Before purchasing a real property it is obvious that the purchaser examines whether the seller is the registered owner of the property and whether the title deed lists any encumbrances relating to the property. If, however, the investigation stops at this point and does not cover the transaction on the basis of which the seller acquired the property, the purchaser may face some unpleasant surprises.
According to the principles of the civil law, ownership rights can only be acquired from the owner. This principle applies to properties as well: the purchaser can only acquire ownership if the seller was the owner of the property. As the land registry authentically certifies who the owner of the property is, it seems easy to check the owner of a real property.
The situation is, however, not as simple as that. It might be the case, for instance, that there was a legal error around the transaction in which the registered owner acquired the property. For example, it may have happened that the parties did not take into consideration the statutory pre-emption right of a municipality. In such case a lawsuit may be initiated against the owner of the property, to cancel its registered ownership. The lawsuit may be initiated against the purchaser at any time, with no deadlines. If this lawsuit determines that the acquisition of ownership was invalid, then the purchaser’s ownership will be de-registered from the land registry.
Acting in good or bad faith?
An obvious question arises: does it affect the new purchaser of a property if its seller is the registered owner upon the acquisition but, later, the preceeding acquisition of the property by the seller proves to be invalid or defective in any other manner? Unfortunately, the answer is yes.
In case the contract on the basis of which the seller acquired the ownership of the property is legally defective then a lawsuit can also be initiated to cancel the ownership of the purchaser who acquired the property from the seller. Regarding the preconditions of such lawsuit the law differentiates whether the purchaser acted in good faith or in bad faith: whether, upon the acquisition the purchaser knew or should have known that the previous acquisition of its seller was defective. If the purchaser acted in good faith and acquired the property for value then the lawsuit to cancel the ownership of the purchaser can only be initiated within three years from the date of the registration of the acquisition of the property by the seller. In this case, the risk of the purchaser is limited in time.
The situation is different if the purchaser acted in bad faith at the time of the acquisition, i.e. it knew or should have known that the previous acquisition of its seller was invalid. In this case, the lawsuit to cancel the ownership of the purchaser can be initiated without time limits. This rule is somewhat justified: if the purchaser already knew at the time of its acquisition that its seller’s ownership right was defective then it is reasonable that the purchaser is not exempted from the related adverse consequences.
The effects of a right of rescission
Similar problems may arise if the agreement on the basis of which the seller previously acquired the ownership of the property ensured a right of rescission to the previous seller. Is the purchaser in risk if a right of rescission has been reserved against its seller? Does, upon the exercise of such right, the purchaser lose its ownership of the property?
According to the prevailing judicial practice if the right of rescission is exercised following the date the purchaser duly acquired the property then such right of the previous owner will not affect the ownership right of the purchaser. The purchaser is, however, in risk as long as its ownership is not registered in the land registry. Even if the sale and purchase agreement has been executed and the purchaser has paid the purchase price, the former seller will still be able to exercise its right of rescission until the new purchaser is recorded in the land registry. Accordingly, should this happen, the new purchaser cannot acquire the property.
How to proceed?
As noted above, even if the seller is registered in the land registry as the owner of the property, the purchaser could still face various legal risks – depending on how and under what conditions the seller acquired the ownership of the property. The legal defects in the acquisition of the property by the seller or a right of rescission can prevent the purchaser from acquiring the property.
As a consequence, during the course of a legal due diligence it is essential to examine the circumstances and documents of the transaction by which the seller acquired the property in the past. This is particularly important if less than three years have passed since the acquisition of the property by the seller. It is also justified that the purchaser requests warranties in the course of the transaction regarding the lawfulness and completeness of the acquisition of the property by the seller, associated with some form of financial guarantees.