A plot owner grants a developer the right to build on his land and receives finished apartments, shops or garages in the future building in return. The deal can be attractive, but the risk lies with the owner: for years he has given up his land while the units do not yet exist. We explain how to structure the contract and what to do if the developer stops.
In brief
- An owner may grant another person the right to build a building on his land, which that person will own (Art. 63(1) of the Property Act); the contract is made by notarial deed (Art. 18 of the Obligations and Contracts Act).
- A building right lapses in favour of the landowner if it is not exercised for 5 years (Art. 67 of the Property Act).
- A contract creating real rights in real property can be terminated only through the courts, and the right to terminate lapses after five years (Art. 87(3) and (5) of the Obligations and Contracts Act).
- Termination does not affect rights acquired by third parties before the statement of claim is registered, so the claim should be filed and registered quickly (Art. 88(2) of the Obligations and Contracts Act).
In a "building right for compensation" deal, the landowner does not sell the plot; he grants the developer the right to build a building on it. The developer becomes the owner of what he builds, and the landowner receives certain units in it as compensation and usually keeps a corresponding share of the land. The arrangement lets the owner share in the value of the new building without investing money, but exposes him to the risk that the developer will not finish.
What the landowner grants
An owner may grant another person the right to build a building on his land, which that person will own (Art. 63(1) of the Property Act). A building right may also cover underground construction, and a right to add storeys or an extension is granted for an existing building (Art. 66(3) and (4)). The owner of the building may use the land only as far as needed to use the building, unless the deed provides otherwise (Art. 64). Contracts creating real rights in real property are made by notarial deed (Art. 18 of the Obligations and Contracts Act).
A building right lapses in favour of the landowner if it is not exercised for 5 years (Art. 67 of the Property Act). This protects the owner if the developer never starts, but does not help if he starts and then stops.
What the contract should contain
Most disputes arise from an unclear contract. The notarial deed and the accompanying contract should cover at least:
- a precise description of the units the owner receives: floor, layout, area, shares in the common parts and in the land, with drawings or architectural plans attached;
- the level of completion on handover and a specification of materials, not general terms such as "turnkey";
- staged deadlines: design approval and building permit, completion of the structure, commissioning, handover of the units;
- penalties for each stage and each day of delay, without being clearly excessive;
- security for performance (see below);
- who pays for design, fees, utility connections and taxes;
- what happens if the design is not approved or the permit not issued within a set time;
- a ban on the developer transferring the building right or the owner's units to third parties.
How the landowner can secure himself
The owner gives value, his land, at the outset and receives the compensation years later. The contract must balance that risk. The usual tools are:
- a bank guarantee or insurance for performance, valid until the units are handed over;
- a contractual mortgage over other property of the developer;
- granting the building right in stages, or conditions under which the owner keeps rights until a certain stage;
- penalties that make delay expensive for the developer.
The law gives the transferor of real property a statutory mortgage over the transferred property for his claims under the contract, registered at his request (Art. 168(1)(1) and (2) of the Obligations and Contracts Act). Whether and how it can secure the claim for compensation in a building right deal must be assessed for the specific transaction, so it should not be relied on alone.
Checking the developer before signing
- The developer's file in the Commercial Register: owners, managers, capital, annual accounts, registered pledges.
- Completed and ongoing projects and how they ended.
- Debts to the Revenue Agency and pending court and enforcement cases.
- The project's financing: own funds, bank loan, off-plan sales.
- The planning status of the plot: what and how much may be built.
When the developer delays or stops
On delay, the owner claims the penalties and damages under the contract. If the delay is serious, he may terminate the contract: as a general rule, the creditor gives the debtor a suitable period to perform with a written warning that the contract will be treated as terminated when it expires (Art. 87(1) of the Obligations and Contracts Act). Contracts creating real rights in real property, however, can be terminated only through the courts (Art. 87(3)). If the defendant offers to perform during the case, the court may give him time to do so; termination is not allowed where the unperformed part is insignificant, and the right to terminate lapses after five years (Art. 87(3) to (5)).
Termination has retroactive effect, and the creditor is also entitled to damages (Art. 88(1)). It does not, however, affect rights acquired by third parties before the statement of claim is registered (Art. 88(2)). So buyers of units in the building who acquired them before the claim was registered keep their rights. In a serious delay, the claim should therefore be filed and registered quickly, and the contract should restrict the developer's sales until a certain stage.
Common mistakes
- the owner's units are described only by number and area, without plans or specification;
- no deadline for the building permit or for starting construction;
- no security other than a penalty that an insolvent developer cannot pay;
- the owner sends a notice of termination instead of suing, and loses time;
- the termination claim is not registered while the developer is selling units.
Where a lawyer changes the outcome
- before signing: checking the developer, the project and the financing;
- in the contract: the compensation, stage deadlines, penalties and description of the units;
- in security: protecting the owner if the builder is late or stops;
- on default: termination of the contract and damages.
Petkova & Minkov Law Firm acts for landowners and developers in building right transactions and in disputes over them. Our team includes lawyers experienced in construction contracts. We work in Bulgarian, English, Russian and German.
How we can help
We act for landowners in deals with developers and builders, from checking the developer to receiving the finished units.
- We check the developer, the project, the permits and the financing
- We negotiate the compensation, staged deadlines, penalties and security
- We draft the notarial deed and the contract with a detailed description of the units
- We monitor performance and bring claims for delay
- We handle court cases for termination of the contract and for damages