The termination of a construction contract in return for flats does not produce a consequence limited to the extinction of the obligational relationship binding the parties. The legal position of the land shares transferred to the contractor under the contract is also directly affected by that termination; for with termination the ground on which the transfer rested falls away, and the winding up of the title deed entry created in the contractor’s name becomes unavoidable.
In such a situation the landowner seeks, through an action for annulment of title deed and registration, to recover the shares transferred and to restore the ownership position to what it was before termination.
In this briefing note we address, in all their aspects, the actions for annulment of title deed and registration that arise following the termination of a construction contract in return for flats — from the conditions of termination to the procedure of the proceedings, and from the parties to the consequences of the judgment.
Termination of the Construction Contract in Return for Flats
Termination of the contract not only brings the relationship between the parties to an end but also determines the fate of the land shares transferred to the contractor. With termination the balance between the reciprocal performances is disturbed, and the legal ground on which the transfers already carried out rested becomes a matter of dispute.
The Link Between Termination and the Claim for Annulment of Title Deed
When the contract comes to an end, the legal ground sustaining the transfer of the land share to the contractor also falls away. As a result, the registration made in the contractor’s name loses its validity and acquires the character of an unlawful registration. If the shares are not returned of their own accord, the landowner is able to re-establish the right of ownership by bringing an action for annulment of title deed and registration.
The Legal Basis for Reclaiming the Shares
Since the ground for the transfer made on the basis of the contract falls away upon termination, the entry appearing in the registry in the contractor’s name loses its legal foundation. At this point the landowner may, relying on the right in rem, request the annulment of the entry and the registration of the immovable property in the landowner’s own name. The claim is assessed in the light of the fundamental principles governing the protection of the right of ownership.
On What Grounds May the Contract Be Terminated?
The construction contract in return for flats is a contract of mixed character which contains elements of the contract for work and rests on reciprocal performances. By reason of that structure, termination arises in four principal situations: complete non-performance of the obligation, performance that does not conform to what was required, default on the part of the contractor, or the objective frustration of the purpose pursued by the contract. In making the assessment, the terms of the contract, the particular circumstances of the case, the periods granted to the contractor and the gravity of the breach are weighed together.
Failure to Commence Construction at All
Where the contractor does not set about the work within the period provided for in the contract or within a reasonable time, this demonstrates that the obligation has not been performed. In such a case the landowner may grant an appropriate period and rely on the provisions governing default; if performance does not take place within the period granted either, the conditions for termination are made out.
Exceeding the Delivery Deadline
Failure to complete the building by the delivery date fixed in the contract amounts to delayed performance. If the delay does not rest on a justified reason and exceeds reasonable limits, the landowner may proceed to terminate. In determining the period, the text of the contract, any additional periods granted subsequently and the conduct of the parties during that process are decisive.
Incomplete or Defective Workmanship
Where the building is produced in an incomplete or defective manner, contrary to the project, to the zoning legislation or to the terms of the contract, it cannot be said that performance has been rendered as required. The defect being material, or its rectification being impossible, may give rise to the right of termination.
Building Permit and Occupancy Permit Problems
The contractor’s failure to obtain the building permit, embarking on works contrary to the permit, or the inability to procure the occupancy permit prevents the contract from attaining its purpose. Obstacles of this kind may render performance impossible in fact and constitute just cause for termination.
Technical or Financial Inadequacy of the Contractor
The contractor’s technical equipment proving inadequate, its being deficient in organisation, or its falling into a position in which it cannot finance the project, are indications that performance has been placed in jeopardy. With a view to forestalling grave breaches that would arise in the future, such situations may be regarded as just cause for termination.
Default and Conduct in Breach of Contract
Where the contractor acts contrary to the obligations it has undertaken and fails to perform, the provisions governing default come into play. If performance does not take place although the landowner has served notice granting an appropriate period, the contract may be terminated. Here, the regularity of the notice, the sufficiency of the period granted and whether the conditions of default have materialised in the particular case are decisive.
How Is Termination Carried Out?
