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Purchase agreement: When is the purchase price due?
Purchase agreement: When is the purchase price due?
In Germany, the notarization of a contract is required for the sale of real estate. This series of articles explains in detail the specific contents of a purchase contract. Specifically, these are: the parties involved, the subject matter of the purchase, the purchase price, the seller's liability for defects, Transfer of possession, use, burdens, and risk, Costs and Taxes, Conveyance and land register entry. This article covers important aspects related to the purchase price. Specifically, it deals with the due date of the purchase price, the protection of both the buyer and the seller, and the necessary approvals.
Purchase Price & Due Date
Every notarized purchase agreement contains the purchase price and the due date recorded in writing. Additionally, the Default interest precisely determined, which the buyer must pay in the event of a default. The amount of the default interest depends on whether the contract is concluded between consumers. In that case, the statutory default interest is 5 percentage points above the base interest rate.
With other contractual partners, 8 percentage points above the base interest rate are calculated (see § 288 paragraphs 1 and 2 of the German Civil Code [BGB]). The base interest rate is variable and can change on January 1 and July 1 of each calendar year. The Deutsche Bundesbank publishes the respective applicable interest rate. The payment date is usually determined by the notary after presentation of certain maturity requirements. As a rule, this is 10 to 14 days after the corresponding requirements have been met.
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Seller Protection & Buyer Protection
When drafting the purchase agreement must the date for the due date of the purchase price be chosen so that the buyer is sufficiently protected. He needs the assurance that he is acquiring unencumbered property. On the other hand the seller must also be protected, that he does not give up his property without being sure that he Purchase price paid in full receives. The notary must therefore take into account the interests of both contracting parties in the purchase agreement. It must be avoided at all costs that one of the parties provides a performance without having the certainty of receiving the desired consideration in return.
Simply put, the buyer's assets are at risk if they pay the purchase price before their acquisition of the property is secured. This is because the seller could encumber the property with new debt in the meantime (e.g., with a loan), sell it again, or become insolvent. A potential obstacle to the success of the contract could be that one of the necessary approvals is not granted.
In return, there is the possibility that the transfer of the property to the buyer may take place even before the purchase price has been paid in full. The seller could then encounter major difficulties in enforcing the claim for the purchase price. Consequently, it is necessary to agree on provisions in the purchase contract that ensure a secure execution of the purchase contract for both sides.
From the following overview, you can see how the seller's protection is enabled.
- submission to enforcement
- escrow account
- Suspension or deferral of execution of the conveyance (or: ...of the transfer of title)
- Charging mortgage or land charge
- Bank guarantee
- Right of rescission & advance notice of re-conveyance
For optimal protection, the seller can either temporarily suspend or delay the transfer of ownership until the full purchase price has been paid. In other words, the transfer of ownership to the buyer by the seller takes place only after the purchase price has been paid in full. This generally means that a few weeks elapse between the notarization of the purchase contract and the transfer of ownership in the land register. This is because almost every purchase contract requires official approvals, waivers, etc.
The buyer is protected by:
- Cancellation caveat in a secure rank in the land register.
- Release of the purchased property from encumbrances not assumed.
- Proof of the non-existence or non-exercise of statutory and other rights of first refusal.
- Existence and effectiveness of required approvals.
- Payment to a notary's trust account.
Buyer protection is primarily achieved through the entry of the notice of conveyance in the land register. If the notice of conveyance is not entered, a risk could arise for the buyer if they pay the purchase price before the transfer of ownership of the property is secured.
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There is a risk that the seller might encumber the property elsewhere or even sell it in the meantime. Enforcement proceedings could also prevent the transfer to the buyer. The land charge caution (preliminary entry) is therefore a protective mechanism for the buyer. In addition, the buyer can deposit the purchase price with the notary in a so-called notary escrow account. The purchase contract stipulates for this purpose that the notary is to be paid as a trustee of both parties. At the same time, the notary is instructed not to disburse the purchase price to the seller until the buyer is secured. It should be noted that costs are associated with this. Therefore, the purchase contract should specify who bears these costs or how they are to be divided.
