New safeguards for purchasers of real estate under construction
The Italian Legislative Decree no. 14 of 2019 (the Amending Decree) has amended the Legislative Decree no. 122 of 2005 (the Decree) which regulates the sale of properties under construction. The changes are designed to provide better safeguards for purchasers buying properties off-plan.
In a nutshell, this has been achieved by enhancing the role of notaries public and amending the provisions concerning guarantee and insurance policy in favour of the purchaser. So, a mandatory notarial form for preliminary sale and purchase agreements has been introduced. There are also new mandatory provisions imposing, among other things, to use standard templates for the form of guarantee and insurance policy in favour of the purchaser.
In this article we offer insight on these developments and reflect on the impact of the changes on the Italian residential real estate market.
Background
The sale of properties under construction is regulated by the Decree, which includes certain safeguards in favour of the purchaser.
The practice of purchasing properties under construction is widespread in the Italian residential market and the main purpose of the legislation is to protect the savings of private individuals who purchase properties off-plan as their main residence, rather than for use as a business opportunity. These purchasers are exposed to an increased risk of developer's insolvency due to the lengthy construction period and because developers will often demand advance stage payments from purchasers. Besides the risks arising from the developer's insolvency, there is another risk. As, on the signing date of the agreement the property under construction does not physically exist or, at least, it does not exist in its final layout, then from a theoretical standpoint the agreement could be deemed null and void for indeterminateness of the object.
Before the Decree, purchasers buying off-plan had limited and generally ineffective protection which simply consisted of the recording (trascrizione) of the preliminary sale and purchase agreement coupled with the special lien (privilegio speciale) in the property.
This was inadequate because recording the agreement did not protect the purchaser against the developer's insolvency, while the effectiveness of the special lien relied on the correct enforcement of insolvency procedures or individual enforcement procedures, with all the associated uncertainties and delay.
The decree: scope
It is necessary to start by analysing the objective and subjective scope of the Decree.
As far as the objective scope is concerned, the Decree identifies those agreements falling within its scope as agreements dealing with the non-immediate transfer of ownership or other enjoyment rights in rem (diritti reali di godimento) in a property to be built (the 'Agreement'), i.e. a property which the developer undertakes to build ex novo or to complete. Therefore, the Decree is deemed to be applicable to any exchange contract (including sale and purchase agreements), both preliminary and definitive, which practical-juridical purpose is those described above.
The Decree also uses objective criteria to define the property to be built as a property:
(a) in relation to which the building title has been requested and
(b) to be built, or which construction has not been finished, so that the status of the property makes it ineligible for a fit-for-use certificate.
The conditions referred to in (a) and (b) above must both be satisfied on the signing date of the agreement. Therefore, the request for the building title has to have been filed and the construction of the property should not have begun or should not be finished (or at least not entirely finished, so that it is excluded the obtainability of the fit-for-use certificate).
Turning to the subjective scope of the Decree, the focus is on two (contractual) parties: the purchaser, or promissory purchaser (the 'Purchaser'), and the developer (the 'Developer'). Given that the Decree applies to any exchange contract as described above, the term 'purchaser' is not necessarily and not exclusively referred to the purchaser in the context of a sale and purchase agreement.
The Purchaser will necessarily be a natural person pursuant to the Decree. Moreover, the natural person must be a 'consumer' as defined by Italian Law no. 206 of 2005, i.e. in brief, the natural person must act for personal and not professional purposes. As a result the Decree will not apply where the Purchaser is not a natural person (for instance, a company) and also where the Purchaser is a natural person but is not acting as a 'consumer'.
The Developer is defined by the Decree as the entrepreneur, or building cooperative, undertaking to build ex novo or complete the property regardless of whether the relevant construction is carried out directly by the Developer or contracted to a third party.
The decree: guarantee and insurance policy
The main safeguards provided to Purchasers under the Decree are the guarantee (the 'Guarantee') and the insurance policy (the 'Insurance') which must be delivered by the Developer to the Purchaser.
As far as the Guarantee is concerned, the Developer is required by the Decree to deliver to the Purchaser a guarantee which complies with the subjective and objective conditions listed below, on or prior to the signing date of the Agreement (which could be a preliminary sale and purchase agreement). Failure to do so could mean that the Agreement is null and void and said nullity is 'relative' and detectable only upon request of the Purchaser.
