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Barter transactions – key issues


Barter transactions have become more popular recently in the undeveloped properties market. Below we present a short summary of key issues to be borne in mind when considering entering into barter transactions. 

Barter transactions being the response to increasing inflation

Until now, barter transactions were known mainly in the form of exchanges of services or regular goods. However, at a time of increasing inflation, both sellers and buyers of property development plots on the real estate market seek alternative methods of reconciling the purchase price. For this reason, barter transactions have become more attractive for the real estate market, as a form of transaction beneficial both for owners of properties and for investors. The sellers, being the owners of undeveloped properties, do not have to face the ‘problem’ of financial revenues, which, in order to avoid the effects of increasing inflation, need to be reinvested as soon as possible. On the other hand, the buyers do not need to invest vast amounts of money to purchase properties and are able to concentrate on construction issues, which undoubtfully improves the viability of investments. As there is no obligation to pay the full purchase price at the moment of the acquisition of the land, investors may be able to pursue construction projects using their own funds, without seeking external financing. 

Our practice shows that this kind of transaction is mainly used by PRS and residential developers.. For instance, we have recently advised on a transaction consisting of sale of land in return for ca. 70 units (which are to be constructed by the investor on the land in a PRS formula), as well as a barter deal in which part of the purchase price was reconciled in residential apartments.

Matters specific to barter transactions

In barter transactions on the real estate market, the price (in whole or in part) is not paid to the seller. It is agreed that it will be covered in kind by way of transfer to the seller of ownership title to separate units (residential, commercial) in the building which is to be constructed on the purchased property. Below we present several key issues that need to be addressed within the transaction documentation.

It is usual practice to provide within a preliminary sale agreement in a barter transaction for a condition precedent of conclusion of a preliminary sale agreement for the units which are to be sold to the seller as the ‘price’ for the property. However, due to the fact that at the moment of execution of both preliminary sale agreements the premises do not exist, the area or number of units to be given to the seller cannot be described precisely but have to be indicated within a range, for example of square meters of usable commercial area or usable residential area of the units. The parties also need to bear in mind any future amendments that may be required to the building plans to comply with the requirements of the public authority issuing the building permit. 

Sale agreements related to premises are usually concluded once the building housing the premises is approved for use (i.e. once a final occupancy permit has been issued), and when the premises constitute separate units. Nevertheless, creating separate units could prove impossible or significant obstacles may arise. This happens mostly in projects conducted as a PRS (Private Rented Sector), in areas of commercial designation. In such a case, the sellers, instead of obtaining title to separate units, must be entitled to receive payment of the price or to be provided with the respective part of the building. However, it may also transpire that a building is not delivered for use or is not constructed within the prescribed terms, thus it is not possible for the parties to perform the intended set off, i.e. set the price of the property off against separated units or part of the building. In order to secure the seller in such a case, the parties may agree that the buyer will provide the seller with a declaration of voluntary submission to enforcement related to payment of the price or a power of attorney from the buyer to the seller to execute a buy-back transaction if the seller fails to pursue the project. 

Notwithstanding the above, the seller may also secure its interest by registering its claim under the preliminary sale agreement concluded with respect to the premises in the land and mortgage register maintained for the property. On the other hand, if the barter deal is concluded with a condition precedent that the parties sign a preliminary sale agreement for the premises – the buyer should ensure that the seller will not withdraw from the agreement by declining to sign such an agreement. 

Typically, the parties also provide in the preliminary sale agreement related to the property for a condition precedent that the buyer obtains a final building permit. Fulfilment of this condition precedent is dependent on the buyer only and is beyond the seller’s control. For this reason, the parties agree certain milestones, for example timeframes for applying for or issuance of the building permit. Usually, if the building permit cannot be issued within the prescribed timeframe or the submitted plans have to be amended (which may prolong the proceedings), the buyer is given right of withdrawal from the preliminary sale agreement. In such a case, if any portion of the price was paid by the buyer at the signing in the form of a cash deposit, a solution satisfactory to the seller may be a right to demand payment of twice that deposit in the event the building permit is not obtained due to reasons attributable to the buyer. The buyer however should exercise caution so that the standard permit process issues (like suspending the proceedings in order to gather additional documents requested by the authorities) will not become a reason for the seller to withdraw from the agreement.

However, it may transpire that the buyer is not performing the construction works in line with the building permit or does not perform such works at all. In order to secure the seller’s interest, the parties may provide for a preliminary buy-back arrangement for the property in a final sale agreement related to the property, which may be further secured by a power of attorney granted by the buyer to the seller to execute the buy-back on the seller’s behalf. 

Notwithstanding the above, a ‘typical’ form of security is equally important for parties to barter transactions – ideally, such a transaction is secured by a mortgage over the sold property for the benefit of the seller. However, since real estate transactions are usually financed by third parties, i.e. banks of financing institutions, the parties to the barter need to address how to secure the third party’s interests. As a general rule, banks or financing institutions require a ‘clear’ mortgage over the property, meaning that the property can only be encumbered with a mortgage established in favor of the financing entity. Our practice has shown that financing entities are not satisfied by a mortgage with priority identical to existing mortgages, or even by a mortgage of highest priority. In effect, if the property is encumbered by any mortgage established in favor of the seller, that mortgage has to be released before the buyer acquires financing and thus before a mortgage is established in favor of the financing entity. As a consequence, the parties may be forced to establish other forms of security satisfactory for the seller, for example a suretyship established by a company affiliated to the buyer.