Bringing the contract to an end rests, as a rule, on the contractor falling into default, acting contrary to the obligation undertaken, or the purpose becoming objectively incapable of realisation. Termination may be asserted by a unilateral declaration of intention; that said, for that declaration to produce its effect, it is required that the conditions of default have materialised, that a notice in due form has been served, and that an appropriate period has been granted to the other party. Should a dispute arise between the parties, the termination is subjected to judicial review and its consequences acquire certainty by court judgment.
Termination by Notarial Notice
Where the contractor has fallen into default in performance, the landowner must grant it an appropriate period by a notice served through a notary. If the performance is not rendered within that period either, the landowner may declare the intention to terminate unilaterally. The notarial notice serves as a decisive document for the purposes of proving both that default has arisen and that the intention to terminate has been declared.
Termination by Court Judgment
Where it is contentious between the parties whether the conditions for termination have materialised, the ending of the contract is established by judicial decision. In the action brought, the court examines whether the contractor has fallen into default, the gravity of the breach, and whether the conditions justifying termination have materialised. The judgment given adjudicates that the contractual bond between the parties has come to an end.
The Distinction Between Just and Unjust Termination
Where the termination rests on a just cause, the terminating party enjoys the legal consequences afforded by rescission of the contract and, as a rule, does not incur an obligation to pay damages. Termination effected without a just cause, by contrast, is regarded as unjust termination and obliges the terminating party to make good the losses suffered by the other party. This distinction comes to the fore particularly in the calculation of reciprocal claims and claims for damages.
Consequences of the Notice of Termination
With termination the bond between the parties comes to an end with prospective effect; in return, the winding up of the performances rendered up to that moment arises. Within that framework, the return of the land shares that have passed to the contractor, the value of the works produced, any claims for damages and the rules relating to unjust enrichment are assessed according to the circumstances of the particular case. Termination is at the same time one of the fundamental facts that establish the legal foundation of the action for annulment of title deed and registration.
What Remedies Are Available If Title Is Not Returned After Termination?
If, notwithstanding that the contract has been terminated, the land shares transferred to the contractor are not given back, the landowner may assert claims of a proprietary nature relying on the right of ownership. Since no ground sustaining the transfer remains after termination, the entry appearing in the contractor’s name turns into an unlawful registration. At this stage the landowner acquires the right to have recourse to the remedies that will bring the registry into conformity with the true position.
Requesting the Voluntary Return of the Shares
The first step to be taken after termination is to reclaim the land shares from the contractor voluntarily. If that request goes unanswered, the landowner must have recourse to the courts relying on the right of ownership. In practice, it is important at this stage that a notice be served and that the intention to terminate be manifested in a manner leaving no room for doubt.
Bringing the Action for Annulment of Title Deed and Registration
When the contractor does not return the shares, the landowner brings an action for annulment of title deed and registration. By the action, the deletion of the entry created in the contractor’s name and the registration of the immovable property in the landowner’s name are sought. The claim is of the nature of a proprietary claim founded on the right of ownership and is directed at the removal of the unlawful registration.
Where the Shares Have Been Transferred to Third Parties
If the contractor has passed on to third parties the land shares transferred to it, the dispute takes on a more intricate character. In that event the landowner’s claim is directed not only against the contractor but also against the third parties appearing as owners in the land registry. The legal position of those persons, however, calls for separate consideration.
The Effect of the Third Party’s Good Faith on the Outcome
Whether the person who acquired the shares stands under the protection of the principle of reliance on the land registry directly determines the fate of the action. Whereas the acquisition of a person found to have acted in good faith may be protected, the annulment of the entry may be ordered if bad faith is proved. For that reason the third party’s good faith is scrutinised with care within the framework of the particular circumstances of the case.
The Parties to the Action
In actions for annulment of title deed and registration brought following termination, establishing standing correctly is decisive if the process is to proceed soundly both procedurally and on the merits. Since the action involves a proprietary claim founded on the right of ownership, the capacities of claimant and respondent must be determined by reference to the criteria of legal interest and capacity to be sued.
