The "trap" of the preliminary agreement

If you read this you have probably had experience with signing a preliminary agreement with Bulgarian developer. This agreement usually binds the developer with the obligation to finish the property and provide you with the title deed by certain deadline. Well, this seems too good to be true.

The preliminary agreement is regulated in only 1 article in the Agreements and Obligations Act and nowhere else:

19. (1) A preliminary contract preceding the conclusion of a final contract for which a notarial deed or notarial certification is required shall be concluded in writing.

(2) A preliminary contract shall contain provisions concerning the material terms of the final contract.

(3) Either party to a preliminary contract may bring an action for conclusion of the final contract. In this case the contract shall be deemed concluded as of the moment of entry into force of the ruling of the court.

In short, this is just written promise that the final agreement will be signed (i.e. title deed). Of course, the preliminary agreement for construction of property is more complicated than just ordinary preliminary agreement. The preliminary construction agreement consists of two basic contracts:

  • the ordinary preliminary agreement as per Art.19 of the Agreements and obligations act and
  • agreement of manufacture . It is also regulated in the Agreements and Obligations Act (you can read the regulation of this type of contract below)

VIII. A CONTRACT OF MANUFACTURE

258. Under the contract of manufacture the contractor shall be liable at his own risk to manufacture something in accordance with the other party's order, and the latter -- to pay a compensation.

259. Unless otherwise agreed the contractor shall manufacture what is ordered with means of his own.

260. The contractor must immediately inform the other party if the provided designs or supplied materials are unfit for the correct performance of the work, and ask for the necessary changes in the designs or for the supply of appropriate materials. If the other party fails to do so the contractor may renounce the contract.

If the contractor fails to provide the above warning, he shall be liable before the other party for the damages caused.

261. The contractor must perform the work in such a manner that it becomes fit for the usual or stipulated in the contract purpose.

The contractor who is performing the work with his own materials is responsible for good quality.

Where several persons have assumed the obligation to perform together certain work, they shall be liable jointly and severally, unless otherwise agreed.

262. The person ordering the work may check the performance of the contract at any time, provided he does not disturb the contractor.

(Amended, SG No. 12/1993). If it becomes evident that the contractor will not be able to perform the work on time or that he will not perform it in the way agreed upon or as due, the person ordering the work may avoid the contract and claim damages under the general rules.

263. The risk of chance loss or damage of the materials shall be borne by the party providing them, if the other party is not in default.

264. The person ordering the work must accept delivery of the work done in accordance with the contract.

Upon accepting delivery he shall examine the work and shall state all the objections for improper performance, except for such defects which cannot be revealed through the usual manner of acceptance of delivery or for such which are revealed only later. The person ordering the work shall inform the contractor of such defects immediately after they are discovered. This shall not be necessary when the contractor was aware of them.

If no such objections are raised, the work shall be deemed accepted.

265. If during the performance of the work the contractor has deviated from the order or if the work done has deficiencies, the person ordering the work may claim:

repair of the work within a stipulated by him period without payment;

covering of the expenses needed for the repair or a respective reduction of the compensation.

If the deviation from the order or the deficiencies are so material that the work is deemed unfit for its contractual or ordinary purpose the person ordering the work may avoid the contract.

These rights shall be extinguished by limitation within six months, and in case of construction work -- within five years.

266. The person ordering the work shall pay compensation for the accepted work. If the compensation is agreed upon on a unit price basis, its amount shall be determined upon acceptance of the work.

If in the course of the performance of the contract the duly determined prices of materials or labour change, the compensation shall be adjusted accordingly, even where it was agreed upon as a total sum.

(Paragraph 3, repealed, SG No. 12/1993).

267. If the performance of the work becomes impossible due to a reason neither party is liable for, the contractor has no right to compensation. If one part of the work was done and may be of use to the person ordering the work, the contractor is entitled to a respective part of the agreed compensation.

The contractor shall be entitled to compensation if the performance of the work has become entirely or partially impossible due to the unfitness of the materials or designs provided by the person ordering the work, and the contractor has duly notified him.

268. If there are reasonable grounds the person ordering the work may renounce the contract, regardless of the fact that the performance has begun, by paying the contractor for the costs incurred, the work done and the profit which he would have obtained from the performance of the work.

(Paragraph 2, repealed, SG No. 12/1993).

269. If the contractor dies or becomes unable to proceed with the work the contract shall be terminated, unless it was concluded with regard to the person of the contractor and his heirs agree to proceed with the work.

Upon the termination of the contract the person ordering the work shall pay for the work done and for the usefully invested materials in accordance with the contracted compensation.

So now you see that the essence of the preliminary agreement for buying offplan property is very complex. I will interpret the nature of the offplan property purchase agreement at a later stage.

