The majority of negotiations for a real estate purchase and sale of a more complex nature take place in three distinct negotiation stages. In the course of these stages, buyer and seller, arrive at the transfer of ownership following a gradual and progressive definition of agreements, through the exchange of legal acts of different content and effectiveness. The negotiation stages of buying and selling are:

1. Negotiation stage through exchange of non-binding acts (letters of intent, unilateral expression of interest, irrevocable offers not formally accepted).
2. Stage of entering into contracts with binding effects (preliminary purchase and sale agreement, option agreement).
3. Stage of concluding contracts with real effects (notarized deed of sale and purchase with transfer of related rights).

In this brief contribution, we will deal with the pre-contractual phase that mainly intervenes in particularly complex purchase and sale agreements. These are deals with a high commercial value where the need arises to test the seriousness of the proposers, together with the buyer’s need to “lock in the deal” while waiting to find financing. There also arises the usefulness of completing extensive and thorough due diligence activities on the property. The codictic regulations governing the pre-contractual phase are Articles 1337 and 1338 Civil Code. Pursuant to Article 1337 of the Civil Code, “The parties, in the conduct of negotiations and the formation of the contract, must behave in accordance with good faith,” while in Article 1338 of the Civil Code, a specification of the general obligation of good faith is grasped which is incumbent on every negotiator and which consists in informing the other party of the known causes of invalidity of the contract being entered into. This is a duty of loyalty from which one cannot deflect, in the spirit of a proper contractual process. Further specification of the general duty of good faith is contained in Articles 1341 and 1342 of the Civil Code.

Content of pre-contractual acts

It is now the consensus among real estate operators and legal professionals in the field that the content of pre-contractual documents should be comprehensive but concise. Expressions of interest and letters of intent should provide from the outset all the essential elements of the future arrangement of interests and mention all the main terms and conditions of the intended purchase and sale, albeit with a different degree of detail and in a concise manner than the more analytical provisions of the subsequent preliminary contract. The typical scheme is as follows:

• Background
• Literal description of the property
• Intended Use
• Estimated value
• Methods of payment
• Conditions of the sale
• Timing
• Constraints
• Rental status
• Suspensive events/conditions
• Date of delivery of the property
• Confidentiality of information
• Jurisdiction

The three duties of conduct in real estate negotiations

Although pre-contractual acts do not obligate subsequent purchase and sale, case law has enucleated three behavioral duties:

1. Disclosure between the parties.
2. Confidentiality to third parties and protection of legitimate expectations of the other party.
3. Right of withdrawal.

As for point 1, which might seem obvious, it is the seller’s duty, for example, to inform the buyer about the urban and cadastral status of the property, the rental status and any arrears or disputes of the tenant, probable changes in urban use in the pipeline, and the existence of any litigation or enforcement procedures. Breach of the duty to inform between the parties is sufficient to ground, pursuant to Article 1337 of the Civil Code, convictions for damages. However, the jurisprudential interpretation on Article 1337 of the Civil Code, does not require the parties to provide information on their economic conditions nor the externalization of the reasons for entering into the contract. Regarding the duty of confidentiality to third parties, it should be referred to the economic conditions and legal terms being negotiated. The buyer must not disclose the negotiated purchase price to third parties, because in the event of a break in negotiations the seller would be prejudiced if he wanted to open negotiations with third parties at a higher price. There is also a duty to protect the property, which means the seller’s duty to continue the proper maintenance of the property and its facilities, to collect the rents, promptly initiate any pre-litigation in case of arrears or late payments, in the prohibition of granting extraordinary encumbrances, limiting the right of ownership of the property, such as the mortgage, which would legitimize the other party to withdraw from negotiations.

Right of withdrawal

Either party may withdraw ad nutum where negotiations are not entrusting. Where negotiations are entrusting, withdrawal will be lawful only if there is just cause or justified reason, or, even in the case of entrusting negotiations, either party may withdraw freely where it has expressly and formally made known, to the other, events to which it would have made the conclusion of further negotiating acts conditional.

When negotiations are considered entrusting

It is receptum jurisprudence that negotiations are entrusted when the parties have considered or reached an agreement in principle at least on the essential elements of the contract, such as the property bought and sold exactly identified in its characteristics and the amount of the consideration. This implies, for example, that the extent of the consideration was the subject of even an approximate determination. We note on this point the judgment Cass. Civ. Sec. III, 3/27/2018 no. 7517: “As repeatedly reiterated by this Supreme Court, in order to consider pre-contractual liability integrated art. 1337 Civil Code. it is necessary: that negotiations are underway between the parties; that they have reached a stage capable of engendering, in the party invoking the liability of others, reasonable reliance on the conclusion of the contract; that they have been interrupted, without a justified reason, by the party to whom said liability is charged; and finally, that even in the ordinary diligence of the party invoking liability, there are no facts capable of excluding its reasonable reliance on the conclusion of the contract.” Conversely, it is inferred that negotiations are not relied upon where the parties have not yet considered in sufficient detail the price or have not yet reached an adequate awareness of the qualitative and quantitative consistency of the good. In such cases, either party may withdraw from such negotiations without stating any just cause or reason. Withdrawal from entrusted negotiations will, on the other hand, be legitimate if there is a just cause or justified reason. Such are considered to be, for example:

• Liens or encumbrances of relief on the property
• Construction abuse
• Tenant’s delinquency
• Existence of litigation
• New negotiating demands of one of the parties.

Conclusions

In light of the above, given the complexity of the subject matter and the blurring of the interpretive boundary between acts without legal effects and acts with binding effects, it seems appropriate to suggest the support of a professional specializing in contractual/real estate matters, in order to draft acts that fully meet the objectives of the parties involved, protecting their interests to the best of their ability, in order to avoid incurring pre-contractual liability risks.