So, subjectively the Guarantee must be issued by a bank, insurance undertaking or qualified financial intermediary and, objectively, the guaranteed sum must be equal to any sums collected by the Developer from the Purchaser prior to the outright purchase of ownership or other enjoyment rights in rem in the property to be built .
This sheds light on the main purpose of the Guarantee, which is to allow the Purchaser, in certain circumstances where its investment is adversely affected, to recover any payments with interest paid to the Developer prior to the effective acquisition of the right in rem in the property to be built. That is to say prior to the definitive sale and purchase agreement, assuming that the parties previously entered into a preliminary sale and purchase agreement.
However the Purchaser can only enforce the Guarantee when certain conditions specified in the Decree are met and these conditions are explained below. We will firstly explain the nature of these conditions and then go on to consider how they have been changed by the Amending Decree.
The first mandatory condition is the 'crisis situation' affecting the Developer (after the signing of the relevant Agreement), which basically involves the enforcement of any insolvency or individual enforcement procedures. The Purchaser's investment is obviously at risk in such a situation.
The second mandatory condition assumes the occurrence of the first and depends on how it occurred, i.e. on what kind of procedure has been enforced. In fact, in case of an individual enforcement procedure, the second condition requires the Purchaser to give notice of withdrawal from the Agreement. Instead, in case of an insolvency procedure, it is necessary that – upon the enforcement date of the Guarantee - the insolvency practitioner or other competent body has not already indicated that it will to take over the Agreement, otherwise the ability to enforce the Guarantee would be prejudiced. Therefore, in the case of an insolvency procedure the Purchaser needs to be proactive.
The enforcement of the Guarantee will always be accompanied by the termination of the Agreement. In the case of an individual enforcement procedure the termination precedes the Guarantee's enforcement and is a direct consequence of the Purchaser's notice of withdrawal. Instead, in the case of an insolvency procedure the termination of the Agreement is a direct consequence of the Guarantee's enforcement and the relevant notice to the competent body of the insolvency procedure, therefore the termination occurs after such enforcement.
Prior to the Amending Decree, the enforceability of the Guarantee ceased upon the outright purchase of the right in rem in the property to be built. This was clearly reasonable as, before the Amending Decree, the rationale underlying the Guarantee was (only) the protection of the Purchaser's investment from any 'crisis situation' affecting the Developer before the outright purchase of the right in rem in the property. The Amending Decree aims to increase the safeguards for a Purchaser by postponing the deadline to enforce the Guarantee to a point after the outright purchase of the right in rem.
The other main protection provided for by the Decree is the Insurance. The Developer is obliged to give the Purchaser a ten-year insurance policy, covering the civil liability for the property's total or partial ruin or material construction defects, on the signing date of the agreement causing the outright purchase of ownership or other rights in rem in the property to be built (the Definitive Agreement). The Insurance covers only any property's total or partial ruin or material construction defects arisen after the signing of the Definitive Agreement.
Prior to the Amending Decree, the Developer's failure to deliver the Insurance was not specifically sanctioned.
The decree: pre-emption right in case of forced sale
Beside the Guarantee and the Insurance, the Decree offers to the Purchasers an additional but limited safeguard of a pre-emption right where there is a forced sale of the property.
The conditions which must be satisfied to give rise to the pre-emption right are:
(1) the forced sale of the property, arising from the 'crisis situation' of the Developer and the consequent enforcement of any insolvency or individual enforcement procedures;
(2) the handover of the property to the Purchaser, by virtue of which the latter acquires the possession thereof;
(3) the designation of the property as main residence of the Purchaser, or its spouse or first-degree relative .Therefore, the ultimate use of the property, which is generally insignificant to the purposes of the Decree, becomes significant in relation to the applicability of the pre-emption right. In this respect, the main purpose of the Decree is to protect the savings used to purchase properties (under construction) as a main residence.
Provided these conditions are all met, the Purchaser is entitled to exercise its pre-emption right, even in situations where it has already enforced the Guarantee . Therefore, the Purchaser may initially enforce the Guarantee to recover any sums paid to the Developer and afterwards may use those sums to pay whole or part of the forced sale price. In this respect, in order to avoid any undue enrichment of the Purchaser, the Decree sets forth the latter's obligation to reimburse to the guarantor issuing the Guarantee any sums, paid by the guarantor, exceeding the forced sale price.
