Buying a property in Italy: The "Contratto Preliminare"
Once the buyer of a property located in Italy agrees with the seller the purchase price and other key terms, such as the date when the handover of the property will happen, the parties enter into a "contratto preliminare", literally a "preliminary contract".
The preliminary contract has the effect of "securing" the property for the prospective buyer and it often entails a substantial down payment by the latter, usually 10% of the purchase price or more.
The contratto preliminare is an agreement to enter at future date into the deed whereby title in the property is transferred from the seller to the buyer. The deed is called "contratto definitivo", literally the "final" or "definitive contract" and it needs to be executed in front of an Italian notary public.
If the buyer refuses to enter into the contratto definitivo, the seller keeps the deposit. If the seller refuses to enter into the contratto definitivo, it has to pay to the buyer double the deposit.
The contratto preliminare deals with basic issues such as the seller and buyer's authority and capacity to enter into the final contract, as well as key terms of such contract, such as information that identifies the property (type of building, number of rooms, land registry data, floor plans, energy efficiency certificate etc). In the absence of such basic elements the contratto preliminare will not be valid.
The more detail the contratto preliminare contains, the less doubts there may be when entering into the final contract. The buyer must therefore pay special attention to what is written in it and it is advisable that an Italian lawyer who acts for thee buyer either drafts the preliminary contract or reviews and approves the proposal that is put forward either by the seller or by the estate agent.
The contratto preliminare often includes "ancillary" provisions which can be of critical importance.
The most common of these clauses are:
- The date by which the final contract must be entered into. This date is agreed by the parties taking into account the time that is required for the buyer to take out the mortgage or, in the case of the sale of properties that have not been built, the time when the property will be finished and ready for sale. The term so agreed may be "semplice", literally "simple" or "essenziale", literally "of the essence". For the reasons that we explain in more detail below, it is very important for the buyer that the term is specified to be of the essence.
- The deposit that is paid by the buyer upon signing the contratto preliminare. The seller usually demands that the buyer pays him a sum of money upon entering into the contratto preliminare. The amount requested by the seller is usually between 10 and 20% of the purchase price. Depending on what the parties agree prior to entering into the contratto preliminare, the down payment made by the buyer can either be characterised as advance on the payment of the purchase price, in which case it is referred to as "acconto". Alternatively, the parties can specify that the down payment constitutes a "caparra confirmatoria" in accordance with Article 1385 of the Italian civil code. This is, literally a "confirmatory deposit", which entitles the seller as the recipient of the deposit to withhold such amount of money should the final contract not be entered into due to circumstances that are attributable to the buyer. On the other hand, if the final contract is not entered into due to circumstances that are attributable to the seller, the buyer is entitled to be paid by the seller double the amount of the deposit that it paid to the seller. If the parties proceed regularly with the final contract, the deposit is either returned to the buyer at the signing of that contract or, more frequently, the amount of the caparra confirmatoria is applied towards the purchase price.
- The penalty that is owed by one party to the other in case the former defaults under the contratto preliminare. This is effectively a provision whereby the parties agree liquidated damages, in accordance with Article 1382 of the Italian Civil Code. The parties can agree to pay the other party an amount of money in advance, on account of such penalty. This is referred to as "caparra penitenziale". The penalty is often determined by reference to the days that elapse after the date when the final contract ought to have been entered into. The penalty ought to be fair or else the court will adjust downwards.
Registration of the contratto preliminare
A very important form of protection for the prospective buyer is the registration of the contratto preliminare and its "iscrizione" (literally inscription) in the the "Registro Immobiliare", broadly the Italian equivalent of the the Land Registry. The registration is expressly contemplated by Art. 2645-bis of the Italian civil code.
In order for the preliminary contract to be inscripted, it must either be drawn up by notary public or it can be signed under hand by the parties but it then needs to be authenticated by a notary public.
Once the contratto preliminare has been inscripted any other subsequent registration of the title (possibly arising as a result of the seller having attempted to sell the property to someone else) or the registration of a restriction on the property (by way of mortgage or enforcement action etc) will not have any effect against the prospective buyer who inscripted the contratto preliminare. Eeffectively the inscription amounts to what in the UK would be a restriction in the Land Registry.
However, it is important to note that the effect of the registration lasts only one year from the agreed original deadline for the signing of the final contract and in any case, within three years from the inscription. If the expected deadline is more than one year, three years from the time of the inscription
Consequences of default
In the absence of a caparra confirmatoria or a caparra penitenziale, upon a default under the contratto preliminare the following remedies are available to the innocent party.
The innocent party can commence a legal action aimed at obtaining the specific performance (esecuzione in forma specifica) of the contract pursuant to Article 2932 of the Italian civil code. Such action results in the court handing down a judgement that has the same legal effect as the final contract was supposed to be entered into, had one of the parties not defaulted under the preliminary contract. In order to obtain such judgement, the innocent party must be seen by the court tendering to the defaulting party its part of the bargain. For example, the buyer must tender the purchase price. The actual payment of the purchase price will only take place once the judgement is final, i.e. it cannot be appealed. That is also the time when the passing of the title in the property will be registered in the Italian Land Registry. In addition to the forced transfer, damages can be sought by the innocent party. It is worth noting that the claim form for this type of action can be registered in the Land Registry. This has the same effect of the registration of the contratto preliminare. Hence it gives the buyer some peace of mind that whilst the action is pending the seller cannot dispose of the property or permit the creation of security interests on it.
Alternatively, pursuant to Article 1453 of the Italian civil code the innocent party can seek a judgement that declares the contratto preliminare terminated and that condemns the defaulting party to return what the defaulting party was given further to the preliminary contract (this could be the advance of the purchase price given by the buyer to the seller, or the access to / use of the property granted by the seller to the buyer). The innocent party can also seek the payment of damages. Importantly, this remedy can only be pursued if the deadline for the stipulation of the contract is "of the essence". If the term was just a "simple" term, the preliminary contract remains in place and, although the party that did not abide by it is in default, such default does not entitle the other party to obtain the termination of the contract.
Very importantly, Italian courts have consistently decided that, in order for a term to be considered of the essence, it is not sufficient that the parties make formal statements to that effect in the contratto preliminare. What is required is that the contratto preliminare makes it clear why a party needs the final contract to be entered by the deadline that is stipulated in the contract. So this is an area where careful drafting by an Italian lawyer who is well versed in property law is absolutely crucial.
If the buyer paid the caparra confirmatoria, then if the seller refused to enter into the final contract by the agreed date (and that date was specified to be "of the essence") then the buyer can terminate the contract and seek the payment of double the amount of the deposit only. It cannot seek damages also. Likewise, if the buyer fails to enter into the final contract by the agreed date the seller can retain the deposit but cannot seek damages also.
The contratto preliminare must be registered with the Inland Revenue Service. The parties or the real estate agent in charge of the sale are required to do this.
Registration must be made within 20 days from the execution of the contratto preliminare, or 30 days where the contract is drawn up with the intervention of a notary public.
If there is no payment in advance of the purchase price a registration fee of ?200 plus ?16 of stamp duty for each page of the contract must be paid on registration of the preliminary contract. Alternatively, if there is a payment in advance of the purchase price the stamp duty equal 3% of such payment with a minimum payment of ?200 (plus ?16 per page stamp duty) unless the transaction is subject to VAT in which case only the VAT is applied. If money is paid on account of the caparra confirmatoria the registration fee is 0.5% of the amount so paid.
The 3% of the down payment in advance or the 0.5% of the deposit will be deducted from the taxes that are owed by the buyer upon the execution of the final contract.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.