More and more people have the desire and need to move away from urban noise to the countryside, closer to nature. Likely as a result of this, cases where a purchased older house or apartment has turned out to be unsuitable for the buyer after moving in have been increasingly covered in the media in recent years. This has often led to disputes between buyers and sellers—buyers have expressed dissatisfaction that the purchased property does not meet their expectations, and they wish to file a claim against the seller or withdraw from the transaction.
The author of this article highlights below some observations that both buyers and sellers might consider in such transactions.
The Estonian Supreme Court made an important ruling in 2023 (civil case no. 2-19-19586), which resolved the issue of whether the property for sale, which included a farmhouse about 100 years old, complied with the contractual terms or not and whether the buyer's claim for damages should have been dismissed on the grounds that the buyer knew or should have known about the defects of the property at the time of entering into the sales contract.
The positions expressed by the Estonian Supreme Court in the aforementioned decision are relevant to all real estate sales transactions, including in cases where claims for damages are filed or when there is a desire to withdraw from the transaction.
In its decision, the Estonian Supreme Court pointed out that under § 217 (2) point 2 of the Law of Obligations Act (LOA), a thing does not conform to the terms of the contract, among other reasons, if in the absence of an agreement on the characteristics of the thing, the thing is not suitable for a specific purpose for which the buyer needs it and which the seller knew or ought to have known at the time of entering into the contract, provided the buyer could reasonably rely on the seller's professional skills or knowledge. Otherwise, it must be suitable for the purpose for which such things are usually used.
When determining "such things," the age of the thing and its previous use must also be taken into account, and on that basis, it must be assessed whether the thing is suitable for the purpose for which it is usually used.
In a situation where the object of sale is a building about 100 years old, the assessment of whether it conforms to the terms of the contract must be based on the typical condition of buildings of similar age and intended use. In such a situation, it is difficult to set a single quality criterion. The courts must determine in each case what are reasonable expectations for the disputed property. For such old houses, the assessment of conformity to contractual terms cannot be based on modern building standards. Additionally, such old farmhouses may typically be used for very different purposes. Although an old farmhouse may be used as a residence, depending on the circumstances, it may also be suitable only for seasonal use or for storage purposes.
With regard to the obligations arising from the sales contract, § 77 (1) of the Law of Obligations Act also applies, which states that the debtor must perform the obligation with the quality required by the contract or law. If the quality of the contractual obligation’s performance is not specified in the contract or law, the obligor must perform the obligation with at least average quality, considering the circumstances.
The Estonian Supreme Court panel also deemed it necessary to clarify that even in a situation where the object of the sales contract is a house decades old and used as a residence, it is not appropriate to assess conformity to contractual terms based on modern building standards or the Estonian Supreme Court's practice regarding the conformity of modern buildings or other structures. For such an old house, it cannot be expected, for example, to have project documentation or to meet modern building requirements. A house about 100 years old that shows typical wear or aging of structures for its age and has not been in active use for years may also comply with the contractual terms. Thus, in the absence of an agreement on the characteristics of the object of the sales contract, the assessment of whether it conforms to the contractual terms must consider what the buyer could reasonably expect regarding the condition of the object, taking into account its age, intended use, and previous actual use. If the condition of the object of the sales contract is worse than what the buyer could reasonably expect based on the object's age, intended use, and previous actual use, it constitutes non-compliance with the contractual terms within the meaning of § 217 (2) point 2 and § 77 (1) of the Law of Obligations Act (see Estonian Supreme Court civil case no. 2-19-19586, paragraph 14).
It is useful to note that under § 14 (1) and (2) of the Law of Obligations Act and § 92 (2) and (3) of the General Part of the Civil Code Act (in conjunction with § 95 of the same Act), the contracting party has, in addition to the general obligation not to mislead the other party before entering into the contract with false information, an obligation arising from the principle of good faith to disclose circumstances that may significantly influence the other party’s decision to enter into the contract.
If a breach of pre-contractual obligations becomes apparent only after the contract has been entered into, the relationship between the parties must be viewed as a unified contractual relationship, which includes not only the obligations arising from the contract but also obligations that arose before the contract was signed. In such cases, the contracting party can invoke a breach of what was agreed upon during pre-contractual negotiations as a breach of the contract concluded after those negotiations. The breach of the obligation stipulated in the first sentence of § 14 (2) of the Law of Obligations Act also allows the contracting party to withdraw from the contract.
What Should Buyers and Sellers Take Away from the Above?
As a seller, it is reasonable and important to have informed the buyer of all known defects in the apartment or house. According to the author of this overview, the seller could send the buyer, for example, a document by email listing all known defects of the house that the buyer might not notice at first glance but that are important. This list should also be included in the notarized sales contract.
Yes, this may reduce the number of people interested in the property and consequently lower the sale price, but it minimizes the risk of claims by the buyer. It may also exclude the buyer’s right to withdraw from the contract and to present other claims.
As a buyer, it is essential to inform the seller of the purpose for which the buyer plans to use the property—for example, whether the buyer plans to live in the house year-round or only in summer, etc. The purpose of the purchase should also be stated in the notarized sales contract to avoid later disputes.
The buyer should notify the seller of discovered defects as soon as possible after discovering them. In more complex cases, the buyer should immediately commission an expert opinion from a professional to assess whether the defect is something uncommon for similar properties. If the expert determines that the defect is typical for such an old house/apartment, there may be no basis for a claim against the seller.
The author of this opinion believes that by taking into account the above observations, both buyers and sellers can mitigate their risks. At the same time, it is important to note that each dispute must be viewed individually, and there is no magic solution to prevent all disputes. Considering this, it is often cheaper to consult a lawyer before entering into a transaction or starting a dispute to ensure your rights are maximally protected.
Kaupo Kask
Attorney-at-Law/Law Firm Partner
The article has also been published in Meesteleht: https://meesteleht.ee/kinnisvara-ja-ehitus/vandeadvokaat-kaupo-kask-kuidas-kaituda-kui-korteril-voi-majal-on-varjatud-puudused/
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