The Decree refers generically to 'property' and not to property to be built. This could be interpreted widely thereby entitling the Purchaser to exercise the pre-emption right not only in case the property is still to be built when the forced sale takes place but also where, in the period between the signing of the Agreement and the forced sale, the construction of the property is completed without the Purchaser acquires the relevant right in rem (being the Definitive Agreement still to be signed) . According to a wide interpretation, the pre-emption right could arise even in a case where the Purchaser acquires the right in rem, by signing the Definitive Agreement, and afterwards the relevant acquisition becomes ineffective due to the positive enforcement of the bankruptcy claw-back. This, of course, assumes the previous enforcement of a bankruptcy procedure against the Developer.
The second condition referred to above gives rise to a theoretical and practical issue which occurs when the Purchaser wants to exercise its pre-emption right after enforcing the Guarantee.
In fact, the second condition referred to above assumes possession of the property by the Purchaser and such possession should be by way of a legitimate title. Theoretically it is hard to identify such title once the Guarantee is enforced and the Agreement is terminated (as explained above).
The practical issue is linked to the theoretical one, as the Purchaser may be tempted not to enforce the Guarantee in order to avoid the risk of losing the legitimate title of possession of the property, and as a result being 'deprived' of the pre-emption right.
Finally, the pre-emption right is a weak protection because the Purchaser is not entitled to any redemption right vis-à-vis the successful third party in a forced sale. This means that if, as a result of the forced sale the property is sold to a third party in breach of the Purchaser's pre-emption right, the Purchaser cannot redeem in its favour the right in rem in the property.
The decree: limits to the bankruptcy claw-back
The final protection granted by the Decree is the exemption – in favour of the Purchaser – from the enforceability of the bankruptcy claw-back action (is aimed at reconstituting the assets of the bankrupt, depriving of effect the acts performed by the same in the period prior to the declaration of bankruptcy) provided by the Italian Royal Decree no. 267 of 1942 (as amended).
By virtue of this exemption, where bankruptcy proceedings are enforced against the Developer, the bankruptcy claw-back is not enforceable against any Definitive Agreements (for instance, the definitive sale and purchase agreement, assuming that the parties previously entered into a preliminary sale and purchase agreement) signed - for value - by the bankrupt Developer. The exemption will apply where the following two conditions are met:
(1) within twelve months following the outright purchase of the right in rem in the property to be built, or following completion of the construction of the property - the property is established as the Purchaser's main residence, or its spouse's or third-degree relative's main residence; and
(2) the 'fair price'.
The first condition underpins the main purpose of the Decree which is to protect the savings of private individuals used to purchase properties (under construction) as their main residence.
As regards the second condition, the 'fairness' of the price is assessed upon the signing date of the preliminary agreement (assuming that a preliminary agreement is entered into prior to the definitive agreement). From a practical standpoint, the concept of 'fair price' is to be developed by Italian case law rulings and by reference to certain parameters, such as the estimated average market value for similar properties.
Taking into account the rationale underlying the exemption from the enforceability of the bankruptcy claw-back action, it could be said that the exemption might be deemed applicable to any Agreements, including preliminary sale and purchase agreements, even though the Decree makes explicit reference to Definitive Agreements only.
Innovations pursuant to the amending decree: preliminary sale and purchase agreement in notarial form
The Amending Decree applies to those properties to be built where the relevant building title has been requested or issued after 16 March 2019 (i.e. the effective date of the Amending Decree).
It provides better protection for purchasers, among other things, by enhancing the role of notaries public, who will carry out a legality check not only with respect to Definitive Agreements but also with respect to Agreements. Before the Amending Decree, notaries public were only mandatory for Definitive Agreements, since these must be signed in notarial form. Instead, the Amending Decree requires all Agreements, including preliminary sale and purchase agreements falling within the scope of the Amending Decree, to be mandatorily executed in the form of a private agreement with notarised signatures (scrittura privata autenticata) or a public deed (atto pubblico). The Amending Decree does not provide for a specific penalty for breach but the Agreement could be deemed null and void for breach of mandatory rules. Such nullity is 'absolute' and, therefore, detectable upon request of any interesting party (including the competent judge), irremediable and it is not subject to statute of limitations.
The Amending Decree will prevent the widespread current practice of executing the Agreements by means of private agreement without notarised signatures (scrittura privata non autenticata) and, as a result of the so-called 'symmetry of forms' principle which requires certain preparatory deeds (for instance, powers of attorney) to be executed in the same form of the final deed, the notarial form will be required even for proposals and acceptances prior to any Agreement, as well as for associated powers of attorney.
