Cyprus property and legal help - The Contract of Sale

Introduction

In a property transaction the Contract of Sale is a very important document that will outline all the conditions of the sale.

Once your negotiations are finalized a Contract will be drawn up to formalize your offer on a chosen property. The onus is on you to make sure that any special conditions you agreed on with the seller is incorporated in the contract of sale.

It is highly recommended that before you sign a Contract of sale, take a copy away and discuss it with your independent legal advisor. Independent advice is especially important if your offer is dependant on conditions such as finance or the sale of another property. Once you sign the contract and it is signed by the seller, it becomes binding.

It is also highly recommended that you never allow yourself to be pressured into signing a Contract of sale, or any contract for that matter, without seeking independent advice first.

The Contract of Sale is the term used to describe the document prepared by the Solicitor, and used to formalize the sale of real estate. However the word "Contract" has more than one meaning.

- Contract can mean an agreement. For example when you walk into a supermarket and pick up a newspaper, place a coin on the counter, make eye contact and get the nod from the salesman, you have both completed a Contract for the sale of the newspaper. Nothing has been written down to record the agreement but the agreement itself is a contract.

- Contract can mean the document that sets out the agreement. This document is usually prepared by a Solicitor and is tailored to suit the parties and the circumstances of the sale. The document itself contains numerous conditions by which the deal will proceed and eventually settle.

Before we deal with the actual contract of sale and terms and conditions thereof we would like to draw your attention to the following definitions. Please note that we have restricted our scope to property transactions and as relevant legislation in Cyprus may be applicable thereto.

In civil law one draws a distinction between movable and immovable property. Movable property refers to personal property whilst immovable property corresponds to real estate or real property, and the associated rights and obligations thereon.

In layman terms "property" is seen as something tangible and owned by a natural person or a legal entity. In the strict legal sense however property is more than that - it is an aggregate of rights which are guaranteed and protected [by the government] and that the term property is not only ownership and possession but also includes the right of use and enjoyment.

Under Cyprus Law private ownership of land extends to

- the surface and the substance of the earth.
- beneath the surface of the earth and to so much as is reasonably required for the enjoyment and cultivation of the earth this however excludes rights to minerals
- to the open space above the surface and as far as necessary for the enjoyment thereof.

The persons rights in Cyprus to absolute ownership in immovable property comprises of the following:

- the right to hold or to claim the property as your own.
- the right to possess such property.
- the right to the use of such property.
- the right to tenure, enjoyment and to the collection of the fruit of such property.
- the right to dispose of such property.

If thereof any of the above elements are missing the exercise by a person of the absolute right of ownership is restricted.

Formalities in property contracts in Cyprus

In Cyprus the basic principles of Contract Law applies. Furthermore we need to look at some specific legislation in Cyprus which apply to formalities when entering into a contract of sale to purchase property.

The Sale of Goods Law No.10 (1) 1994, as amended, provides that subject to the provisions of any other law being in force in Cyprus for the time being, a contract of sale of goods may be concluded in writing or verbally, or partly in writing and partly verbally or may be implied from the conduct of the parties. It thus follows that a contract can be concluded by exchange of correspondence. It also follows that a signed or sealed contract is not required.

If however you are purchasing property in Cyprus "off-plan", on which there are no title deeds, you will be advised to lodge your contract of sale with the Land Registry. For this purpose your contract of sale has to be in writing. In Cyprus this is dealt with in the Sale of Land Specific performance Law, which provides that the contract must be in writing, signed by both the Vendor and Purchaser and witnessed.

Further to the above and in terms of Contract Law, Cap.149, the contract must be entered into by the free consent of the contracting parties who must be competent to contract. A party is said to be competent if he or she is of sound mind and is not disqualified from contracting by any law.

Formation of a contract

As stated above a contract is a legally binding exchange of a promise or promises between parties which the law will enforce. Typically, in order to be enforceable, a contract must involve the following elements.

1.1. Mutual consent or "meeting of the minds" and intention to create legal relations.

The parties to the contract have a mutual understanding of what the contract covers. If for example I think I am buying a motor vehicle and the seller believes he is contracting to sell a house, there is no meeting of the minds and the contract will likely he held unenforceable.

The parties must intend the agreement to be legally binding. The courts in Cyprus will use an objective test to discover what was the intention of the parties and judge the situation based on what was said and done.

1.2. Offer and acceptance.

The offer is defined as an expression of willingness to contract made with the intention that it is to become binding on the person making it, the offeror, as soon as it is accepted by the person to whom it is addressed, the offeree.

