Preliminary contract

What it means

A preliminary contract, or contract to conclude a future contract, is one in which one or both parties undertake to conclude another contract, the main contract, within an agreed period. It is most often used in property purchases when the buyer is still arranging a loan or the seller is not yet registered as owner, but the parties want to commit now.

To be enforceable, it must be in writing and contain at least the essential terms of the future contract, for a purchase contract a precise description of the subject and the price, as well as the deadline for concluding the main contract. If any of these are missing, a court may be unable to determine what the future contract should contain.

If the obliged party refuses to conclude the main contract, the other party can ask a court to substitute its declaration of intent and is entitled to damages. Preliminary contracts are often combined with earnest money or a contractual penalty to motivate the parties to keep their word.

How it works in practice

When a company buys property, we check that the preliminary contract contains everything essential: precise identification of the property from the land register, the price, payment method, the deadline for the purchase contract and conditions such as loan approval. We recommend attaching a draft of the purchase contract itself.

Preliminary contracts are also useful in development projects where the property being sold is not yet finished. They should clearly describe the future condition, the finish standard and what happens if construction is delayed.

In the accounts, the preliminary contract itself is not recorded as an asset acquisition. Earnest money or an advance paid is carried as a prepayment, and the asset is recognised only when ownership passes, for property on registration in the land register.

What to watch out for

The most common mistake is an imprecise description of the subject or price, such as “approximately 100 m²” or “price to be agreed”. Such a contract is often unenforceable. The second risk is missing the deadline: if the entitled party does not call on the other to conclude the contract in time, the obligation lapses.

A preliminary contract does not transfer ownership or create a property right. The seller may meanwhile sell the property to someone else or encumber it. The buyer then has only contractual claims, so for larger sums other security, such as a notary escrow, is worth considering.