Introduction
Be it for personal, professional or any other reason for which an owner may choose to sell his property, the selling process may involve numerous issues and whilst the process is relatively straightforward, guidance from legal professionals is generally called for to ensure that the rights of the seller are being protected in every step of the way.
Valuing the property
Having decided to sell one’s property, an owner’s first challenge is to establish the market value of the same and set the price for which it is to be sold. Determining the right price is crucial not only from a marketing perspective to attract potential buyers but also from a financial point of view in that the price set for the sale determines the taxable amount of the said transaction.
In theory, a seller can set any price at which the property is to be sold. In practice, however, most sellers resort to estate agencies which value the property (through the advice of their architects) and recommend a selling price to the owner after considering the local real estate market, prices of similar properties and current pricing trends. Nothing precludes a vendor from engaging more than one estate agency but typically the estate agency fees are higher in case of open agency as opposed to cases where an exclusive contract is in place. Typically, sellers opt to advertise their properties by engaging the same estate agents. In fact, most agents take out local press advertising, place property details on their websites or feature the seller’s property on their publications.
Once a prospective purchaser has been identified, the next step for the seller is to enter into a Promise of Sale Agreement. At this stage, it is highly advisable that the seller appoints a legal representative to ensure its rights are protected, since the role of the estate agents is typically limited to helping in finding the right buyer for the seller’s property.
Promise of Sale Agreement
The Promise of Sale Agreement (the konvenju) is a very important phase in the acquisition process in that it sets out the conditions under which the property shall eventually be purchased. The contract is typically concluded between the legal representatives of both the buyer and the seller based on prior negotiations.
Generally speaking, a standard Promise of Sale Agreement includes:
- Details of the contracting parties;
- Detailed description of the property;
- Details on payment of a deposit;
- Minimum conditions surrounding the purchase;
- Agreement on the remaining works to be undertaken (if any);
- Clauses on payment due to the estate agent (if any);
- Condition that on final deed, the vendor will warrant peaceful possession according to law;
- Date by which the Final Deed needs to be signed;
- Authority to the Notary to register the Promise of Sale Agreement with the Commissioner of Inland Revenue.
Customarily the Promise of Sale Agreement has a term of validity of three months; however, the parties are free to agree on a shorter or a longer period. If no time frame is indicated, the Promise of Sale Agreement has a validity of 90 days. During this period, all the conditions in the Promise of Sale on which the Final Deed rests must be fulfilled.
On signature of the Promise of Sale Agreement, the prospective buyer would typically transfer 10% of the value of the property, which is usually held in escrow by the Notary Public, typically appointed by the purchaser, and released to the vendor upon the Final Deed of Sale. For its validity, it is essential that the Promise of Sale Agreement be executed in written form. Thereupon, the document must be registered, and provisional duty amounting to 1% of the purchase price paid by the prospective purchaser within 21 calendar days to the Inland Revenue Department.
It is essential that one makes a distinction between the Promise of Sale and the Final Deed that completes the sale. This distinction is important both from an academic and practical perspective in that upon signature of the Promise of Sale Agreement, there is no change in ownership, and the prospective buyer becomes the effective owner only upon the signature of the Final Deed of Sale. Thus, following the Promise of Sale Agreement stage, risk would still lie with the prospective vendor.
What happens during the term of the Promise of Sale?
During the three month term, or as otherwise agreed upon between the parties, both parties much ensure that the conditions on which the Final Deed of Sale depends are fulfilled.
Usually, one of the conditions set in the Promise of Sale Agreement is that the property is transferred in good title and that there are no court orders or third parties that may prevent the sale or the grant of an absolute and proper title. Another condition usually imposed is that, unless stipulated otherwise, the property is transferred with vacant possession. In order to ensure that this is really the case, the Notary Public and the legal advisors of the purchaser would carry out the necessary searches. It is also customary for the buyer to subject the Promise of Sale Agreement to the issue of a bank loan. In fact, signature of the Final Deed of Sale is usually made conditional on the issuance of a sanction letter by the bank which confirms that such loan will be granted to the buyer.
Since property may be sold even prior to completion, it is common that one of the conditions in the Promise of Sale Agreement states that the property is to be completed by a set date. Failure of the owner to complete the property by the agreed date will usually terminate the obligation of the purchaser to appear on the Final Deed of Sale.
Another common condition included in the Promise of Sale Agreement is that the property be covered by all necessary permits and that the building is structurally sound. This would include permits issued by the Malta Environment and Planning Authority (MEPA) and other local authorities addressing building permits, sanitary conditions and other standards set in local legislation. In assessing whether the property is covered by such purchases and whether it is structurally sound, the purchaser typically appoints an architect who evaluates the property.
Most Promise of Sale Agreements include other conditions such as that the Acquisition of Immovable Property (AIP) Permit is issued to the buyer. In such cases, if the permit is not issued, the Final Deed of Sale does not take place and the prospective buyer gets the deposit back.
The Final Deed of Sale
Once all the conditions of the Promise of Sale Agreement are satisfied, the Notary Public drafts the Final Deed of Sale which is then signed by both parties. At this stage, the balance due (determined by taking into account the purchase price and any deposits paid on account) is paid to the vendor. In the case of a bank loan having been obtained by the buyer, the balance is not collected directly from the buyer but the seller is paid by the bank on account of the loan granted to the buyer. The keys of the property are then handed over to the purchaser or his representative.
In cases where a bank loan is taken out for the acquisition of the property, bank representatives appear on the Final Deed of Sale in order to sign the relevant documentation. In this case the Final Deed is usually divided into two parts, with an agreement made between the bank and the purchasers, and a second agreement made for the purchase of the property.
Subsequently, the Notary Public registers the transfer at the Public Registry, or the Land Registry as applicable. Through such registration, the agreement made between the parties is rendered public.
Applicable taxes
Maltese law allows the vendor a choice of two regimes under which tax can be paid, thus allowing him the possibility of choosing the more beneficial regime. This choice applies if the property is sold within seven years from the date of acquisition, at the lapse of which, tax is payable only under the Property Transfer Tax regime. Additionally, different circumstances, such as devolution of property through succession or the sale of the primary residence qualify the seller for tax exemptions or lower tax rates.
If the property is sold within seven years of acquisition, the seller may opt to pay Capital Gains Tax which is paid on the gains realized, after taking into consideration the initial cost of the purchase, any improvements carried out on the property and the eventual price for which the property was sold. Capital Gains Tax is not charged when the property being transferred has been the owner’s own residence for at least three consecutive years immediately prior to the date of transfer and is being sold within 12 months from when it was vacated.
Alternatively, the Property Transfer Tax must be paid at a rate of 12% of the sale price of the immovable property.
In the case that the property sold was acquired through inheritance, the 12% tax is charged on the excess of the transfer value over the acquisition value as declared in the deed of the Causa Mortis. If the property was inherited before the 25th November 1992, the rate of tax will be equivalent to 7% of the transfer value.
Irrespective of the regime opted for by the vendor, a provisional tax amounting to 7% of the total selling price must be deposited with the Notary Public to be passed on to the Commissioner of the Inland Revenue. All additional payments and refunds, as applicable, are settled after the final deed has been concluded and after the tax has been computed.
Conclusion
Although the process of sale of property in Malta is fairly straightforward it is however advised that you appointed legal representatives who will be able to guide you throughout the process. The binding nature of the Promise of Sale Agreement means that if this agreement is not honoured, serious liabilities will arise.