An acceptance is a final and unqualified expression of assent to the terms of an offer. To create a binding contract the acceptance must match the offer exactly.

The contract entails an offer to another party, who accepts the offer. If for example I offer to sell a motor vehicle to the buyer for £ 1000 the buyers acceptance of this offer is a necessary part of creating a binding contract for the sale of the motor vehicle.

If the buyer counter-offers to purchase the vehicle for £500 this counts as a rejection of my offer and no binding agreement is created. If however I accept the counter offer only then is the contract completed. A counter-offer also amounts to a rejection of the original offer which cannot then be subsequently accepted.

The general rule is that an acceptance has no legal effect until such time as it is communicated to the offeror. It thus follows that no contract has been created if a person notes on a document that he accepts but retains such document himself. The acceptance must be communicated and brought to the notice of the offerer. It is also to be noted here that if the offer requires that acceptance is to be communicated in a specified way then generally it can only be accepted that way. If for example the offerer requires that acceptance be in writing the offeror will not be bound by an oral acceptance.

An offer may be terminated by withdrawal or lapse of time. Generally in submitting an offer stipulate by which date the offeree is to communicate his or her acceptance to you. If you revoke an offer remember that the revocation of the offer must be communicated to the offeree. Unless and until it is so communicated it is ineffective.

1.3. Mutual consideration (The mutual exchange of something of value)

The parties to a contract must exchange something of value in order for the contract to be valid.

Both parties to the contract must provide consideration. This means that each must promise to give or do something for the other. For example if A promises to wash B's motor vehicle, As promise will only be enforceable by B as a contract if B has provided consideration.

Section 10(1) of the Cyprus Contract Law Cap.49, provides, inter alia, that the consideration must be lawful and with a lawful object. In Cyprus the consideration or object of the contract is said to be unlawful if it:

- is forbidden by law,
- is of such a nature that, if permitted, it would defeat the provisions any law,
- is fraudulent,
- involves or implies injury to the person or property of another, or
- the court regards it as immoral or against public policy.

It will thus follow that the contract is void if the consideration, object or performance is unlawful.

1.4. Performance or delivery

The general rule is that a party to a contract must perform precisely what he undertook to do. In order to be enforceable, the action contemplated by the contract must be completed. In the above case of the motor vehicle, if the purchaser pays the £ 1000 he can enforce the contract and require the delivery of the motor vehicle. If however the contract provides that delivery will occur before payment, the buyer may not be able to enforce the contract if he himself does not perform by paying the £ 1000.

Both parties to the contract must provide consideration. This means that each must promise to give or do something for the other. For example if A promises to wash B's motor vehicle, A's promise will only be enforceable by B as a contract if B has provided consideration.

In a breach of contract situation the party alleging the breach will plead that he performed all of his duties under the contract.

Contract related issues

We have often consulted with clients who have raised certain questions of law relating to contracts in general and we will attempt to deal with a number of these issues here.

A. Mistake

In dealing with mistake in the law of contract one often encounters two different situations. The one is where both parties reached agreement on the terms of the contract but entered into the contract under the shared misapprehension as to the fact. There was in other words a common mistake. The other situation is where each of the parties are mistaken as to the terms intended by the other. This is referred to as "mistake in communication" or "unilateral mistake".

In the case of "common mistake" the parties although genuinely agreed, both have contracted in the mistaken belief that some fact which lies at the root of the contract is true. On the other hand a "unilateral mistake" will only operate where the mistake or misunderstanding is about the terms of the contact for example the price or description of the article.

In law there is a third category that needs to be differentiated from the two stated above, namely misrepresentation. If one party entered into a contract relying on a statement made by the other party about a material fact to the contract, and the statement was untrue, the first party will normally have a remedy for misrepresentation. In Cyprus the innocent party may claim that he or she be put in the position he or she would have been in as if the representation has been true.

No such claim will lie however if the innocent party had the means of discovering the truth by exercising ordinary diligence.

The innocent party's claim will be in terms of the Provisions of Contract Law, Cap 149, where a misrepresentation is defined as a false statement of fact, not of law or opinion, made by a party to the contract before the conclusion of the contract which induces the formation of the contract. Misrepresentation includes positive affirmation of a false fact and any breach of a duty benefiting the person performing it even though he had no intention to deceive.

B. Rectification

Rectification only applies to contracts which have been reduced to writing. Where a contract by reason of a mistake common to the two parties been drafted so as to militate against the terms intended by both as evident in their previous oral understanding, a court will rectify the contract so as to carry out such intentions.

