Purchase Of Real Estate And Material Defects: What A Prospective Buyer Should Know And How They Can Protect Themselves

In this article, we examine what constitutes a "material defect" in the sale of real estate, the risks its existence entails for the buyer, and the rights granted to them under the applicable Greek law, as shaped following the amendment of the provisions on sale by Law 4967/2022. At the same time, the cases of exclusion of the seller's liability are analysed, as well as the practical steps that the buyer ought to take in order to protect their interests effectively.

Introduction

The purchase of real estate is undoubtedly one of the most important financial decisions in a person's life. However, in practice it is not uncommon for the buyer to discover, after already signing the relevant contract and paying the price, that the property has defects which were not disclosed to them or which they were unable to detect during the usual visit before the purchase took place. Thus, in some cases the buyer discovers afterwards that the property either bears material defects, namely practical imperfections that impede the use for which properties of that kind are ordinarily intended, or lacks certain qualities that had been agreed between buyer and seller to exist in the thing sold.

What constitutes a "material defect" in the sale of real estate

A material defect exists when the property does not have the qualities that were agreed or that are ordinarily expected from properties of its kind, or when its value or usefulness is significantly reduced (Articles 534 et seq. GCC). In practice, the most common material defects appearing in real estate sales include, indicatively, the following:

• Dampness, leaks or mould concealed behind recent renovations.
• Other defects in installations (electrical, plumbing, heating).
• Unauthorised constructions or changes of use that have not been legalised under the urban planning legislation in force from time to time (see Supreme Court judgment No. 956/2019).
• Serious structural problems, such as insufficient structural adequacy, cracks or defective construction.
• The classification of the building as listed/preserved, without this being stated in the contract (see Supreme Court judgment No. 29/1990, according to which: "The classification of the building as preserved ... constitutes, also in view of Article 24 para. 6 of the Constitution in force, a lawful restriction of ownership and amounts, due to the prohibition on demolition of the preserved building on the plot which is purchased, according to its intended purpose and the sale contract, for the construction of a new building, to a material defect under Article 534 GCC. Within the meaning of this article, a material defect exists not only when it relates to the material substance of the thing, but also to its legal status, provided that this does not derive from a third party right.")
• The prohibition of building on the property or its non-habitability due to urban planning or sanitary regulations or violations.

It should be noted that the existence of real rights encumbrances (mortgage, prenotation of mortgage, easement, etc.) unknown to the buyer constitutes "legal" and not "material" defects.

The risks for the buyer

The existence of a material defect in the purchased property entails multiple risks for the buyer, which may concern both the reduction of their assets and the inability to exploit the property for the purpose for which they acquired it. Thus, the following risks arise:

a) Financial risk: The buyer may find themselves faced with significant repair or restoration costs for the defect, while at the same time the value of the property may fall substantially short of the amount they paid.

b) Legal risk: In extreme cases, unauthorised parts or urban planning violations may render the property impossible to transfer, mortgage or finance.

c) Risk of limitation of their claims against the seller: One critical point, often overlooked in practice, is that the rights which the buyer may have against the seller due to the existence of a material defect or, more generally, due to the lack of conformity of the sold item with the contract, and which will be set out below, are time-barred after the lapse of five (5) years from delivery of the property (Articles 554–555 GCC).

The seller's liability and the possibility of excluding or limiting it

Article 534 GCC provides that the seller is obliged "to deliver an item that conforms to the contract," while Article 539 GCC provides that "The seller is liable regardless of fault if the item, at the time when the risk passes to the buyer, does not conform to the contract, unless the buyer at the time of conclusion of the contract knew of the lack of conformity or this is due to materials supplied by the buyer." It is therefore observed that the seller's liability is objective, since proven bad faith or fault on their part is no longer required in order to establish liability. Only if the buyer knew of the lack of conformity of the sold item with the contract, or if this was due to materials supplied by the buyer themselves, does the liability shift to the buyer.

The critical time for the transfer of risk from the seller to the buyer is, pursuant to Article 522 GCC, the time of delivery of the property to the buyer, while in the event that registration of the sale in the Land Registry took place before delivery, the buyer bears the risk from the time of registration. Under Article 541 GCC, "Any lack of conformity appearing within one (1) year from delivery of the item is presumed to have existed at the time of delivery, unless this is incompatible with the nature of the item or the nature of the lack of conformity."

In practice, it is common for real estate sale contracts to contain clauses excluding or limiting the seller's liability for defects (see Rhodes Multi-Member Court of First Instance judgment No. 42/2009). The validity of such clauses, however, is not unlimited. First, such agreement must likewise be drawn up in notarial form. Moreover, under Article 332 GCC, exclusion of the seller's liability is not possible where fraud or gross negligence is attributable to them. Thus, even if the contract contains wording that the buyer accepts the property "as is" or "waives any right to rescind, annul and generally challenge the sale contract," such clause produces no effect in cases where the seller knowingly concealed the defect from the buyer.