The notary is obliged to point out in the purchase agreement that the validity of the contract depends in most cases on various approvals. The transfer of ownership can only take place once the notary has received the approvals. As a rule, all necessary approvals must first be obtained before the notary requests the buyer to pay the purchase price. This provides further protection for the buyer.
Here are some examples of approvals that are necessary when selling real estate:
- Approvals under the Federal Building Code
- Approvals under the Real Estate Transactions Act
- Approvals by the guardianship court.
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Excerpt from the purchase agreement: Purchase price and purchase price due date
The total purchase price is €680,000.00
Euro six hundred eighty thousand
– and is payable as follows:
The entire purchase price is due for payment (receipt by the seller) 10 bank working days after the fulfillment of the last of the following conditions:
– the priority notice of conveyance is entered in the land register in the agreed rank,
– the municipality has issued a certificate confirming the non-exercise or non-existence of the statutory rights of first refusal pursuant to the Federal Building Code,
– the declarations and other documents required for the release from encumbrances with regard to all encumbrances that are prior or equal in rank to the caution (priority notice) and are not expressly assumed are available to the notary for unconditional use or in escrow, with the proviso that these may only be used against payment of certain redemption amounts that do not exceed the purchase price.
The buyer is authorized and obligated, upon the due date, to pay the redemption amounts required for the release from encumbrances, including any notary fees as well as the partial amount of € 110,000.00 assigned to Bayerische Hypo- und Vereinsbank in accordance with the assignment described below, directly to the respective creditors for the account of the seller, to be credited against the purchase price. The buyer and the notary are not required to verify whether conditions upon which the release from encumbrances depends are justified.
The aforementioned period begins as soon as the notary has sent a written confirmation to the buyer by regular mail that the above-mentioned prerequisites have been met, or when the buyer has obtained knowledge thereof independently. The seller receives a copy of this letter.
Furthermore, however, the purchase price is not due for payment earlier than 10 bank working days after the contractual property has been vacated and the seller has given written notice thereof, nor before May 1, 2015; this due date requirement is not to be verified or communicated by the notary.
If the buyer fails to pay when due, they will be in default upon the expiry of the above-mentioned period without the need for a reminder. They will then be required, in particular, to pay statutory default interest.
The buyer submits to immediate enforcement of execution from this deed against his entire assets with regard to the payment obligation entered into above, excluding interest. Multiple buyers shall be liable jointly and severally.
An enforcement clause can be issued after the notarized determination of due date.
The seller has assigned the purchase price claims amounting to €110,000.00, which are not required for the release from encumbrances, to Bayerische Hypo- und Vereinsbank AG, Munich. This amount must be irrevocably transferred solely to the IBAN ..., BIC ..., specifying the payment reference „Abtretung Kaufpreis Manfred und Manuela Muster“. The buyer has taken note of this.
Unless required for the discharge of encumbrances or for the aforementioned assignment of the purchase price, the remaining purchase price shall be transferred with a discharging effect upon due date to the following account of the Seller:
Bank details: ...
conveyance, instruction
The parties agree on the transfer of ownership to the buyer, or in the case of multiple buyers, in the fractional or joint ownership ratio specified above. This unconditional agreement does not contain any consent to registration or application for registration.
The parties instruct the notary public to declare the consent to registration and the application for registration of the conveyance only when the full purchase price without interest has been confirmed by the seller or otherwise proven to the notary public. An irrevocable power of attorney to make these declarations is granted to the notarizing notary public, his partner, or successor. The seller undertakes to notify the notary public of the payment of the purchase price immediately in text form. Confirmation by one seller shall suffice.
Rights of first refusal
The parties to the contract were informed of any statutory pre-emption rights that may exist. They instruct the notary to obtain the corresponding negative certificates.
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