A real estate sale and purchase agreement, concluded when the seller and buyer agree on the contract terms, is required for any real estate transaction. Once a contract is signed, it cannot be easily canceled, so it is important to proceed with proper knowledge. This article clearly explains the basic knowledge of real estate sale and purchase agreements, checkpoints for reviewing the contract, and types of cancellation.
What Is a Real Estate Sale and Purchase Agreement? Key Features Explained
A real estate sale and purchase agreement is a contract concluded when both the seller and the buyer agree on the contract terms in a real estate transaction. It has the following three basic features.
Contract Terms Can Be Freely Determined Between the Parties
The content of a real estate sale and purchase agreement can be freely determined as long as it does not violate laws or public policy. Therefore, a contract is concluded at the parties' own responsibility is an important point to understand. If important items contain unclear conditions, there is a risk of disputes after the contract is signed.
If the Seller Is a Real Estate Company, the Contract Terms Are Restricted
If the seller is a licensed real estate broker, part of the contract terms is restricted under the Real Estate Brokerage Act. This is a protective rule intended to prevent the buyer from entering into a disadvantageous contract.
The Consumer Contract Act May Apply
The Consumer Contract Act applies to transactions between businesses and consumers. If the consumer misunderstands the contract terms or there are disadvantageous provisions, the contract may be canceled or invalidated. However, even if the party is an individual, contracts entered into for business purposes are excluded from this protection.
What Is "Liability for Non-Conformity with the Contract" in Real Estate Transactions?
Liability for non-conformity with the contract is the seller's liability when the actual transaction does not conform to the contract terms after the sale is concluded. The buyer may make the following claims.
- Demand for repair: requesting repairs so that the property conforms to the contract terms
- Price reduction: if the seller does not comply with the repair request
- Damages: only if the seller is at fault
- Contract cancellation: except for minor non-conformity
Period of Liability for Non-Conformity with the Contract
Under the Civil Code, a claim must be made within one year after the non-conformity is discovered. In practice, however, in transactions between individuals, it is often 2 to 3 months from delivery, and when the seller is a real estate company, at least 2 years from delivery is required under the Real Estate Brokerage Act.
Limiting the Scope of Liability by Special Agreement
In ordinary real estate transactions, it is possible to include a special agreement limiting the scope and period of liability. It is even possible to agree that the seller bears no liability at all, but because this is disadvantageous to the buyer, carefully check the details before signing.
What Are the 10 Points You Should Check in a Real Estate Sale and Purchase Agreement?
Carefully review the contract, and make sure every question is resolved before signing.
1. Description of the Real Estate Being Sold
Check whether the details based on the real estate registry are stated accurately.
2. Purchase Price, Deposit Amount, and Payment Date
Check the purpose of the deposit (earnest deposit, cancellation deposit, or penalty deposit) and whether the amount is appropriate.
3. Land Survey and Price Adjustment
If there is a difference between the registered land area and the actual measured area, check whether the price will be adjusted.
4. Timing of Transfer of Ownership and Delivery
Consider your moving schedule and check whether the timing is reasonable.
5. Details of the Transfer of Attached Equipment
Clarify what will be handed over and what will be removed, and also check for equipment defects. Disputes are common over the transfer of attached equipment, so special caution is required.
6. Removal of Encumbrances
Mortgage and leasehold rights are completely removed before delivery.
7. Settlement of Taxes and Public Charges
Check the settlement details and calculation method for fixed asset tax, city planning tax, management fees, and similar charges.
8. Conditions for Deposit Cancellation
Check the period and conditions under which the deposit cancellation can be exercised. It is also possible to have a contract that does not permit deposit cancellation by mutual agreement.
9. Allocation of Risk
Check the arrangements that apply if the building is damaged by a natural disaster. Normally, the seller repairs it before delivery, but if repair is difficult, the buyer may cancel the contract unconditionally.
10. Liability for Non-Conformity with the Contract and Cancellation for Breach
Check the scope of liability, the liability period, and the amount of liquidated damages (the typical benchmark is 20% of the purchase price). Also make sure to check the anti-social forces exclusion clause.
How Much Deposit Is Needed for a Real Estate Sale and Purchase Agreement?
A deposit is money paid by the buyer to the seller to guarantee performance of the contract.
