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Real Estate Purchase Agreement

When purchasing, exchanging, or selling property, we typically turn to a lawyer to draft the contract. However, it is not a disadvantage if, in addition to the professional, we ourselves are aware of the content and formal requirements of the purchase agreement.

What is a Real Estate Purchase Agreement?

The real estate purchase agreement is one of the simplest, most common types of contracts that has evolved over millennia to facilitate the transfer of ownership.

It is a special contract in which the seller is obliged to transfer the ownership of the property in question to the buyer and place the property in the buyer’s possession, while the buyer is obliged to pay the purchase price to the seller and take possession of the property.

Validity of the Contract

For real estate purchases, it is mandatory to put the contract in writing!

The contract becomes valid when it is put in writing, with the endorsement of a lawyer. Another essential element is preparing and submitting the application for entry into the land registry. If the purchase agreement is valid but cannot be registered for some reason, court proceedings can be initiated to request the registration.

Mandatory Elements of a Real Estate Purchase Agreement

Minimum Content Elements of a Real Estate Purchase Agreement

The minimum content elements help clearly identify the transaction related to the property. Accordingly, it is necessary and minimally expected to record the seller and buyer, the subject of the sale, the intention to transfer the property, and the purchase price in the contract.

Seller and Buyer – Anyone who is legally competent according to civil law and can own property can enter into a purchase agreement. The contract must include personal data such as birth name, mother’s name, place and date of birth, identity card number, personal number, tax identification number, nationality, and address.

For companies, the name, registered office, company registration number, statistical identification number, and the representative acting on behalf of the company must be specified.

Subject of the Contract – the data of the property that can be taken into possession. Recently, it has been acceptable for the precise details of the property not to be indicated in the purchase agreement. In such cases, the seller only declares that “I am selling my apartment in Budapest.” This is a viable option if the seller owns only one property in Budapest. At a minimum, the town and the plot number must be included in the contract. Nevertheless, it is still recommended to include as many precise details as possible about the property being sold in the agreement.

Intention to Transfer – the contract must reveal the parties’ expressed will to transfer ownership.

Purchase Price – must, of course, be indicated.

Additional Mandatory Elements

For a real estate purchase, a land register extract not older than 30 days must be obtained. This is requested from the Land Registry by the lawyer handling the transfer. The land register shows whether there are any current encumbrances, such as mortgages, alienation and encumbrance restrictions, or other liens on the property. These must also be included in the purchase agreement if such encumbrances exist.

In addition to the minimum content elements, the contract must also include the following:

  • The legal basis for the ownership change
  • The energy certificate number
  • The contracting parties’ declaration regarding their citizenship
  • Details of the transfer of possession and the seller’s unconditional, final, and irrevocable consent for their ownership to be deleted and the buyer’s ownership to be registered in the land registry
  • Any pre-emption rights, repurchase rights, purchase options, or sale options that may be established by contract, as regulated in the Civil Code
  • The bank’s lending terms in the case of a bank loan
  • If the purchase price is not paid in one sum, the contract must include any application for deferred registration or retention of title
  • The terms of any down payment or advance payment if applicable.

Mandatory Formal Elements

A real estate purchase agreement must include a few, but very important, formal elements. These include:

  • The mandatory lawyer’s endorsement
  • In the case of an agent acting under power of attorney, the power of attorney must be certified by a lawyer or notary public
  • The contracting parties must sign every page of the contract
  • The place and date of the contract must be indicated.

Costs

Seller – The costs associated with transferring the property and rectifying the status recorded in the land register are borne by the seller according to the Civil Code. This also includes the cost of preparing the energy certificate, as well as the cost of the lawyer handling the transaction.

The personal income tax generated from the income derived from the sale of the property is also paid by the seller.

Buyer – The buyer pays the costs associated with taking possession of the property and registering the change of ownership in the land register. These include requesting the land register extract, paying the registration fee, and paying the property acquisition tax. After the transfer, the utilities must be transferred into the buyer’s name.

These costs can significantly influence the real estate transaction and the price indicated in the contract.

In certain cases, both the seller and the buyer may be eligible for tax or duty exemptions.

Tax and Duty Exemptions

Duty – a sum of money the client must pay to the state budget after a property transaction. Duties are regulated by Act XCIII of 1990 on Duties.

