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Seller liability for legal defects of the object

Legal defects are also known as non – material defects of the object. The object sold under the sale and purchase contract has a legal defect in case of being encumbered with the rights of the third person, excluding or constraining the rights of the purchaser, and the purchaser was not informed of the existence of the named right nor has he agreed to purchase the object encumbered with the third person’s rights. The seller is liable for all the legal defects of the object even in case there are special limitations governed by public law that the purchaser had not have knowledge of under the condition that the seller was aware of their existence or could have expected them, but did not inform the purchaser. The example of such legal defect would be if the seller sold the real estate for agricultural purposes to the foreigner, knowing or expecting there are or could be certain legal restrictions regarding the acquisition of such real estate by the foreign natural and legal persons.

In reference with the movables that are not registered in public registers, there is a small possibility that there would appear a legal defect, taking into consideration that the honest acquirer of the movable acquires the object taking the object into possession. The problems can occur in effect in relation with the sale and purchase of the real estate and movables registered in the public register (vessels, vehicles etc.)

Prior to the execution of the sale and purchase agreement it is of the essence to examine the status of the object in the public register. After it was determined that the register does not contain any registries of encumbrances or third people’s rights restricting the right of the purchaser, it is necessary to secure the purchaser’s rights during the transition period before the payment of the purchase price. Hence meaning that it is necessary to make sure that it is visible in the register that the transfer of the ownership right from seller to the purchaser is in process. In effect, it often happens, especially with the sale and purchase of the real estate, that the purchaser receives the seller’s approval for registration of his ownership right with the Land Register after the receipt of the down payment or even the full amount of the purchase price. From the moment of the purchaser’s payment of the purchase price up to the moment of filing of the purchaser’s motion for the registration of the transfer of the ownership right, the third person can notify her claim excluding or constraining the purchaser’s right regarding the object with the public register. In the event that the third person justifies her claim regarding the object, for example on the basis of the relevant court decision, the purchaser will lose his ownership right, hence the named right will be constrained in relation with the right of the third person. The risk of legal defects can be avoided with adequate agreement clauses so it is strongly recommended that sale and purchase agreement is drafted by the competent lawyer.
In effect, such situations are met in cases of the double sale and purchase of the real estate in which event the ownership of the real estate is acquired by the person that was the first to file the motion for the registration of the transfer of the ownership right. There often exist such situations in which one of the spouses is registered as the owner of the real estate with the Land Register and the same sells the real estate while the second spouse, in the meantime, starts the proceeding for determination that ½ of the real estate represents matrimonial property, which proceeding is then registered with the Land Register before the purchaser files the motion for the transfer of the ownership right. In the event that the second spouse succeeds with the proceeding for determination of the matrimonial property, the purchaser will lose the ownership right of the ½ of the real estate. When a builder is selling the real estate in construction with the deferral of payment until the real estate is completely built, it can occur that the Ministry of Finance of the Republic of Croatia notifies its right regarding the real estate for the reason of non-payment of the tax. If the seller does not settle the tax debt the state has the option to settle the tax debt including the legal interest from the value of the real estate, even if the ownership right is, in the meantime, transferred to the purchaser.

If any legal defect of the sold object occurs, the purchaser is obligated to inform the seller and invite him to free the object from the right or request of the third person within a reasonable time period or to provide the purchaser with the new object without the legal defect.

In the event that the object was deprived from the purchaser because of the third person’s request, the sale and purchase agreement would automatically terminate and the purchaser would have the right to request the repayment of the purchase price from the seller. If the purchaser’s right was only constrained, the purchaser would have the right to choose between the reduction of the purchase price in proportion with the constraint of his right and the termination of the agreement with the request for the repayment of the purchase price in full. If the purchaser was unable to fulfill the purpose of the sale and purchase agreement for the reason of the third person’s request regarding the object, the purchaser would have the right to terminate the agreement even in case that the seller does not provide the purchaser with the object free of the third person’s right within a reasonable time period. Nonetheless, the purchaser has the right to damages, unless he was aware of the possibility of being deprived of the object or his right to the object being constrained at the time period of the execution of the agreement. The purchaser who enters the legal proceeding with the third person, but has not informed the seller of the defect of the object, in case that the court passed down the decision in the legal proceeding in favour of the third person, the purchaser preserves the abovementioned rights towards the seller, unless the seller proves that he provided the legal measures to reject the third person’s claim. The purchaser may confer the right of the third person towards the object or compensate the third person for the renouncement of their right regarding the object, in which case the seller will be released from the liability if he compensates the purchaser for the payment made to the third person and the suffered damage.

The rights of the purchaser on the basis of the legal defects extinguishes with the expiration of the term of one year starting from the day the purchaser became aware of the defect. In case that the third person started a claim before the expiration of the abovementioned term, the purchaser’s right would extinguish with the expiration of the term of six months starting from the day of the final conclusion of the proceeding. The question is whether the purchaser is obligated to wait until the proceeding regarding the claim of the third person, in which the purchaser was included, is finally concluded, hence does the same enter into the legal scope of the reasonable time period for the remediation of the object’s defect. Taking into consideration the longevity of the legal proceedings where the third person proves her rights, there is a legal insecurity that will occur to the purchaser in the event that the third person’s claim is accepted by the competent court. Meaning, whether the purchaser will manage to gain the settlement and the damages from the seller at the moment of the final conclusion of the proceeding. For the same reason it is important that the purchaser’s rights are properly secured as soon as the existence of the legal defect of the object is recognized.

There is a possibility to limit or even completely exclude the seller’s liability with the sale and purchase agreement. However, such agreement clause will not enter into force if the seller was aware of the defect or could have expected that the object is legally defective, but has not informed the purchaser of such circumstances.