In most cases, the buyer and seller will sign a preliminary purchase agreement to formalize the accepted offer and the conditions of the purchase. This document can then be presented to lenders to secure a mortgage, and otherwise will be the terms on which the purchase is completed.
Compromis de vente or promesse de vente?
There are two types of preliminary agreements that the parties can sign.
There are two substantial drawbacks to a compromis de vente:
- If the buyer chooses not to complete the purchase, he can be sued for specific performance. While ordinarily the seller will just take the good faith deposit and resell, the agent – who stands to lose their fee entirely – can and may sue to recover their commission.
- If the buyer ultimately decides to purchase through a company structure, or wants to add a co-purchaser, there is a risk that this substitution will be considered a second “sale” of the property subject to double the taxes.
Most importantly, the promesse de vente is drafted by a notaire, a legally trained authority on property transactions. Signing a compromis runs the risk of being poorly drafted and resulting in consequences the buyer (and/or seller) did not foresee. Our advice is always to sign a promesse if possible or, if not, to have a notaire review the compromis during the 7-day period of reflection, so that you can retract without consequences if need be.
Who is committed to what once the initial agreement is signed?
Whatever the preliminary agreement signed, it must contain the following terms:
- The agreed purchase price.
- Any conditions for completion of the sale, including the minimum acceptable terms for financing if the buyer will be seeking a mortgage. The party to whose benefit any conditional clause was written will be released from the contract if that condition is not fulfilled.
- The last possible date for signature of the final purchase agreement, or acte de vente.
The buyer has 10 days within which to withdraw from the purchase without any financial penalty. In contrast, the seller’s signature is binding and he cannot retract his commitment to sell.
If the buyer is seeking a loan in France, the preliminary contract will include a conditional clause for financing, including the intended loan amount, rate of interest, and payback term. If the buyer cannot obtain a loan on these terms, he is relieved of his purchase obligations and will recover his good faith deposit.
The buyer will need to put up a good faith guarantee of 10% of the purchase price – paid into the escrow account of a notaire or estate agent. Sometimes the seller will allow the buyer to put only 5% down, but he remains responsible for the 10% if he defaults on the purchase.