In general, the buyer is required to pay a property transfer tax. However, there are cases that may entitle the buyer to a tax exemption, such as:

  • The amount of non-refundable state housing support (to be deducted from the market value of the property)
  • In the case of property exchange, the duty is based on the exchanged properties. This is a replacement purchase-related duty discount. In the case of multiple property exchanges, the duty payer may consider the most favorable duty base
  • When an individual sells their other property within three years before or one year after the purchase
  • The sale of a property with a higher market value within one year before or after purchasing a property
  • Individuals under the age of 35, purchasing their first property, are entitled to a discount of up to 50% of the duty if the market value of the acquired property does not exceed HUF 15 million
  • Individuals purchasing their first property may also apply for installment payment relief
  • Property transfer between direct relatives (ascendants and descendants) is exempt from duty
  • Property transfer between spouses and the transfer of property as a result of the dissolution of marital community property is exempt from duty
  • The purchase of a plot for building a house is exempt from duty if the buyer commits to building a house that will cover at least 10% of the plot’s maximum allowable buildable area within four years
  • The acquisition of newly built residential properties by entrepreneurs for sale purposes, with a market value not exceeding HUF 15 million.

IMPORTANT!

Tax exemption and discounts must be applied for, meaning the authority will not automatically grant tax exemptions without an application. The market value as of the date of acquisition is the basis for the duty. The discount is granted based on the designation of the property in the land register.

Deferred Registration and Retention of Title

There are cases where the purchase price of the property is not paid in one lump sum immediately. In such cases, the lawyer endorsing the contract records this in the contract.

Deferred Registration

The current Land Registry Act of 1997 governs deferred registration. In such cases, the seller gives their unconditional, final, and irrevocable consent in the purchase agreement for the buyer’s ownership to be registered, subject to the buyer’s application for registration being deferred by the land registry.

The transaction is recorded as a marginal note in the property’s land register until the seller declares that the full purchase price has been paid.

The land registry will hold the application in suspense until the registration permit is submitted or for a maximum of six months. A one-time administrative service fee is required for the registration application.

Typically, the registration permit is placed in escrow with the lawyer, serving as security for the buyer.

Retention of Title

This relates to the retention of title. According to the Civil Code, the seller may retain ownership until the full purchase price is paid. The seller must register this right in the land register, specifying the buyer.

Retention of title is recorded as an encumbrance on the property’s land register. In addition, there is no time limit for retention of title. It is typically chosen by the parties when payment of the purchase price exceeds six months. Once the full purchase price is paid, this encumbrance is removed from the land register with the seller’s consent.

Securing the Contract: Earnest Money, Penalty, and Forfeiture

There are ways to strengthen the commitment to fulfilling the contract. These are not mandatory elements of a purchase agreement, but many choose to include them. They can take the form of earnest money, penalties, or forfeiture.

Earnest Money

The buyer pays earnest money to the seller before or at the time of signing the real estate purchase agreement. The typical amount is 10%. The parties may agree on a higher amount, but it is worth considering that a court may reduce an excessively high sum.

If the contract fails due to neither or both parties, the earnest money is returned. If one party is responsible for the failure, the responsible party forfeits the earnest money, while the other party must return the earnest money in double.

Penalty

When a penalty is included, the contracting party agrees to pay a specified sum in the event of a particular breach of contract. The penalty can be tied to any breach of contract, such as late payment of the purchase price or delayed handover of the property.

The penalty becomes due only upon breach of contract. According to the Civil Code, the provisions on late payment interest apply to penalties.

In both the case of earnest money and penalties, the party entitled may claim regardless of whether the breach caused any damage.

Forfeiture Clause

When forfeiture is included in the contract, the party responsible for the breach loses a right that they would otherwise have been entitled to under the contract.

The parties must clearly define in the purchase agreement the specific circumstances under which forfeiture will apply.

Summary of the Requirements for a Real Estate Purchase Agreement

In summary, the following should be included in the real estate purchase agreement:

  • The personal details of the seller and buyer
  • The property details, as precise as possible, even attaching a floor plan if available
  • Any outstanding debts or liabilities
  • The method and deadline for payment
  • Provisions for deferred registration or retention of title
  • Options for strengthening the contract (earnest money, penalties, forfeiture).

And of course, you will need a lawyer to guide you through the contractual process of the real estate transaction. The Kenway team offers legal assistance in drafting real estate purchase agreements.