Buying a second-hand apartment
Cautionary note and payment mechanism: how to protect your money in an apartment deal
In an apartment transaction, money changes hands before the right is registered. That gap, between payment and registration, is where all the risks arise. This is how it is closed.
What does a cautionary note do?
A cautionary note is an entry in the land registers giving notice of an undertaking by the rights holder to carry out a transaction, or to refrain from a transaction, in the property. It does not transfer ownership, but it does two important things: it gives notice to any third party of the undertaking made to you, and it prevents the registration of a conflicting transaction. If the seller becomes insolvent, the existence of a cautionary note is sometimes the difference between a buyer whose right is preserved and an ordinary creditor.
Why is it registered immediately?
The gap between the date of signing and the date of registration lasts months. Throughout that period the property is still registered in the seller's name, and is therefore exposed to attachments and charges arising against him. Registering a cautionary note as close to the signing as possible reduces that window of exposure to a minimum. That is why, in a well-drafted agreement, the first significant payment is conditional on registration of the note, and not the other way round.
Trust: the money held in the middle
A trust account is a central tool in an apartment transaction. The funds are deposited in it and released only when conditions set in advance in the agreement are met: discharge of a mortgage, removal of an attachment, receipt of tax clearances or delivery of possession. The advantage of a trust is that it takes the money out of both parties' hands and subjects it to written rules. The amount held in trust and the release dates are exactly where the quality of the agreement is tested.
Letter of intent: closing out the seller's mortgage
Where the apartment is subject to a mortgage, the seller's bank issues a letter of intent: a document stating the amount required for full repayment and undertaking to remove the charge on receipt of that amount. The amount is valid as at a specific date, so the date on which the letter is issued must be coordinated with the date of payment. Paying directly into the redemption account specified in the letter, and not to the seller, is the right way to do this.
Irrevocable power of attorney
An irrevocable power of attorney makes it possible to carry out the registration steps even if the seller is unavailable, is abroad or refuses to cooperate at the technical stage. It is usually given to the parties' lawyers and deposited with them, and it is one of the tools that ensure the transaction is completed by registration rather than getting stuck. For certain properties it is also required for registration with the body that administers the rights.
What does a protected payment schedule look like?
There is no single formula, but the logic is constant: each payment is made against a corresponding security, and the amount remaining at the end is sufficient to ensure that the seller completes his part.
| Stage | What is received against the payment |
|---|---|
| First payment on signing | Registration of a cautionary note in favour of the buyer |
| Interim payment | Direct transfer to the seller's bank under a letter of intent, against an undertaking to remove the charge |
| Amount held in trust | Held back until receipt of the betterment tax clearance and the municipal certificate and removal of charges |
| Final payment | Actual delivery of possession, a handover protocol and meter readings |
The simple rule: no payment precedes its security. When that order is reversed, even a transaction with an honest counterparty becomes a gamble.
What happens if the transaction is cancelled?
A good sale agreement sets out not only what happens when everything goes smoothly, but also what happens when it does not. Removal of the cautionary note, the return of funds from the trust, agreed compensation and the mechanism for giving notice of cancellation must all be settled in advance. Without this, a buyer who has rightfully cancelled a transaction may find himself in lengthy proceedings merely to get his money back, while his cautionary note remains on a property he no longer wants.
Questions and answers
How long does it take to register a cautionary note?
In most cases the note is registered close to the signing, sometimes on the same day or in the following days, provided the required documents have been prepared in advance. For property that is not registered in the land registers, the procedure is different and may take longer.
The seller refuses to have the payment made through a trust. Is that reasonable?
A blanket objection to a trust mechanism warrants a closer look. A properly structured trust does not prejudice the seller: it releases the money as soon as the conditions are met. A refusal may point to a difficulty that has not been disclosed.
What is the difference between a cautionary note and registration of ownership?
A cautionary note gives notice of an undertaking and protects against a conflicting transaction, but it does not transfer ownership. Ownership is transferred by final registration, once the tax clearances and the local authority's certificate have been obtained.
Not sure the deal is safe? Let's start with a conversation
In an initial conversation we will go over the property, the other party and the payment schedule, and tell you what needs to be checked before you sign.