Preliminary Real Estate Purchase Agreements: Effectiveness and Risks

This page is a translation of the original Portuguese text, provided for convenience. It deals with Brazilian law. If there is any discrepancy, the Portuguese version prevails. Read the original in Portuguese

The preliminary purchase and sale agreement is an essential tool in real estate transactions. It creates rights and obligations for both parties, but it can be enforced against third parties only if it is registered.

Legal nature of the preliminary purchase and sale agreement

The compromisso de compra e venda (also called a promise of purchase and sale, or a preliminary contract) is the instrument by which the parties commit to each other to enter into the final purchase and sale contract for the property at a later date. It is a stand-alone contract with its own legal effects, governed by articles 1.417 and 1.418 of the Civil Code and, for urban land subdivisions, by Law No. 6.766/79.

Unlike the final public deed, the preliminary agreement may be executed as a private instrument, regardless of the property’s value. This makes real estate transactions easier, because the parties do not have to go to a notary’s office at the preliminary stage. That cuts costs and speeds up the process of formalizing the deal between buyer and seller.

When the agreement is registered in the property record (matrícula), it gives the prospective buyer a real right of acquisition under article 1.417 of the Civil Code. This right allows the buyer to demand that the seller (or the seller’s heirs and successors) execute the final deed. If the seller refuses to perform the contractual obligation, the buyer may obtain compulsory adjudication (a court-ordered transfer of title).

Essential clauses and drafting precautions

The preliminary agreement should include the full identification of the parties (name, nationality, marital status, occupation, CPF (Brazil’s individual taxpayer registry number), and address). It should also contain a detailed description of the property (as shown in the property record at the real estate registry), the price and payment terms, the deadlines for executing the final deed, and the penalties for each party’s failure to perform its obligations.

An irrevocability clause is fundamental to the security of the deal. When it is included, neither party can unilaterally back out of the contract without bearing the legal and financial consequences provided for in it. Without this clause, the promise may be treated as revocable, which weakens the position of a buyer who has already made partial payments to the seller.

The payment terms should be precise, stating amounts, due dates, inflation adjustment indexes, and the consequences of late payment. Installments tied to future events (such as approval of a bank loan) should set maximum deadlines and provide alternative solutions in case the event does not occur within the period the parties set in the contract.

Unlike the final public deed, the preliminary agreement may be executed as a private instrument, regardless of the property’s value.

Clauses on possession of the property deserve special attention. The contract should state when the buyer takes possession (at signing, after full payment, or on a specific date), who is responsible for taxes and charges between signing and the final deed, and the conditions for inspecting the property and the buyer’s acceptance of it as the purchase is being formalized.

Registering the agreement and its effects

Registering the preliminary agreement at the real estate registry gives the deal public notice and makes the prospective buyer’s right enforceable against third parties. Without registration, the agreement is valid only between the contracting parties. It does not prevent the seller from transferring the property to someone else, or the seller’s creditors from seizing the property that is the subject of the promise.

Registration is especially important in long-term installment purchases, where the buyer makes payments for months or years before paying off the price and receiving the final deed. During that time, registration protects the buyer against the seller’s insolvency, fraudulent transfers, and court-ordered liens on the property that was promised for sale.

For subdivided lots, Law No. 6.766/79 requires registration of the preliminary agreement as a condition of its validity against third parties. The developer must give the buyer the registered contract, and a refusal may lead to administrative and criminal penalties under the specific legislation that regulates the subdivision of urban land in Brazil.

Default and termination of the agreement

When the buyer defaults (usually by failing to pay installments), the seller may seek to terminate the contract, following the applicable legal formalities. The buyer must be placed in default by an out-of-court notice that allows a reasonable period to cure the default before a lawsuit for contract rescission is filed against the defaulting prospective buyer.

When the contract is terminated because of the buyer’s fault, well-settled case law guarantees a partial refund of the amounts paid, minus the seller’s expenses and the contractual penalty clause. The percentage the seller may retain varies with the circumstances of the case, but courts usually limit it to between 10% and 25% of the amounts paid, except in cases governed by Law No. 13.786/2018 for off-plan properties.

When the seller defaults (by refusing to execute the final deed after full payment), the buyer may file a lawsuit for compulsory adjudication. This lawsuit seeks to substitute for the seller’s consent. The buyer obtains a judgment that takes the place of the public deed and allows the transfer to be registered directly at the competent real estate registry.

To protect your interests in a preliminary purchase and sale agreement, it is essential to have the help of a specialized attorney who can review the contract, advise you on registration, and make sure every clause complies with current law and serves your interests in the planned real estate transaction.

Preliminary agreements and bank financing

It is common for a preliminary purchase and sale agreement to be signed as a preparatory step before bank financing. In that scenario, the contract provides that closing depends on the lender’s approval of the loan. It sets deadlines and consequences in case the financing is not approved within the period the parties set in the contract.

The deposit (arras, or earnest money) paid when the agreement is signed may be either confirmatory or penitential. Confirmatory earnest money is credited against the price. If a party fails to perform, the innocent party has the right to keep it, plus damages. Penitential earnest money works as a pre-set measure of damages, limiting compensation to the amount of the deposit regardless of the loss the innocent party actually suffered.

Qualified legal guidance while negotiating and formalizing the preliminary agreement is an investment that prevents future disputes and gives both parties to the real estate transaction legal certainty while the final contract is being formalized.

Frequently Asked Questions

Is a preliminary purchase and sale agreement as valid as a deed?

No. The preliminary agreement is a contract that creates an obligation to enter into the final contract (the public deed). Ownership passes only when the deed is registered at the real estate registry. However, when the agreement is registered in the property record, it gives the buyer a real right of acquisition that is enforceable against third parties and can be enforced through court-ordered compulsory adjudication.

Can I sell my rights under a preliminary purchase and sale agreement to a third party?

Assigning your rights under the agreement is allowed unless the contract expressly says otherwise. The assignee (the new buyer) takes on all the rights and obligations of the assignor (the original buyer) toward the seller. The seller must be notified of the assignment, and it should preferably be annotated in the property record so that it is effective against third parties and gives full legal certainty.

What happens if the seller refuses to execute the deed after the price is paid in full?

A buyer who has paid the price in full may file a lawsuit for compulsory adjudication to obtain a court judgment that replaces the public deed. The judgment is registered directly at the real estate registry and transfers ownership without the seller’s cooperation. An agreement registered in the property record makes the process easier, but adjudication is possible even without registration when full payment is proven.

As informações deste artigo são de caráter informativo e não substituem consulta jurídica individualizada. Cada caso possui particularidades que exigem análise específica.