Land purchase by a developer – what is worth knowing?

1. PRELIMINARY AGREEMENT

Transactions involving investment land are generally a multi-stage process. Before making a final decision to purchase, the developer carries out a comprehensive due diligence process, covering an analysis of the legal and factual status of the property, as well as obtaining the administrative decisions necessary for the project’s implementation (e.g. planning permission, building permits, technical conditions for connection to utilities, or the results of geotechnical surveys).

Given the length and complexity of these procedures, the parties usually enter into a preliminary sale agreement – preferably in the form of a notarial deed. This allows the buyer to register a claim for the transfer of ownership in the land and mortgage register, which effectively safeguards their interests and, if necessary, enables them to seek the conclusion of the final sale agreement through the courts.

The preliminary agreement should include, in particular:

• A description of the procedure and timetable for the future sale;
• The conditions the plot must meet for the sale to proceed (e.g. obtaining planning permission, connection requirements);
• The price and payment arrangements (deposit/advance payment, instalments);
• The consequences of the main contract not being concluded;
• The amount of the deposit and the conditions for its return;
• Security for the performance of the sale agreement;
• The seller’s declarations regarding the absence of encumbrances on the property and third-party claims (including mortgages or easements);
• Conditions for withdrawing from the preliminary agreement;
• Terms and conditions for the completion of the transaction;
• The date and place of conclusion of the final contract.

2. CONDITIONAL AGREEMENT

An alternative solution, increasingly common in property development practice, is a sale agreement concluded subject to a condition precedent. Its structure provides the buyer with a higher level of legal certainty, as the transfer of ownership takes effect only once the conditions specified in the agreement have been met.

Such conditions may include, for example:

• Obtaining planning permission,
• Obtaining a building permit,
• Obtaining an environmental decision;
• Obtaining technical conditions;
• Verification or confirmation of ground conditions.

A contract structured in this way allows the developer to avoid the risk of acquiring land that does not meet investment requirements, whilst giving the seller the certainty that the transaction will be finalised once clearly defined conditions have been met.

3. SECURITIES USED IN A PROPERTY SALE AGREEMENT

• Deposit

Secures the completion of the transaction. If the final contract is concluded, it is credited towards the purchase price. In the event of a culpable withdrawal by the buyer, the seller may retain the deposit; whereas in the event of a culpable breach of contract by the seller, the seller is obliged to return double the amount of the deposit.

• Warranty

The warranty is the seller’s liability for defects in the property. Between businesses, it may be limited or excluded. In the case of extensive due diligence by the developer, the warranty for physical defects in the land is often excluded, leaving liability for legal defects (e.g. undisclosed encumbrances).

• Entry of a claim in the land register.

A claim for transfer of ownership may be entered in Section III of the Land and Mortgage Register in favour of the buyer, which grants them priority to purchase the property. It is, however, advantageous for the seller to require the developer to submit to a notary their consent to the deletion of the entry in the event that the final sale agreement does not come into effect.

4. SECURITY FOR THE SELLER AFTER THE CONCLUSION OF THE SALE AGREEMENT

Upon signing the sale agreement, ownership of the property passes to the buyer, regardless of payment of the price. This creates a natural risk for the seller, particularly in the case of deferred payment. To mitigate this risk, it is advisable to employ additional legal instruments to secure the buyer’s performance of their obligations. It is therefore advisable to use instruments ensuring effective enforcement of the measures:

• Declaration of voluntary submission to enforcement by the buyer (Article 777(1) of the Code of Civil Procedure)

This allows, once an enforcement clause has been issued, for enforcement proceedings to be initiated without a trial (e.g. regarding payment of the price or the surrender of property). However, it does not eliminate the risk of the debtor’s insolvency.

• Notarial escrow

The buyer pays the purchase price into a notarial deposit. The funds are held in a deposit account and paid to the seller upon fulfilment of the agreed conditions (e.g. signing the deed of transfer, submitting an application to the Land and Mortgage Register for the buyer’s ownership to be entered, submitting certificates). This solution effectively mitigates the risk of non-payment.

Summary:

Land sales to developers are among the most legally complex transactions in the property market. Conducting them correctly requires not only a thorough knowledge of civil and administrative law, but also a practical understanding of investment processes.

For the developer, it is crucial to ensure the feasibility of the planned project whilst minimising the risk of acquiring property that is unsuitable for investment. For the seller – to obtain a guarantee of payment of the price and to avoid a situation where the sale of the property is not finalised despite the costs incurred and the loss of the opportunity to sell to another party.

A carefully drafted agreement – preceded by a comprehensive review of the property’s legal and factual status – constitutes the fundamental instrument for protecting the interests of both parties. In practice, well-prepared documentation and appropriately selected safeguards not only minimise transactional risks but also enable the efficient and conflict-free execution of the investment, which, in the long term, translates into the stability and predictability of the entire development process.