C. Implied terms

Express terms to a contract of sale are those terms which are actually recorded in a written contract. There are instances however in which the law implies a term in a contract although it is not expressly included in the contract by the parties.

Whether a term is implied is usually said to depend upon the intention of the parties as collateral from the words of the agreement and the surrounding circumstances. The court will be prepared to imply a term to the agreement if there arises from the language of the contract itself, and the circumstances under which it was entered into, an inference that the parties must have intended the stipulation in question.

A term ought not to be implied unless it is in all the circumstances equitable and reasonable. This does not mean however that a term will be implied merely because in all the circumstances it will be reasonable to do so or because it would improve the contract or make carrying it out more convenient. The yardstick is always necessity and not merely reasonableness. The term to be implied must also be capable of being formulated with sufficient clarity and precision.

In the case of a contract for sale of a piece of land with a villa on it, there is no warranty as to the habitability of the villa. In the case where the vender however sells a piece of land and contracts to build a villa on it, there is, at common law, an implied term that the work will be done in a good and workman like manner, that the contractor will supply good and proper materials and that the villa will be fit for human habitation when built.

D. Force Majeure Clauses

The expression "force majeure clause" is normally used to describe a contractual term by which a party to a contract is excused from performance of the contract either in whole or in part, or is entitled to suspend performance or claim an extension of time for his performance, upon the happening of a specified event or events beyond his control.

Usually in a contract of sale in Cyprus a number of events are set out followed by the words "or any other cause beyond the vendors control". Such words are construed as having their natural and larger meaning and are not limited to events ejusdem generis with those previously enumerated.

Remember that it is for the party relying on a force majeure clause to prove the fact bringing the case within the clause. He must prove the occurrence of one of these events referred to in the clause and that he has been prevented, hindered or delayed from performing the contract by reason of that event. He must further prove that his non performance was due to circumstances beyond his control and that there where no reasonable steps that he could have taken to avoid or mitigate the event or its consequences.

Often one finds the actual expression "force mejeure" incorporated in such a clause. This expression is wider than that of "Act of God" or "vis major" as these latter expressions appears to denote events due to natural causes without any human intervention. It has been held that war, strikes, legislative or administrative interference, an embargo, the refusal of a license or seizure, abnormal storm or tempest, and even the accidental breakdown of machinery can amount to force majeure. It was also held that bad weather, a funeral, a failure of performance due to the provision of insufficient financial resources, the failure by a third party to fulfill his contract, or any act, negligence, omission or default on the part of the parties seeking to be excused did not amount to force majeure.

Quite often in a contract the words "force mejeure" are qualified which may even extend or explain the meaning of "force majeure". The expression is thus to be construed with regards to words which precede and follow it. If it is unqualified then performance of the relevant obligation must have been prevented by an event force majeure and not merely hindered or rendered more onerous.

E. Penalty or liquidating damages.

It is to be noted that the parties to a contract may themselves specify in their contract the remedy available to the innocent party in the event of a breach by the other party. In the absence of such clause, the law fills the gap here for you with standard-form provisions on the assessment of money compensation which applies to all types of contract.

Quite often the parties to the contract agree that, in the event of a breach, the guilty party will pay to the innocent party a specified sum of money. The sum so fixed may be classified by the courts either as a penalty, which is irrecoverable, or as liquidated damages, which are recoverable.

The clause fixing the sum is enforceable if it does not exceed a genuine attempt to estimate in advance the loss which the innocent party would likely suffer from a breach of the obligation in question. The failure to do so runs the risk of the clause been classified as a penalty which we remind you is not enforceable. It is enforceable irrespective of the loss actually suffered. The purpose of the parties fixing the amount is to facilitate recovery of damages without the trouble of proving actual damage.

The question whether a sum stipulated in a contract is a penalty or liquidated damages is a question of law. The essence of a penalty is a payment of money stipulated as in terrorem of the offending party and of liquidated damages is a genuine pre-estimate of damage.

In amplification of the above and whether the sum stipulated is a penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of at the time of entering into the contract and not at the time of the breach.

It will be held to be penalty:

F. Components of a contract

Contracts of Sale in Cyprus can range from a few pages to sizeable documents with a few schedules or attachments. We feel that the more specific the better. Having things on paper, never mind how minor reduces the risk and conflict later.

