes complete as soon as the agreement is signed. Therefore, particular caution is advised before signing such a document.

Since 1 July 2012, real estate ads for the sale or rental of property which are published in commercial media must specify the energy performance class (according to the primary energy expenditure index) and the thermal insulation class (according to the heating energy expenditure index) of the residential building.

Nature of the sales agreement

Theoretically, a sales agreement—i.e., a promise-of-sale agreement—could be used for the sale of any object.

In practice, however, such agreements are mainly used for the sale of buildings. The reason for this is that, in order to be enforceable against third parties, the sale of a building must be formalised in a notarial instrument, which alone can be registered at a Mortgage Registry. The law has given exclusive jurisdiction to notaries to prepare the documents through which a building changes ownership. In particular, a notary will make a number of background checks to determine the seller's ownership status and whether or not any mortgages, easements and other charges exist.

As soon as seller and the purchaser have agreed in principle to the sale, they often wish to formalise their agreement in writing, before they go to the notary's office, to protect themselves in case one of the parties changes their mind their appointment with the notary.

The preparation and signing of a sales agreement are subject to 2 conditions:

  • the seller must have the legal capacity to sell the asset, and the buyer the right to purchase it;
  • the object and the price must be determined.

A notarial instrument makes it possible to enforce a private document signed between the parties against third parties. Skipping this formality in no way changes the final and binding nature of the sales agreement, from which, in theory, the parties cannot withdraw.

However, the signing of a sales agreement is not mandatory. The seller and buyer could very well go to the notary's office without first having signed a sales agreement. Nevertheless there is a risk that the buyer could lose their option to purchase the asset.

Main clauses contained in a sales agreement

To be valid, the sales agreement must at least contain the names and addresses of the parties, the designation (land register references, etc.) of the property to be sold, the sale price and the terms and conditions of payment. Other information may be included as well, such as the existence of any easements, the name of the notary and the date of signing of the deed, or the date scheduled for the actual transfer of occupancy (which takes place when the keys are handed over). The sales agreement may also contain a delayed occupancy compensation clause in the event that the keys are not handed over on the scheduled date.

Beyond these references, virtually all sales agreements contain a number of special clauses that make the sale referred to in the agreement subject to conditions.

Granting of a bank loan as a suspensive condition (condition precedent)

Pursuant to this clause, the buyer is not obliged to buy the building until they have received a loan from a bank.

To prevent the seller from having to wait indefinitely for the buyer to inform them whether or not a bank loan has been granted, the parties usually set a time limit—in writing—within which the buyer promises to inform the seller of the bank's response.

This time limit is determined by the parties at their discretion. However, the time limit must be long enough to allow the buyer reasonable time to submit a loan application to their bank and receive a response before the time limit expires. The time limits observed in practice are at least 4 to 6 weeks. The time limit may be extended through an official letter from the bank certifying that an application for a bank loan has been submitted and is being processed.

The condition/clause is called a "suspensive" condition/clause because it suspends the effects of the agreement until the buyer obtains the bank loan. In the event of a dispute, the courts will attempt to ascertain that the purchaser has performed the clause in good faith and with due diligence. As a result, if there is a trial, it is up to the buyer to prove that they actually applied for a loan from at least one bank, that the application was submitted in a timely enough manner to enable the bank to determine whether to grant the requested loan, and that the buyer informed the seller of the bank's approval or refusal within the period stipulated in the agreement.

Penalty clause

This is a clause in which the parties make advance provision for the payment of a lump-sum penalty by the party that terminates the agreement without being entitled to do so. In other words, a penalty clause provides for the payment of a sum of money to the injured party if the other party fails to perform an obligation. The penalty amount is specified in the agreement and, in principle, cannot be adjusted by a court. A penalty clause provides for a lump sum, which avoids the need to quantify the injury suffered.

In practice, the penalty amount is set at 10 % of the sale price.

Example: the sale price is EUR 350,000. The buyer obtains a bank loan, but refuses to sign a notarial deed of sale. If a penalty clause of 10 % of the sale price is provided for in the agreement, the buyer must pay the seller EUR 35,000 as compensation for damages.

The payment of notary fees and real estate agent's commission

In many cases, the parties specify in the agreement who will pay the notary fees and the real estate agency fees, if any.

Although the parties may allow the seller or the buyer to pay the notary fees at their discretion, the established practice in this scenario is for the buyer to pay the notary fees.

The parties are free to have the notarial instrument drawn up by the notary of their choice (regardless of location). If the name of the notary has not been determined by mutual agreement, it is generally up to the party who pays the notarial expenses to seek out the services of the notary of his choice.

When a sale occurs through a real estate agent, their commission—usually 3 % of the sale price of the building + VAT—is paid by the party who engaged the real estate agent (generally the seller).

Registration of an agreement

In principle, sales agreements for buildings must be registered with the Registration Duties, Estates and VAT Authority. Non-professionals in the real estate business must submit the sales agreement to the registration department within 3 months of the day of signing.

In practice, however, many sales agreements are not registered. Failure to register an agreement does not affect its validity between the parties. However, registration makes the agreement enforceable against third parties from its date of registration, which allows the buyer to invoke the agreement against a third-party purchaser to whom the seller might have sold the building in violation of the agreement.

The party who presents the agreement at any Registration Duties, Estates and VAT Authority office in Luxembourg must pay the registration fee. For agreements that contain a suspensive clause—such as the application for a bank loan—the registration fees are fixed (EUR 12).

The same is not true for agreements that do not contain a suspensive clause. In that case, a registration fee of 7 % on the stipulated selling price is charged to the person who presented the agreement.

Consequences of non-compliance

Contrary to common belief, a sales agreement is not just a preliminary contract without legal effects. Actually, a sales agreement signed by the seller and the buyer (or their representatives, such as a duly authorised estate agent) immediately produces legal effects between the parties.

As such, failure to comply with a sales agreement could give rise to legal action against the party whose non-compliance prevented the parties from entering into the notarial deed of sale.

The defaulting party can either be the buyer who, after some thought, no longer wants to buy the building, or the seller, who no longer wants to sell their building to the other party (because they have changed their maid about selling the building, or because they have found another buyer willing to pay a higher price).

The party whose fault or negligence is the cause of the non-compliance with the agreement may then be ordered to pay the other party the amount in the penalty clause, if there was one in the agreement, or compensate him for the damage actually caused.

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