Three Types of Deposits
- Earnest deposit: delivered as evidence that the contract has been concluded
- Cancellation deposit: a deposit paid as the price of canceling the contract (forfeited if the buyer cancels, returned at double the amount if the seller cancels)
- Penalty deposit: forfeited as liquidated damages in the event of default
Typical Deposit Amount
The general benchmark is 5% to 20% of the purchase price. If the seller is a real estate company, the law limits it to 20% or less of the purchase price. If the amount is too small, cancellation becomes easier; if it is too large, the contract becomes harder to conclude. Use the typical range as a guide.
What Documents Are Required for a Real Estate Sale and Purchase Agreement?
The required documents differ depending on the stage of the transaction.
At the Time of Signing the Sale Contract
Both the seller and the buyer need identification documents and a personal seal. The seller should also prepare a certificate of residence, seal registration certificate, fixed asset tax notice, certificate of building confirmation, equipment list, and property condition report.
At Settlement
In addition to identification documents, a personal seal, a seal registration certificate, and a certificate of residence, the seller also needs registration identification information (title deed) and mortgage release documents.
At Delivery
Registration identification information, a seal registration certificate, a certificate of residence, a fixed asset valuation certificate, a power of attorney for the judicial scrivener, and handover of the keys are required.
What Is the Process for Concluding a Real Estate Sale and Purchase Agreement?
Understand the general process leading up to the contract.
- Execution of a brokerage agreement: ask a real estate company to find a buyer
- Purchase application: receive an application from a prospective buyer and accept the deposit
- Discussion of the contract and important matters explanation document: check that there are no omissions or errors in the content
- Implementation of the explanation of important matters: conducted in person or online
- Contract, settlement, and delivery: if the property cannot be vacated by the deadline, it constitutes breach of contract
In What Cases Can a Real Estate Sale and Purchase Agreement Be Canceled?
Cancellation is not easy, but the following types exist.
Main Types of Contract Cancellation
| Type of cancellation | Overview | Penalty |
|---|---|---|
| Deposit cancellation | Canceled before the other party starts performance | Forfeiture of the deposit / double refund |
| Cancellation due to allocation of risk | When the property is damaged by a natural disaster | None (unconditional cancellation) |
| Cancellation based on liability for non-conformity with the contract | When there is a serious defect | None (unconditional cancellation) |
| Cancellation for breach of contract | Non-performance of the contract terms | 10% to 20% of the purchase price |
| Cancellation under a loan contingency | If the home loan application is rejected | None (contract canceled without effect) |
| Cooling-off | Within 8 days under certain conditions | None |
| Cancellation by mutual agreement | Canceled by agreement of both parties | As agreed |
Cases Where Cancellation Is Possible Without a Penalty
- If the other party is in default: if delivery or payment is not made by the deadline
- If unavoidable circumstances arise: natural disasters, serious illness, death, etc.
Points to Note When Canceling a Contract
- Cancellation by forfeiting the deposit must be made before the other party starts performance
- If you receive liquidated damages, they are treated as temporary income, and a final tax return is required the following year
- In a buyer-initiated cancellation, the brokered real estate company may claim an amount equivalent to the brokerage fee.
Because a real estate sale and purchase agreement involves a high-value transaction, carefully review each clause of the contract and make sure all unclear points are clarified before signing. It is also important to understand the cancellation conditions in case any trouble arises.
Frequently Asked Questions (FAQ)
Can I prepare a real estate sale and purchase agreement myself?
Legally, individuals can prepare one between themselves, but because specialized knowledge is required, it is safer to ask a real estate company or lawyer. In particular, liability for non-conformity with the contract and special clauses require professional judgment.
Do I need to pay the deposit in cash?
In general, it is paid in cash or by bank transfer. If the amount is large, a banker's check may also be used. Confirm the payment method before signing.
Can an online explanation of important matters be trusted?
An online explanation of important matters is a method formally recognized by the Ministry of Land, Infrastructure, Transport and Tourism and has the same legal effect as an in-person explanation. It is convenient if you live far away or have difficulty coordinating schedules.
What happens if my home loan application is rejected after the contract is signed?
If the contract includes a loan contingency, the contract can be canceled without a penalty and restored to its pre-contract state. Be sure to confirm whether the loan contingency exists and what conditions apply when signing.
If an exemption clause for liability for non-conformity with the contract is included, isn't that disadvantageous to the buyer?
If there is an exemption clause, the buyer cannot demand repairs or damages from the seller, so it is disadvantageous for the buyer. On the other hand, the purchase price is often lower for that reason, so compare the risks and benefits before deciding.
