Conditions precedent during the purchase of land, a precaution that is useless today?

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Home >Conditions precedent when buying land, a precaution that is now unnecessary?Olivier Duparc, associate notary 12 Notaries |28/05/2021 | Real estate operationsMy personalized newsletterYour request has been taken into account.Configure my newsletterAdd this/these theme(s) to my personalized newsletterReal estate operationsDeleteValidate

Created by the practice to secure the promoter during the purchase of the land base of the project, the insertion of the conditions precedent in the deed of purchase of the land is qualified, today, as an obsolete precaution by certain practitioners. Indeed, during the emergence of these contractual stipulations, the risk of cancellation of the building permit was real. But 25 years later, the successive reforms have only ceased to limit this cancellation. Therefore, could the conditions precedent disappear?

The promoter's job consists of controlling risks, juggling between those that are acceptable and those that are not. Before launching the construction of a building, the promoter must seek and find the land base of the future construction. In this area, faced with the scarcity of land, competition is fierce between developers. Sellers are perfectly aware of this competition, and of their strength in negotiations with prospective buyers. To crystallize discussions with your seller(s) as quickly as possible and avoid seeing the land pass into the hands of a colleague, it is therefore necessary to sign a promise of sale as soon as possible. Only, it is well known that notaries are slow, having on their side the constraint of checking the documentation provided, which is sometimes very incomplete, and, in view of it, of establishing a reassuring preliminary contract project.

Also, to stop the discussions and guide the drafting of the acts, the burning question will therefore be to know what the conditions of this preliminary contract will be. These conditions must take into account the urgency of dealing with the seller, the financial requirements of the promoter, who buys the land at a price according to the project he plans to carry out to ensure the financial balance of the operation, the subsequent preparation of the application file for administrative authorizations with a view to obtaining them, technical audits.

The letter of offer, the first step in the contracting process

Once the promoter has reached an agreement with his seller, a letter of offer will be signed and accepted to specify the conditions of acquisition, which will appear in the promise of sale.

This letter of offer is an invitation to contract the preliminary contract, even if many owners of real estate believe that they are bound hand and foot when they have accepted or drawn up an offer to sell and that it has been explicitly accepted. by the promoter It is only at the stage of the regularization of the preliminary contract that the offer will be deemed perfect, the seller cannot go back on his decision unless he engages his responsibility.

Synallagmatic or unilateral promise, a choice to be made

The accepted offer of sale will determine the nature of the preliminary contract to be regularized. It can take the form of a synallagmatic promise, commonly called sales agreement or a unilateral promise, designated by the term sales promise in common language.

The synallagmatic promise of sale is the contract by which the owner of a good (the seller) undertakes to sell it at a determined price to a person (the buyer) who himself undertakes to buy it from him, subject to the fulfillment of conditions precedent. Both parties are bound by reciprocal obligations.

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The unilateral promise of sale is the contract according to which the owner of an asset (the promisor) undertakes to sell it at a determined price to a person (the beneficiary) who has an option to buy or not to buy within a period agreed in the promise of sale. During this option period, the beneficiary of the promise to sell remains free to decide whether or not to conclude the purchase promised to him by the seller, again subject to the fulfillment of the conditions precedent.

Conditions suspensives lors de l'achat du terrain, une précaution aujourd'hui inutile ?

With a view to controlling risks, the promoter prefers to choose the unilateral promise to sell. He is thus not obliged to acquire the land in the event of a market downturn. In this case, it suffices for him not to exercise the option offered to him by the promisor. However, careful and rigorous attention must be paid to the conditions precedent contained in the promise of sale. Indeed, even if the promise of sale leaves the promoter free to exercise his option or not, the fact remains that the counterpart of the promisor's commitment is the payment by the beneficiary of an indemnity of fixed asset, the amount of which is to be agreed upon in the letter of offer. This compensation is usually around 5 to 10%, depending on what is agreed between the parties. If the promoter, beneficiary of the promise of sale, does not exercise the option offered by his promisor, while all the conditions precedent have also been fulfilled, the immobilisation compensation issued during the regularization of the promise of sale; in cash, in the form of a bank guarantee or in the form of an independent first demand bank guarantee (GAPD); will be given to the promisor. Indeed, the immobilisation indemnity is paid by the beneficiary to compensate the promisor for the damage that the non-completion of the sale could cause him to suffer, in particular the obligation in which he would find himself to seek a new buyer.

Also, the challenge of this preliminary contract is that of the suspensive conditions in connection with the duration of the intermediate period, that is to say the duration of the promise. This duration is dictated by the time required to fulfill the conditions precedent agreed to in the promise.

The conditions precedent contained in the promoter's promises of sale

A condition precedent is a condition placed in the performance of an obligation provided for by a contractual commitment. In other words, the contract binding the parties, here the promise of sale, only becomes definitive upon the fulfillment of this condition. The law of obligations allows contracting parties to condition their commitments on the accomplishment of an event, future and uncertain, external to the parties.

Thus, the person for whose benefit the conditions precedent are drafted can disengage from the promise of sale. This faculty weakens the possibility of concluding a contract for its co-contracting party. A deadline for fulfilling these conditions precedent is systematically provided for in order to manage the outcome of the commitment.

Also, two options are then possible. The condition is met: the obligation being confirmed, the contract can be executed. On the other hand, if the condition is not fulfilled, the obligation is deemed never to have existed and the contract lapses.

These suspensive conditions are found systematically during a real estate transaction. The number and nature of these stipulations will change depending on the objectives sought and the agreed price.