Innovations pursuant to the amending decree: the guarantee
The Amending Decree has also introduced some remarkable changes regarding the Guarantee. These are:
(1) the ability to issue the Guarantee is reserved to banks and insurance undertakings only. Qualified financial intermediaries are now excluded;
(2) the Guarantee must comply with the standard template to be issued within ninety days following the effective date of the Amending Decree by the Italian Ministry of Justice, in agreement with the Ministry of Economy and Finance. In light of the rationale underlying the Decree and the Amending Decree, the standard template of the Guarantee is expected to be drafted in favour of the Purchaser;
(3) the details identifying the Guarantee, as well as the certification of its compliance with the standard template, are to be inserted in the notarial Agreement. Said insertion can be deemed part of the legality check entrusted to the notaries public by the Amending Decree.
(4) the enforceability of the Guarantee is extended to cover the Developer's breach of its obligation to deliver the Insurance to the Purchaser upon the date of the Definitive Agreement;
(5) the extension of the deadline to enforce the Guarantee to a point in time after the outright purchase of the right in rem, i.e. the date by which the guarantor issuing the Guarantee receives a copy of the Definitive Agreement containing the details of the Insurance delivered by the Developer, as well the certification of its compliance with the relevant standard template.
The most important change is undoubtedly that referred to in point (4) above, which increases the scope of the Guarantee to cover cases of Developer's breach of its obligation to provide Insurance and not just cases of Developer's financial troubles. Therefore, for properties to be built which fall within the scope of the Amending Decree, the Guarantee will be enforceable not only in a 'crisis situation' affecting the Developer, but also where the Developer breaches its obligation to deliver the Insurance to the Purchaser upon the signing date of the Definitive Agreement.
Two specific conditions - which are different from those required for the enforceability of the Guarantee in case of a 'crisis situation' affecting the Developer - must be met to enforce the Guarantee in case of lack of delivery of the Insurance :
(a) the competent notary public must provide a certificate attesting that, on the signing date of the Definitive Agreement, it has not received the Insurance compliant with the relevant standard template, and
(b) the Purchaser's notice of withdrawal from the Agreement signed.
As regards the change referred to in point (5) above, the Amending Decree has postponed the Guarantee's enforceability deadline to a time later than the Definitive Agreement, with a view to protecting the Purchaser even after the outright purchase of the right in rem against the lack of delivery of the Insurance. Therefore, the Purchaser is theoretically entitled to enforce the Guarantee even in case the Definitive Agreement has been signed in lack of delivery of the Insurance; in such a case, beside the compliance with the conditions referred to in (a) and (b) above, it is reasonable to expect the Purchaser to claim the nullity of the Definitive Agreement (as better specified below).
Innovations pursuant to the amending decree: the insurance policy
The Amending Decree has introduced the following changes as regards the Insurance:
(1) the Insurance must comply with the standard template to be issued within ninety days following the effective date of the Amending Decree by the Italian Ministry of Justice, in agreement with the Ministry of Economy and Finance;
(2) the details identifying the Insurance delivered by the Developer, as well as the certification of its compliance with the standard template, are to be inserted in the notarial Definitive Agreement;
(3) the Guarantee will be enforceable where the Developer fails to give the Insurance to the Purchaser on the signing date of the Definitive Agreement; and
(4) the Definitive Agreement will be null and void where the Insurance is not provided to the Purchaser.
The introduction of the nullity provision, which is a 'relative' nullity detectable only upon request of the Purchaser, aligns the consequences arising from the failed delivery of the Insurance with those arising from the failed delivery of the Guarantee, i.e. the 'relative' nullity – respectively – of the Definitive Agreement or the Agreement. Therefore, the legislative gap in which the Developer's failure to deliver the Insurance was not sanctioned, has been remedied.
Conclusion
The innovations introduced by the Amending Decree concerning the sale of properties under construction are undoubtedly of primary importance and significantly strengthen the safeguards available to Purchasers.
Although it is too early to draw any conclusions, given that the Amending Decree only came into force a few months ago, it is hoped that these changes will increase the appeal and reliability of the Italian real estate market for properties under construction, even if only from the perspective of natural persons (institutional investors do not fall within the meaning of Purchaser in the legislation) willing to purchase properties as their main residence.
Author: Diego Mallone, Associate
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