Deposit in Real Estate Purchase in the Republic of Croatia – How to Avoid Losing Money When Signing a Preliminary Contract?
The purchase of real estate in the Republic of Croatia, especially when it comes to an apartment or a house, usually begins with the conclusion of a preliminary sales contract and an agreement on the payment of a deposit. For buyers, this stage is often crucial but also the most risky, because at that moment significant financial obligations are assumed before all legal prerequisites for the purchase have been fully verified.
In practice, it is often the case that the purchase of real estate is also connected with long-term financing through a loan, as well as additional legal checks that have not yet been completed, such as land registry status or condominium (separate ownership) registration.
What is a deposit and what is its legal role?
A deposit is an institute regulated by Article 303 of the Law on Obligations and represents a monetary amount or another fungible thing that one contracting party gives to the other at the moment of conclusion of the contract.
Its basic purpose is twofold. On the one hand, the deposit serves as proof that the contract has been concluded, and on the other hand it serves as a means of securing that the contract will be fulfilled. For this reason, a deposit is not the same as a simple advance payment, but an institute that produces specific legal effects from the moment it is given.
When is the contract considered concluded?
If a deposit is given at the time of concluding the contract, it is generally considered that the contract has thereby been concluded, unless the parties have explicitly agreed otherwise. In the case of proper performance of the contract, the deposit is most often either credited towards the total purchase price, i.e. it forms part of the purchase obligation, or it is returned if so explicitly agreed.
Can a party withdraw from the contract?
If the contract does not specifically provide for the right of withdrawal, the party that gave the deposit cannot unilaterally withdraw from the contract and demand its return, just as the other party cannot unilaterally terminate the contract by simply returning double the amount of the deposit.
In this way, the deposit functions as a mechanism for stabilizing the contractual relationship and limits the possibility of unilateral withdrawal from an already concluded transaction.
What happens if the contract is not fulfilled?
The legal consequences of non-performance of the contract depend on which party is responsible for such non-performance.
If the party that gave the deposit is responsible for the non-performance, the other party may demand performance of the contract if it is still possible, or claim damages, whereby the deposit may be included in the compensation for damages or retained as a form of compensation.
If the party that received the deposit is responsible for the non-performance, the other party may demand performance of the contract if possible, or claim damages with the return of the deposit, or in certain cases even the return of double the amount of the deposit.
Deposit and withdrawal fee – an important distinction
A deposit may also have another function if so agreed, namely it may represent a withdrawal fee.
In that case, the parties are mutually authorized to withdraw from the contract, but under certain consequences. If the party that gave the deposit withdraws, it loses it, while if the party that received it withdraws, it is obliged to return it in double the amount.
In this way, the deposit ceases to be only a means of securing performance of the contract and becomes a predetermined “price of withdrawal”.
The most common risks in preliminary real estate contracts
When purchasing apartments in new developments or real estate that does not yet have fully regulated land registry status, preliminary contracts often provide for the payment of a significant part of the purchase price in advance, before all legal and technical prerequisites for concluding the main contract have been fully met.
The problem arises when the contract does not clearly distinguish the deposit from a part of the purchase price, when it provides for the retention of the entire amount paid, or when it does not precisely regulate what happens if the main contract cannot be concluded.
Such situations are particularly risky when condominium (separate ownership) registration has not yet been carried out, when there are unresolved land registry issues, or when the buyer depends on loan approval that has not yet been finalized at the time of the preliminary contract.
In all these cases, there is a real risk of losing a significant amount of money, even if the final purchase of the property does not take place.
Why is legal review of the preliminary contract crucial before purchasing real estate?
In conclusion, we note that preliminary contracts may contain various legal and financial pitfalls that can easily be overlooked by a person without legal knowledge. In practice, it often happens that preliminary real estate purchase contracts are drafted by construction companies, investors, or real estate intermediaries, i.e. agents, who simultaneously act as sellers or as persons interested in ensuring that the transaction is completed as quickly as possible. For this reason, such preliminary contracts often do not contain sufficiently precise legal provisions or do not clearly distinguish key institutes such as deposits, advance payments, and parts of the purchase price.
A deposit is one of the most important institutes in real estate transactions, but also one of those that most often leads to misunderstandings and financial consequences in practice. For this reason, when purchasing real estate, it is crucial to clearly regulate its legal regime in order to avoid ambiguities and potentially serious financial losses.
When purchasing real estate, it is important that preliminary contracts are legally reviewed before signing, especially in cases where the conclusion of the contract takes place before the completion of all land registry or administrative procedures, for example before the implementation of condominium (separate ownership) registration.