It is classic to find the following conditions when purchasing land by a promoter: the non-exercise by the municipality of its right of pre-emption, the absence of servitude, the justification of an origin of ownership, the absence of mortgage registration above the sale price, absence of pollution or geological constraints, pre-marketing of at least 40 to 50% of the planned construction program (this is in fact a condition for obtaining a credit disguised real estate, necessary to obtain the financial guarantee of completion: GFA) as well as conditions relating to obtaining the building permit according to the developer's project and the definitive nature of the permit.

For his part, the seller has an interest in limiting the number of conditions precedent appearing in the promise of sale in order to secure the sale of his property as well as possible and as quickly as possible. These are therefore discussions that are initiated as soon as the letter of offer mentioned above is drawn up. This negotiation has an impact on the price because the reduction of the conditions precedent mechanically increases the promoter's risk-taking and, consequently, leads to a price reduction.

Usually, the sale price provided for in the promise accompanied by the conditions precedent linked to obtaining the definitive administrative authorizations is 30% higher than that fixed in the promise to sell goods sold in the state with the conditions. classic suspensive conditions of a sale of this type, namely the purge of the urban right of first refusal, the absence of easements, the justification of an origin of ownership and the absence of superior mortgage registration(s) ) at the selling price. This difference is explained by the certainty that the promoter has. Once the administrative authorizations have become final, he knows that the project as he imagined it will take place and thus ensures its profitability.

Emergence of a new practice: the memorandum of understanding between a land holder and a promoter

It is therefore important to understand that the letter of offer is essential since it is at the initiative of the contractual process. Its negotiation is due to these circumstances which are not legal; great care will be taken.

To date, we are observing the development of operations envisaged by the promoter on the market, taking place in two stages. In addition to the landowner and the promoter, this arrangement involves a land holder. The imperative was to find a base land at the best price, you have to block the land. However, instead of the developer agreeing to acquire the land in a promise of sale, he appoints a land holder who carries out this act in his place. This promise contains minimal classic conditions precedent. Thus, the price negotiated with the seller will therefore be a selling price corresponding to the market price. The seller will not benefit from a maximum sale price if the sale takes place when the promoter has obtained his rights to build, but his land is immobilized for a shorter period.

As soon as the building permit has become definitive, the promoter acquires the land kept in the hands of the land holder at the price of a building plot and the building rights thus obtained.

For this operation, a memorandum of understanding between the promoter and its land holder is signed. This contract defines the respective conditions of intervention of the two parties and the legal nature of their reciprocal relations.

In this scheme, the seller is guaranteed to sell his building quickly at the market price and the land holder is guaranteed to resell with a gross margin corresponding to the resale price to the developer, namely the price of land and building rights. This arrangement makes it possible to secure the availability of the land for the time required to obtain the building permit and for the time limits for appeal to expire, without mobilizing its cash in order to allow itself to develop other competing operations.

Development of insurance offers

This device works in a new context marked by two parallel phenomena which tend to develop. These could be such as to reduce the share of transactions concluded under the condition precedent of obtaining planning permission free of the time limit for appeal by third parties, the prefectoral referral and withdrawal.

The first phenomenon is the development on the market of insurance offers that can be taken out by the promoter. He requests from an insurance company the guarantee of the damages he would suffer in the event of cancellation of the town planning authorization which he obtained if he builds the building despite the introduction of an appeal. .

The second phenomenon seems to have a more important scope: it is the current of the regularization of planning permissions (see in this respect Regularization of planning permissions: it is better not to suffer in the present file). Indeed, the Council of State has considerably extended the scope of the regularization of building permits. Developers can therefore validly ask themselves the following question: given the largely regularizable nature of town planning permits, is it profitable today to grant sellers a price bonus of around 30% of the intrinsic value of the asset sold? If the condition precedent relating to obtaining and serving the withdrawal period is maintained, at what percentage should it be valued?

In addition, the promoters are wondering about the following equation: insofar as an ever-increasing proportion of defects of legality can be regularized, which the applicants will not be unaware of, is it not more profitable to disinterest the neighbour's applicant than to increase the cost of land control by "paying" a condition precedent relating to the completion of the third-party appeal period? Isn't it faster and therefore more profitable to negotiate with the requesting neighbor than to pursue a procedure in the courts?

A transitional period opened by the Council of State?

In the state of administrative case law on regularization, and its “incomplete” nature at this stage, it is still early to abandon the conditions precedent of the purge of the third party appeal period. This transitional period sees sellers increasingly reluctant to the introduction of planning permission conditions with their final character, without developers still being able to buy without this precaution by financially securing the 'operation. This transitional period seems, on the other hand, to be favorable to the building land carrying activity. The players in this sector are making an interesting bet: selling the promoter "security", reserving the capital gain on resale of around 30%, while benefiting either from insurance solutions whose financial cost remains limited , or the favorable development of the case law of the Council of State by “betting” on the regularizable nature of the planning authorization obtained by the promoter. However, the risk associated with obtaining planning permission does not seem to me to be covered, either by the existing offers on the insurance market, or by the development of administrative case law (see in this regard Refusals and withdrawals planning permissions: the gaping hole in the racket of regularization in this case). Because of its eminently political nature, which largely escapes strict legality, the risk attached to a refusal of authorization, or to its withdrawal, seems to me, for the time being, still to have to be covered by a condition precedent to the prof it of the promoter, even if today insurance companies already offer to cover this risk as well.

Distinction between the definitive and enforceable nature of the building permit

In practice, it is common to hear that until the building permit is final, work will not begin. However, the permit is enforceable as soon as it is obtained from the public authority. The developer can therefore choose to start construction immediately. Potential subsequent appeals do not suspend this execution.

But in practice, for reasons including financial, manufacturers want to wait until the permit has become final. It is final when all the time limits for appeal have been served. In other words when the sustainability of the permit in the legal order is no longer questionable.