The buyer's rights

The law in force, following Law 4967/2022, provides for a system of graded protection for the buyer. The hierarchy of these rights is not accidental, but serves the purpose of preserving the sale contract, where this is possible, while at the same time remedying the imbalance created by the defect. Based on the above, the legislator has provided that, in the event of non-conformity of the sold item with the contract, the buyer has the following rights:

a) Repair of the defect. Under Article 543 GCC, the buyer is entitled, first of all, to demand from the seller the remedying of the defect, provided this is feasible, at the latter's expense, without corresponding burden on the buyer. This constitutes the "first level" of the buyer's rights. It should be noted that the repair must be made within a reasonable time. The seller, moreover, is entitled to refuse to remedy the lack of conformity of the item if this is impossible or entails disproportionate costs for them.

b) Reduction of the price. If repair is impossible, excessively delayed or unsuccessful, the buyer is entitled to demand a proportional reduction of the price paid (Article 545 GCC). This reduction is determined according to the ratio between the value of the property with the defect and the value it would have had without it. The return of the corresponding part of the price is made by the seller to the buyer with interest (Article 546 GCC).

c) Withdrawal from the contract. Under Article 545 GCC, in the event of a substantial defect that renders the property essentially unsuitable for the agreed use, or if the buyer proves that they would not have proceeded with the purchase had they known of the defect, the latter may withdraw from the contract. In the event that the buyer chooses to withdraw from the contract, they are obliged, pursuant to Article 546 sentence b GCC, to return the property to the seller free from any encumbrance added by the buyer themselves (e.g. mortgage). Furthermore, the buyer must also return to the seller the benefits derived in the meantime from the property (e.g. rents). On the other hand, the seller is obliged, once they receive the item, to return the price with interest from the day of payment, the expenses of the sale (e.g. notarial fees and registration expenses) and the expenses of returning the item, as well as whatever the buyer spent on the item. In the event of withdrawal from a sale contract where the notarial deed states a price lower than that actually paid, the part of the price not stated in the contract may be claimed under the provisions on unjust enrichment (Supreme Court judgment No. 652/2011).

d) Damages. In parallel with the above rights, the buyer may seek compensation for any loss suffered due to the defect and not covered by the exercise of the aforementioned rights (e.g. the loss arising from deprivation of use of the item until the defect is repaired), or may seek damages only (e.g. the expenses of remedying the defect by themselves).

Practical advice: How to protect yourself before and after the purchase

Every buyer, before committing to a purchase either through a preliminary agreement or through a final contract, should have taken the following steps:

a) Assignment of a technical inspection to a licensed engineer. If the property sold is a building or apartment within a building, the following should indicatively be checked: structural adequacy, any unauthorised constructions or urban planning violations, as well as the condition of the electromechanical installations. If, on the other hand, it is a plot of land, such inspection should indicatively include a review of the topographic diagrams as well as the urban planning regulations of the relevant area, in order to determine whether the property is suitable for the use intended by the buyer, e.g. its buildability and legal suitability for development, as well as the determination of permitted building limits, if the purpose is the construction of a building of specific square metres. This inspection strengthens the buyer's position against any argument by the seller that the former "knew" of the defect.

b) Assignment of legal due diligence to a specialised legal adviser. Legal title due diligence ensures that the property indeed belongs to the seller, and reveals any existence of other legal defects or encumbrances on the property (e.g. mortgages, seizures, etc.). A specialised legal adviser may additionally ensure the inclusion in the contract of clauses safeguarding the buyer's interests, as well as the removal of clauses limiting or excluding the seller's liability.

c) Immediate action in the event a defect is discovered. If a defect is discovered afterwards, it is important for the buyer to collect evidence immediately and contact a lawyer as soon as possible, in order to be informed of their rights and the available options for addressing the problem. Any unjustified delay may be assessed adversely or may entail the risk of limitation.

In lieu of a conclusion

Summarising the above, it is observed that the Greek law in force, as shaped by Law 4967/2022 and Articles 534 et seq. GCC, provides the real estate buyer with a relatively strong system of protection. The seller's objective liability, the hierarchy of rights, and the prohibition on excluding liability in cases of fraud constitute the main pillars of this protection. However, such protection does not operate automatically: it presupposes vigilance, timely action and appropriate professional assistance. The combination of a full technical inspection, thorough legal title due diligence and a carefully drafted contract constitutes the safest route for the buyer who wishes to avoid unpleasant surprises after completion of the purchase. It is noted that, for every specific issue concerning the existence of a material or legal defect in real estate, immediate recourse to a specialised lawyer is recommended, as the assessment of each case depends on its specific factual circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.