Defects of will in real estate transactions: guidance from the Supreme Court

The Supreme Court has published a Thematic Review on challenging transactions with residential premises. Despite the title, many of the document's conclusions apply directly to commercial property as well, where the seller is an individual.

What matters

A defect of will does not depend on the type of property. A sale of an office, a warehouse or retail premises may be challenged on the same grounds as a transaction with a flat: an inability to understand the meaning of one's actions, a mistake, or deceit.

The risks are created not only by the parties to the transaction, but also by intermediaries. If the buyer knew, or ought to have known, of dishonest acts by third parties, that may affect the outcome of the dispute.

If the transaction is held invalid, the property is returned to the seller, and the buyer receives a right to claim the money back. It is often here that the main problems begin.

The protective mechanisms in the Unified State Register of Real Estate (EGRN) work for any real estate. An application stating that registration is impossible without the owner's personal participation, or a report of fraud, can stop the registration of a transaction regardless of the purpose of the property.

The main conclusion is this: if commercial property is sold by an individual, what must be checked is not only the property but the seller as well, including the seller's condition, financial position, history of transactions and possible signs of bankruptcy.

If the seller of a commercial property is an individual, and all the more so if that seller is not an individual entrepreneur, vigilance should be at its highest. Such a seller is not bound by the requirements imposed on an entrepreneur, and it is easier for that seller to challenge the transaction for a defect of will.

The main problem, however, arises not when the transaction is held invalid, but at the stage when the consequences of invalidity are applied. Formally, the law proceeds from the need to restore the parties to their original position. In practice, a situation often arises in which the real estate has already been returned to the seller, while the buyer in fact receives only a right to claim the money.

Unfortunately, there are still no clear explanations from the Supreme Court as to how restitution should be arranged so that a party acting in good faith does not bear the risk that the counter-obligation will not be performed. As a result, the buyer may lose the real estate and, at the same time, face years of recovering money from a person who no longer has it. That is why, in transactions with commercial property, it is important to assess not only the property itself but also the seller's financial position, and the possible risks of a later challenge to the transaction, comments Sergei Pivovarchik, managing partner of Consul Group.

Follow Consul Group on Telegram.