Purchase of a property to be built and buyer protection: the specifics of Decree 14 of 2019

A useful guide on the Italian legislation on the purchase of a property to be built and the most recent changes introduced to protect the buyer.

The purchase of a property to be built represents an important and often complex decision, as it implies an economic commitment for a property not yet built. To protect those who are about to take this step and to ensure greater transparency in real estate transactions, the Italian legislature has progressively introduced specific rules, with significant updates in 2019.

LEGISLATIVE DECREE NO. 122 OF 2005

The first important legislative intervention on the protection of purchasers of real estate for construction is represented by Legislative Decree No. 122 of 20 June 2005, known as the Law on the Purchase of Real Estate for Construction. This rule applies when the seller is a builder, i.e. an entrepreneur (in individual or corporate form) or a building co-op, and the purchaser is an individual (also a member of a building co-op). The aim pursued by the legislator is to protect purchasers from the risks associated with any bankruptcy of the builder by introducing specific obligations for the latter. In particular:

• surety bond obligation.
  The builder must issue a surety in favour of the buyer equal to the sums paid or still to be paid before the final transfer of the property. This instrument guarantees the repayment of the money in the event of the builder’s financial crisis.
  
• Ten-year insurance policy.
  The builder is obliged to take out a ten-year insurance policy (so-called ten-year posthumous) guaranteeing compensation for material and direct damage to the property, resulting from total or partial ruin or serious construction defects (obligation triggered when the final deed of sale of the property is signed)definitive deed of sale of the property).
  
• Prohibition of unfair terms.
  Contractual clauses that may disproportionately alter the relationship between the builder and the buyer are prohibited.
  
• Protection in cases of bankruptcy.
  The buyer has a right of first refusal to be satisfied in asset distributions.
  

In spite of the importance of these provisions, the practical application of the legislation has revealed some critical issues over the years, especially about the effectiveness of the guarantee instruments and manufacturers’ compliance with their obligations.

For this reason, the government has decided to tighten up this area with a new regulation.

LEGISLATIVE DECREE NO. 14 OF 2019

With the introduction of Legislative Decree No.14 of 12 January 2019, known as the Business Crisis and Insolvency Code, the regulatory framework on real estate for construction has undergone a significant update. Among the main novelties, the strengthening of buyer protections and an increased focus on business crisis prevention stand out. Here are the two most important ones.

• Obligation to conclude the preliminary contract by public deed or notarised private deed.
• Obligation of the notary to verify the issuance of the surety bond and ten-year posthumous insurance.

The new law establishes the obligation to stipulate the preliminary contract with a public deed or notarised private deed (under penalty of absolute nullity of the contract for lack of form), with the intervention of the notary, and requires the notary to verify and certify the correctness of the surety bond, which must comply with a ministerial model. The notary will not sign the deed in the absence of a surety.

The latter must guarantee the reimbursement of the sums paid by the future purchaser even if the ten-year posthumous indemnity policy is not issued at the final deed of sale of the real estate. The surety will remain effective until the issuing insurance company or bank receives a certified copy of the deed of transfer of the real estate, containing the certificate of the issuance of the aforementioned insurance policy.

Until this happens, the sum secured by the surety may be claimed by the future purchaser in the following cases:

• in case of a crisis for the building company;
  
• if the prospective purchaser has given notice of its intention to withdraw from the contract;
  
• the notary has certified that he/she could not receive the deed of transfer due to the failure to issue the ten-year posthumous policy.
  

THE CONTENT OF THE PRELIMINARY PURCHASE CONTRACT

In addition to stating that the surety has been issued and certifying that it complies with the ministerial model, the preliminary contract must contain the following elements:

• the description of the property to be constructed, with its boundaries, and appurtenances;
  
• an indication of any deeds of obligation and the existence of mortgages or prejudicial transcriptions;
  
• the agreed term for the execution of the work, the price and the terms of payment;
  
•  the details of the building permit and the indication of the existence of contractors;
  
• the specifications with the characteristics of the materials and the project drawings.

As for the definitive purchase and sale contract, upon signing the contract, the builder is required to deliver to the purchaser a ten-year indemnity insurance policy, the details of which must be indicated in the deed. If the delivery does not take place, the notary does not proceed to receive the deed and the purchaser, who has communicated his wish to withdraw from the contract, has the right to obtain from the company or bank that issued the surety compensation for the amount paid to the builder.

THE ADVANTAGES OF THE NOTARY’S INTERVENTION

The notary ensures compliance with the dual obligation, delivery of the surety bond and delivery of the ten-year insurance, at the time of the stipulation of the preliminary contract and the definitive purchase and sale contract respectively.

In addition to this, he is also responsible, from the moment of the preliminary contract, for carrying out all checks on the existence of mortgages or other encumbrances on the property to be built (mortgage searches). In addition, it is obliged to transcribe the preliminary contract in the real estate registers, which will protect the buyer from the risk of mortgages or liens after transcription (provided that the sale takes place within three years).

OTHER CHANGES

Legislative Decree No. 14 of 2019 has also introduced other novelties.

• The content of the surety has been made more detailed and binding.
  Furthermore, this surety must be issued by qualified parties, such as banking institutions or insurance companies.
  
• The obligation to take out the ten-year insurance policy has been extended and strengthened, with more stringent specifications on coverage and duration.
  
• The builder is required to provide more detailed information to the purchaser, including information on its financial situation and soundness.
  

Finally, Legislative Decree No. 14 has included some tools to monitor and prevent corporate crises of construction companies, strengthening controls and increasing the transparency of bankruptcy procedures, so as to reduce the risks for buyers related to the possible insolvency of the builder.

In conclusion, Legislative Decree No. 14/2019 and the innovations it introduces provide buyers with greater security. What was previously only a ‘recommendation’ is now a real obligation, namely to rely on a notary to carry out the check on the issuance of the surety bond, as well as the checks on the inexistence of mortgages or other liens.

This indication, together with the new rules on surety bonds and changes to the insurance guarantee system, improves the transparency of transactions and offers the buyer more effective protection against potential damage and defects to the property in the first ten years after completion.