New company or off-the-shelf company in Bulgaria

Off-the-shelf companies are not popular in Bulgaria. This is due to the fact that additional accounting expenses are involved. Off-the-shelf companies are dormant companies with nominee directors/shareholders and a registered business address in Bulgaria. The additional expenses are for filing annual tax declarations and annual accounts in the Commercial Register. Having the baove in mind, foreigners and Bulgarians, prefer to register a brand new company, rather than buy off-shelf one. Moreover, registration of a new LLC in Bulgaria takes just about 2 days.

If you intent to buy a startup business, having its first months behind, then you can buy that enterprise in two ways:

  1. Buy the shares of the company via signed and notarized agreement or,
  2. Bye the whole enterprise i.e. everything except the company name. This also will be done through a written and notarized agreement.

Company financial statements should be announced in the Commercial Register

All companies  has to prepare annual financial reports according to the Bulgarian and International Financial Reporting Standards. The reports of companies with turnover above EUR 1,000,000 are subject to compulsory audit.

Pursuant to Article 40 of the Accountancy Act all companies shall announce their financial reports to the Commercial register. You can read the provisions below:

Article 40      (Supplemented, SG No.96/2004, amended SG No. 105/2006)

(1) By 30 June on the following year, enterprises shall publish their annual financial statements and their consolidatedfinancial statements, their annual management report and their annual consolidated management report as adopted by thegeneral meeting of partners/shareholders or by the relevant body as follows:

1. merchants in the meaning of the Commerce Act , by filing and submitting them for the purposes of announcing them in the Commercial Register;

  1. non-profit legal persons designated as operating for the public benefit: by filing for recordation and submitting themto the Central Register with the Ministry of Justice under the terms and following the procedure set out in the Non-ProfitLegal Persons Act;

  2. the rest of enterprises, through a business publication or in the Internet.

(2) Following the procedure set out in paragraph (1), enterprises referred to in Article 38 shall publish:

  1. their financial statements, in the form in which they were certified by a registered auditor;

  2. their annual management reports, in the form on the basis of which the registered auditor expressed his/her opinion;

  3. the auditor's report on the statements and reports referred to in items (1) and (2).

(3) Following the procedure set out in paragraph (1), together with their annual financial statements, joint stockcompanies, partnerships limited by shares and limited liability companies shall also publish information on the proposal of themanaging body on the distribution of profit or for covering a previous year's loss and the decision of the general meeting ofshareholders/partners on the allocation of profit for distribution or for covering a previous year's loss.

(4) The annual financial statements of an enterprise which prepares consolidated financial statements shall be publishedconcurrently with the consolidated financial statements of the group, together with their respective annual managementreports.

All necessary documents for announcing the annual financial report of your Bulgarian company should be drafter be a professional lawyer .

The financial report DO NOT SHOW any details about your company. It shows only numbers without specifying the sources of your profit or the actual property, owned by your company.

New facts about "Windows to Paradise" case

On 10th August 2009 a new record appeared in the Commercial Register. "Interlink BG" Ltd - developer of  Windows to Paradise - has  1/3 of its shares seized by a creditor.

I warned several times that such thing can happen. The creditor is Raiffeisen Bank and they have seized Ivan Stanchev's (one of the shareholders) shares in the company. Obviously, the reason for the share seizure is that Interlink BG hasn't paid the mortgage loan (EUR 4 000 000) to Raiffeisen Bank. Therefore the bank sued Interlink BG and won the case.  Studying the court documents, it's clear that Ivan Stanchev acted as second debtor (a guarantor), since he guaranteed for the loan with his own property.

Now, after the lawsuit is over, Interlink BG has secured the whole loan except EUR 63,818. Consequently the bank sued Ivan Stanchev for that amount as he is the second debtor. He hasn't paid them right away, so the bank used an enforcement agent to seize Ivan Stanchev's shares in Interlink BG Ltd.

The documents are not so clear if Interlink has repaid the loan in cash, or the banks took the ownership over some of the apartments in Windows to Paradies. This requires further legal research.

Bulgarian lawsuit guide

This article is aimed to be a short FAQ, explaining the "nuts-and-bolts" of the Bulgarian court proceedings. I've been asked these questions thousand times, so I decided to write a brief description of the claim process in Bulgaria.

Q: What are the court expenses?

A: The court expenses are separated in several subcategories:

  1. Court fee/State fee - the court fee in Bulgaria is fixed. It is calculated on the basis of the amount you claim. The usual fee is 4% of the claim amount. In rare cases,explicitly stated in the law, the court fee is 2% of the claimed amount. The court fee has to be paid prior filing the claim.

2. Attorney fee - the attorney fee can be negotiated with the particular lawyer who represents in in court. There is no fixed amount for the attorney fee.

