MyFondia VirtualLawyer
April 28, 2016

Do not slip up on technicalities – form requirements of real estate sales

A real estate sale is an agreement, which is governed by provisions of the Finnish Code of Real Estate. Although contractual freedom is the starting point in the Code of Real Estate, it has, however, been limited in certain respects. For example, the deed of sale and the preliminary agreement have to be completed according to rules specified in the Code of Real Estate, that is, in writing, signed by both parties and attested by a notary. Ignoring these mandatory form requirements results in the agreement being invalid. In fact, real estate sales are usually completed in the form prescribed by the Code of Real Estate, but the situation may not be quite as clear when it comes to preliminary agreements.

For example, fairly recently the Supreme Court ruled (2015:80) that an entitled ‘company premises’ was in fact a preliminary agreement of a real estate sale. Since the agreement had not been drawn up in accordance with the Code of Real Estate – in this case, a notary had not attested the sale – the Supreme Court saw it as invalid. The agreement between the municipality and the company concerned a building site and a building that the municipality had agreed to renovate for industrial use. The company had agreed in a separate deed of transfer to purchase the real estate and the municipality had agreed to transfer ownership once the price had been paid in full in 12 years time. A clause had been included in the agreement regarding the consequences of its cancellation, the content of which the two parties disagreed on following the cancellation of the agreement. The municipality had cancelled the agreement with the company due to payment defaults, after which the company demanded, in accordance with the terms of the agreement, that the municipality return the instalments they had paid. The municipality had contested the company’s interpretation of the terms of the agreement. During the court proceedings, the parties had not referred to the fact that the form requirements had not been met, nor had the District Court or the Court of Appeal taken this into consideration. In the lower courts, the source of dispute had instead been the content of specific terms of the agreement.

Unlike the decisions of the District Court and the Court of Appeal, the Supreme Court held that the form error should have been raised at the preliminary stage of the case in the District Court, even though the parties had not referred to it. The Supreme Court decided to return the case back to the District Court, as the basis for legal assessment of the matter had changed so substantially that, according the Supreme Court, the parties should be given an opportunity to appeal the case.

The above mentioned decision of the Supreme Court shows the importance of the form requirements of the Code of Real Estate in relation to preliminary agreements, and that an agreement can be found invalid even if the parties do not refer to the form error. Saving on notary costs is therefore not a sensible choice. And in order to know how to follow the Code of Real Estate’s from requirements, it is also important to be able to identify agreements that are actually describing a preliminary agreement of a real estate sale. A preliminary agreement may be titled differently or it may be part of a larger agreement package. Form therefore matters – at least in a real estate sale and in the preliminary agreement.