The following highlight some of the information you may find in a standard Cyprus Contract of Sale. Bear in mind that each developer and/or Agent and/or Solicitor does business differently. Also bear in mind that Cyprus developers contracts may include provisions or restrictions for the developers benefit. Read the contract very carefully and make sure you are comfortable and understand everything in it.

Most real estate Contracts contain most or all of the following:

- A legal description of the property.
- The selling price.
- Subject to obtaining a mortgage (*if applicable) and the specifics of the mortgage - amount, rate and terms.
- How much money accompanies the contract and who holds it.
- When and where.
- What is and is not included in the sale of the property.
- Only that are included with the property and description of the warranty.
- When the buyer takes possession of the property - before, on or after closing.
- Any provisions for arbitration of disputes.
- Whose insurance covers the property up until the closing date.
- Attachments of site plan, floor plan, elevations of the property, specifications, construction/architected plans.
- The general agreement if possible if you are buying into a large development.
- Payment schedule.
- Any other costs for which either parts is liable.
- Construction schedule.
- Details regarding delays.
- Site visits during construction or practices of the developer.
- Colour/finishing selection.
- Provision should you wish to change something.
- Deviation from the plans - where the developer needs to change something.
- Warranty - in your favour from the developer.
- Manufacturers warranty.

Some common contract clauses

1. Merger and integration clause

The purpose of this clause is to prevent a party to a contract from later claiming that the contract does not reflect their entire understanding, was changed by a subsequent oral agreement, or is not consistent with prior agreements.

A typical example is the following: This agreement contains the entire agreement of the parties with respect to the subject matter of this agreement, and supersedes all prior negotiations, agreements and understandings with respect thereto. This agreement may only be amended by a written document duly executed by both parties.

With a contract which includes this type of a clause you should make sure that all promises and agreements are actually included in the written contract as it will then be impossible to enforce those unwritten promises.

2. Choice of Law

Contracts will often contain a clause expressing that they are to be interpreted under the laws of a particular country.

3. Time of Performance

Some contacts will provide that "time is of the essence" which may support an action for breach of contract where the contract is not completed within a reasonable or specified time. This is often seen in construction contracts.

An example of this clause is as follows:

"Time is of the essence for the completion of the work described in this contract. It is anticipated by the parties that all work described herein will be completed within 3 months of the date of execution and that any delay in the completion of the work shall constitute a material breach of this contract.

Others may specifically provide that time is not of the essence. A typical example is as follows: The parties agree that time is not of the essence in the completion of the work described in this contract. Where a contract includes such a clause question the motive. Do they anticipate delays which will leave you dissatisfied?

4. Severability Clause

Most contracts include a severability clause, which is meant to ensure that the contract remains enforceable even if part of the contract is later held invalid.

On example of this clause: If any provisions of this cantract are held enforceable, then such provisions will be modified to reflect the Parties intention. All remaining provisions of this contract shall remain in full force and effect.

5. Non-waver

The purpose of a non-waver clause is to protect a party who excuses the other party's non-compliance with contract terms, and to prevent the parties course of conduct under the contract from resulting in the loss of enforceability of the actual terms of the contract.

A standard non-waver clause is: The failure by one party to require performance of any provision shall not affect the party's right to require performance at any time thereafter, nor shall a waver of any breach or default of this contract constitute a waver of any subsequent breach or default or a waver of the provision itself.

For example, if a contract requires monthly payments but the purchaser pays every second month, in the absence of a non-waver clause, after a year of acceptance of the late payments a court would be likely to hold that bimonthly payments do not constitute a breach of the contract. With a non-waver clause, the party to whom payments are due would typically be able to enforce the monthly payment provision, despite the course of the conduct which was inconsistent with the contract.

6. Liquidated Damages Clause

Where it can be difficult to calculate actual damages, it may be appropriate to include a "liquidated damages clause" in a contract. The most common form of "liquidated damages" is probably the fee charged following the late receipt of payment on a lease or credit card. The rental of a university dormitory room for example.

"Students canceling their housing contract after occupying their room shall pay liquidated damages in the amount of £ 50 per day for the remainder or unexpired portion of the term of the academic agreement, not to exceed £ 1000.

The damages are "liquidated" in the sense that the contract sets out a specific sum that will be paid as damages, whatever the actual amount of damages may be. However, the amount of "liquidated damages" should roughly parallel what actual damages might realistically be. Courts will typically not uphold "liquidated damages" clauses if the damages are disproportionate to the injury, or if the amount of liquidated damages appears to be intended as punitive as opposed to fair compensation for the injury.

Who prepares the Contract of Sale of Property?