3. Experts fees - expert fees can occur only if special expert opinion is needed during the case proceedings. For example, if you need to calculate your interest over the money you are owed by the defendant. Expert opinion may be needed if the court needs to establish the authenticiy of a signature or needs to estimate if the construction plans match the actual building status.

  1. Travel costs - if the lawsuit is heard in another city, the clients should cover the lawyer travels expenses e.g. petrol costs, hotels costs etc.

Q: How long a lawsuit will take?

A: It depends where the court proceedings will take place.  If your case is to be heard in Sofia and you claim EUR 15,000 or more, your case will be heard in Sofia City Court.  In this case it's likely that your "court battle" will last 1-2 years. If the defendant you sue is registered in a city other than Sofia, it's likely you will get a court resolution wihtin a year.

Q: Can I speed up the court process?

A: A kind of. If you claim part of your money (upto 25,000 levs or about EUR 12,500) you can file a partial claim in the Regional Court (lower court). The advantage is that the Regional Court is working quicker and you will get a court resolution sooner than the Sofia City Court. The disadvantage is that if you get a positive court resolution it will be for the part of your money. The good thing is that you can enclose the old court resolution and file another claim for the rest of teh money.

Q:  How likely is that I get a positive court resolution for my case?

A: Each particular case needs to be reviewed separately. There is no common estimation of that matter.

Q: Will I get my money back?

A: It depends on the debtor. There are several sources you can get your money from. You should seach for property, bank accounts, vehicles, subsidiary companies of the debtor.  If the properties are mortgaged by third party, you cannot benefit from that property.

Q: How about the company managers and partners?  Can I get my money from them?

A: No, you cannot! The legal entity of the Limited Liability Company (LLC) prevents creditors pursuing company managers and owenrs. There are few cases in which the owners are liable for their company's debts, but I will not get in details here.

Q: Can I do something to prevent the debtor from selling their assets while my case is being heard in court?

A: Yes, you can. You can ask your lawyer to initialte a security procedure. You should ask the court to issue a lien order. This order can be used to "freeze" debtor assest while your case is heard in court. You will be able to benefit those assets after yo uget a positive court resolution.

The lien is not mandatory. It has to be asked for. The judge is not obliget to issue a lien order. The judge estimates the case and decides at its own discretion. If a lien orer is issued, you sill be asked b ythe court to transfer a deposit to the court bank account. This eposit is usually about 5% of the claimed amount. It is used to secure the defendant if  the latter proves damages caused by the lien (and you lose the case).

Additional information

The court process can be described as follows:

  1. Filing the claim

  2. Sending a copy of the claim to the defendant

  3. The defendant sends an answer to the claim

  4. Additional documents exchange

  5. The judge sets a date for the first court hearing

  6. Firts court hearing: collecting evidence (interrogating witneses, presenting documents, requiring documents from state authorities)

  7. Second hearing: presenting the paries' pleads.

  8. Depending of the judge, additional hearings can be set.

  9. Setting the case for resolution. The judge is obliged to resolve the case within one month after the last court hearing.

The problem points are 2,3 and 4. These are the points that delay the case. The summons are extremely slow to be delivered, as the delivery men don't do their job dilligently. Moreover, the defendant usually hides and this slows down the process too.

Bulgarian Debt Portfolios

Now's a good time for buying debt portfolios in Bulgaria. Why is it a good idea? Remember the property baloon in Bulgaria. Yes, the one just like in Spain. Well, the situation is as follows:

Developers got big amounts of mortgage credits so they can build holliday homes. Well, the calculations were wrong and the developers are now short in money. The developments are almost finished but the mortgages are not paid. The result is over 300 hotels in Bulgaria are owned by the banks and are being sold.

Thus, buying a debt potfolio from Bulgarian banks, can bring you a cheap hotel in a ski resort or at the Black Sea coast.

Why some Bulgarian Dreams' properties will probably never be finished

A massive fightback of Bulgarian Dreams is taking place in the Internet. It's conducted by RG Jenkin. The failure to complete Windows to Paradise development brought him the BBC Prime attention as well as the buyer's anger. However now he convinces the same buyers, who he deceived with the completion dates, so they put more money in the "concrete pile" called Windows to Paradise.

In order to backup my words with facts, all of you should know that "Interlink BG" Ltd.'s loans owed to BG banks amount to over EUR 9,000,000. This fact is stated by Interlink BG Ltd. in its own annual financial report, submitted to the Commercial Register. The company's General Meeting is blocked by the Court, so no convening will take place in the near future. The company is practically inactive. This means that unless major events happen, the company cannot operate and therefore cannot complete the building it has started.

Any promises that the developments will be finishes shall be seriously estimated. The fresh flow of money can ONLY fill RJ's pockets with cash and please his offshore bankers. All buyer who put their trust in this man for second time, will have no second chance for getting out of the situation. The will only regret their decision.