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Initial Sales Agreement

Initial sales agreement or preliminary sales agreement

 

When a purchaser wants to formalize the purchase of a property he has visited, he is required to sign, in conjunction with the seller, a unilateral initial sales agreement (“Promesse de Vente”) or a preliminary sales agreement (“Compromis de Vente”). These two types of contracts are preliminary. The final sales agreement will be signed at the notaire’s office, under the form of a certified act, within two or three months after the signature of the initial or preliminary sales agreement.

The seller and the buyer are sometimes under the impression that the signature of a preliminary sales agreement means very little. Nothing is far from the truth: despite its name, the preliminary sales agreement is a true and binding “contract”, in the legal sense, which outlines important obligations for both parties.

  1. What is the importance of the preliminary sales agreement?
  2. Unilateral initial sales agreement (Promesse de Vente)
  3. The initial sales agreement
  4. The different typesof conditions contained in the initial sales agreement

What is the importance of the preliminary sales agreement?

To be more precise, the signature of a preliminary sales agreement is not legally required. However, it is essential in common practice: at the time of the agreement, the purchaser does not generally have all of the information (right of first refusal, possible easements, etc.).

In practice, the need of a professional (i.e. real estate agent) is also essential, given the complex nature of the transaction and the importance of the underlying commitments into which you have entered. In fact, the terms of the preliminary sales contract are just as important, if not more so, than the final sales agreement. As it is, the initial framework that defines the terms of the final agreement.

We advise you not sign a preliminary sales contract directly on a property that is for sale by owner (FSBO) without consulting a professional, whether it be a real estate agent or a notaire. Otherwise, you risk accepting conditions that could potentially be to your detriment.

Since the "Solidarity and Urban Renewal" law of June 1, 2001, a period of retraction was instituted to protect the non professional buyer. A private individual who signs a preliminary or initial sales agreement has seven days from the time of signature to change his mind by informing the seller by hand delivery or registered mail of his intent to withdraw from the transaction.

When the seller is a private individual, he does not have the right to cash the deposit until the period of retraction has passed. Conversely, when the property is new construction, to be constructed or the seller is a professional, the seller has the right to cash the deposit within the 7-day retraction period.

In every case, when the buyer retracts or withdraws his intent to purchase, the funds deposited will be refunded within 21 days, counting the day after the date of his retraction.

Unilateral initial sales agreement (Promesse de Vente):

The unilateral, initial sales agreements, binds primarily the seller. The owner (who is called the “the promissory” in the contract) gives the option to purchase the property to the buyer according to certain conditions stipulated in the contract. Obviously, the contract has a limit date by which the transaction must be completed.

In validating the transaction, the purchaser accepts the right of the promissory and, until the limit date, he has the right to purchase or not to purchase the property in exercising the option. For his part in this option, he deposits an amount to be held in escrow on the seller’s behalf.

This sum is generally 10% of the purchase price. However, if the price is valued beyond the market and the duration of the agreement is reduced, it is possible to reduce the amount. Once again, the parties are free to negotiate.

Consequently, several scenarios can happen:

  1. The prospective buyer exercises the option within the deadline. The transaction is completed through the normal, legal channels (formalized through the final sales agreement in the presence of a notaire).

  2. The prospective buyer does not exercise his option to purchase. Once the deadline passes, the owner is free to offer his property to another candidate and keeps the funds that were held in escrow.

    If the potential buyer expresses his refusal to refund the deposit quickly, he can eventually demand a partial reimbursement of the deposit. The courts sometimes agree to a reduction in the refund amount when total period of the deadline is considered to be excessive.

    Except to the contrary, the beneficiary of the initial sales agreement can yield it to a third party, who can be substituted on his behalf. This would permit him to receive the deposit placed in escrow.

  3. The owner renounces his right to sell the property before the recipient exercises his option. In this case, the latter cannot oblige the owner to sell his property, but he has the right to seek damages, possibly through the legal channels, and only after having officially exercising his option before the deadline. It is the same when the owner sells his property to a third party before the option to purchase is exercised by the original buyer.

  4. The owner refuses to sell his property after the buyer has exercised his option. In addition to damages that he can claim, the latter can also oblige the seller to sell his property since lifting the option is the only way to conclude the transaction legally.

    Naturally, the deposit held in escrow is refunded when the owner does fulfill his obligations vis-à-vis the transaction.

The initial sales agreement:

Pertaining to the sales contract, it is a true sales contract “beginning with the execution” since the two parties are engaged in an irrevocable way : the seller promises to sell the property such as it is defined in the initial sales agreement to the buyer, who promises to buy it at the price indicated. The final language indicates the seller is required to make a “deposit” as with any other contract.

The contract generally includes conditions to the sale, known as “clauses suspensives.” Once the conditions are met and lifted, if one of the two parties decides no to proceed with the transaction, the other party can force the continuation of the transaction through legal channels, in addition to seeking punitive damages.

The initial sales agreement or “promesse de vente” thus definitively formalizes the transaction at the time the conditions to sale contained therein are met and lifted.

The different types of conditions contained in the initial sales agreement:

Taking into account the importance of the requirements of each party, the initial sales agreement includes, in theory, certain clauses which can prevent the execution of the final agreement. The parties freely decide the drafting of these clauses. The only legal obligation relates to the purchase of residences financed by a mortgage.

Exit clauses: Particularly used in initial sales agreement, exit clauses allows each party to exit the transaction by making a payment of a fixed amount payable in advance.

In certain cases, it acts of payment of down payment "being worth half of the withdrawal.” The owner must then pay an amount equal to twice the down payment if he decides not to purchase, while the buyer loses the deposit if he decides not to purchase.

Conditional clauses: The "conditional" clauses do not prevent the commencement of realization of the contract, but cancels it if the events envisaged are satisfied. The "conditional" clauses, suspend the execution of the contract until the events envisaged are satisfied. The result is in fact identical: the transaction is not carried out because of an event independent beyond the control of the two parts.

The only required conditional clause relates to obtaining a mortgage. If the purchase is financed by the mortgage, the buyer is released from his engagement if he does not secure mortgage within the guidelines and timeframe indicated in the initial sales agreement. The buyer can then recover the down payment, in full, held in escrow. Conversely, he is required to communicate the terms of the offer from a financial institution as soon as he receives an offer which meets the parameters contained in the agreement. It is necessary to negotiate the terms of the mortgage before the signature of the preliminary contract.

A buyer who is not seeking to borrow the funds to purchase the property, must expressly indicate such in the initial sales agreement to give up the right of this conditional clause as required by law.

A buyer does not have to use this clause to give up his right at will to purchase and to recover his deposit. The courts have ruled against certain cases, when, for example, the buyer submits an incomplete application to the bank. Conversely, certain events (job loss, disability, etc), can be admitted by the courts to allow the buyer to recover his deposit even if he has secured his loan.

Other conditional clauses are freely negotiated by the two parties. For example: the procurement of the urban planning certificate indicating the absences of liens or a construction permit which the buyer anticipates renovation works, the absence of the right of first refusal by the city, or the absence of mortgage guaranty, etc.

If required, the buyer can request to include a clause which suspends the execution of the contraction in the event that he does not himself find a buyer for his own property. This clause is perfectly legal.


In conclusion, the preliminary sales agreement is a document that engages both parties. It is always necessary to engage the counsel of a professional, whether it is a real estate agency or a notaire.

Ce document issu de Droit-Finances.net (droit-finances.commentcamarche.net) est soumis au droit d’auteur. Toute reproduction ou représentation totale ou partielle de ce site par quelque procédé que ce soit, sans autorisation expresse, est interdite.

 

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