The Contract should always be prepared by the Solicitor representing one of the parties and carefully checked by a Solicitor acting for the other. This is to ensure that both parties' interests are protected.

Signing the Contract

As a general rule, once the Contract has been signed by the purchaser, and counter-signed by the Vendor, a binding contract is created, and the matter is final. While it is possible to make changes to the contract after it has been signed changes can be made only if both parties agree. If either party disagrees, then the Contract remains as it was when first signed.

When it comes to obtaining legal advice, the best time is before the contract is signed. Often you will be encouraged to sign first, and seek advice later. You are advised to obtain legal advice before signing the Contract and before partying with your money.

The contract must be signed by or on behalf of each party. If a document is incorporated by reference, such as a plan, this too is to be installed by both parties.

The property must be sufficiently described. Whether the property is freehold or leasehold. The description of the property should be clear from the title.

If a plan is used, it can be either "for identification only" or the property can be stated to be "as more particularly delineated" in the plan. If the former expression is used (identification only) the plan is not an integral part of the description of the property. It is there for reference purposes only and subordinate to any verbal description of the property, and in the event of conflict the verbal description will prevail. If however, the property is "more particularly delineated" the plan prevails. It follows that this formula should not be used unless the plan can be relied upon to be thoroughly accurate.

Damages for breach of contract

It is well recognized in Cyprus Law that a breach of a warranty in a contract will give rise to a claim for damages.

The innocent party must in the first instance and at the outset be certain that the loss was one which resulted from a breach of contract by the other party to the contract. In other words there has to be a direct link.

Not every type of damage caused however as a result of the breach of contract will be recoverable. If the loss flowing from the breach is too remote then and in such event it cannot be recovered. For an action to lie and for losses to be recoverable they must have been within the reasonable contemplation of the parties. In calculating the measure of damages one must always bear in mind that the innocent party has a duty to take reasonable steps to mitigate his or her damages. There are a number of rules that must be considered here namely:-

- the innocent party cannot recover for loss which he could have avoided by taking reasonable steps,
- the innocent party can also not recover for any loss he has actually avoided, even though he did more than was necessary in compliance with the above, and
- the innocent party may recover his loss incurred in taking the reasonable steps to mitigate his loss, even though he did not succeed.

The purpose of damages awarded to an innocent party are meant to compensate him for any consequences of the breach of contract. The underlying principle is to put him financially in as near as possible into the position he would have been in had the promise been carried out.

There are several ways in which an innocent party can claim for his loss and he is entitled in law to choose whichever form of compensation he feels is most appropriate to his case.

Loss of a bargain

For example in the case of a contract for the sale of goods which are defective, the innocent party will be entitled to damages reflecting the difference between the purchase price paid in terms of the contract and the actual value of the defective goods.

Reliance loss

This type of damages for reliance loss are designed to put the innocent party in the position he would have been, if the contract had never been entered into, by compensating him for expenses he has incurred in his abortive performance.

The choice of claims may be aided by the fact that more than one of the claims are available to the innocent party.

The general rule is that damages are assessed at the time of the breach and not when the contract was entered into.

Calculation of damages for loss of a bargain

Where the innocent party claims for loss of a bargain and that he be placed in the position as if the contract had been performed two basis of assessment are available namely, cost of cure and difference in value. The court will exercise its discretion, if there is one, to use the most appropriate basis of assessment. However there are a number of rules for calculating the appropriate mode of assessment namely:

- In a contract for the sale of goods, if the defect can be cured at a reasonable cost, this cost will be awarded otherwise the difference in value is awarded.
- In building contracts, the cost of the cure basis is used, and the developer must rectify the defects. If however the cost of cure is greater than the whole value of the building, then only the difference in value will be awarded.

Irrecoverable damages

In contract damages for injury to feelings are irrecoverable.

Liquidated damages and penalty clauses

This has been dealt with elsewhere on our website. The parties may make a genuine assessment of the losses which are likely to result in the event of a breach and incorporate it in the contract that such sum shall be payable in the event of a breach.

Such clauses are known as liquidated damages clause and will be effective in the event of a breach. If an amount has been fixed this way the innocent party will not recover more than the sum so fixed.

If the clause incorporated in the contract is not on assessment of losses, but it is intended as a punishment then this clause is a penalty clause and will not be enforced.

Damages for late delivery

If the terms incorporated in the contract for the time of delivery is a warranty the innocent party can sue for damages. The innocent party must be put in the financial position he would have been in had the Vendor fulfilled his contractual obligation with regard to the time for delivery.