Persons Who May Be Claimants
This action is, as a rule, brought by the persons whose right of ownership has been impaired. Among those entitled to bring the action, the landowner takes first place. If there is co-ownership in shares over the immovable property, the co-owners may exercise that entitlement, as may the condominium owners where condominium ownership has been established. Should the landowner die, the heirs may continue the action; furthermore, other persons who hold a right in rem in the particular case, or who have a legal interest deserving of protection, may also bring the action. In all these eventualities the common condition is the existence of a current interest, deserving of protection, that will benefit directly from the correction of the entry in the registry.
Persons to Be Named as Respondents
Standing to be sued is, as a rule, directed against the persons appearing in the registry in the capacity of owner. Within that scope, those who must be named as respondents are as follows:
- The natural person bearing the capacity of contractor or the company carrying on contracting business
- Third parties who acquired the land share from the contractor
- Other persons appearing as owners in the title deed entry
Where the shares have been passed on to more than one person, it is compulsory for everyone registered as an owner in the registry to take part in the proceedings. Since compulsory joinder of parties arises in files of this kind, a failure to direct the claim against all of them may result in the action being dismissed on procedural grounds.
Time Limits and the Statute of Limitations
In actions for annulment of title deed and registration brought following termination, the question of time limits varies according to the nature of the claim. Whereas proprietary claims founded on the right of ownership are as a rule not subject to the statute of limitations, restrictions as to time may take on importance particularly in respect of claims to be directed against third parties.
The Time Limit for Bringing the Action After Termination
Because this action, brought after termination, is a proprietary claim founded on ownership, it is as a rule not subject to the statute of limitations. The landowner may at any time seek the annulment of a registration whose legal ground has fallen away upon termination. That said, depending on the circumstances of the case, a defence of abuse of right may be raised.
The Difference Between the Statute of Limitations and the Preclusive Period
The statute of limitations does not extinguish the obligation; it merely constitutes a defence preventing that obligation from being claimed by way of an action. A preclusive period, by contrast, extinguishes the right itself once it has expired. In actions for annulment of title deed and registration this distinction takes on importance according to the basis on which the claim rests. Whereas certain claims arising out of the contract may be assessed within the scope of the statute of limitations, the position is treated differently in respect of claims founded on a right in rem.
The Effect of the Date of Knowledge
In certain types of action the starting point of the period is tied to the moment at which the infringement of the right became known. In actions for annulment of title deed and registration founded on the right of ownership there is, as a rule, no such starting moment. Even so, the date of knowledge may become decisive according to the nature of the claims asserted in the particular case.
The Position in Actions Directed Against Third Parties
If the land share has passed to third parties, whether that person acted in good faith and whether they may benefit from the principle of reliance on the registry come to the fore. In a file of that kind, besides the time limit, the legal position of the third party also affects the outcome. The protection of acquisitions made in good faith may restrict the assertion of the proprietary claim.
The Proceedings
These actions brought following termination fall among disputes of a proprietary nature founded on ownership and are heard within a procedural framework of their own. The court assesses together both whether the conditions for termination have materialised and whether the entry in the registry has become contrary to law.
The Court with Subject-Matter and Territorial Jurisdiction
In these actions, subject-matter jurisdiction lies as a rule with the Civil Court of First Instance.
As to territorial jurisdiction, the action is heard before the court of the place where the immovable property is situated. Since the jurisdiction of that court is exclusive, an action brought elsewhere will meet with a decision declining jurisdiction.
Application for an Interim Injunction
One of the most important procedural steps to be taken in files of this kind is preventing the land shares in dispute from passing to third parties. For that reason it is of great importance that an interim injunction be sought from the court when the action is brought or while the proceedings are continuing.
Where the claimant is able to establish the merits of its case on a prima facie basis, the court may order that an annotation prohibiting sale and transfer be entered on the title deed record. That protection is an effective instrument preventing the judgment ultimately obtained from being rendered ineffective.
Proof and Evidence
In actions brought following termination, the claimant bears the burden of proving that the contract was brought to an end for just cause and that the ground on which the title deed entry rested has fallen away. In practice that proof is furnished by the following evidence:
- The construction contract in return for flats signed between the parties
- Current and historical title deed records
- Notarial notices evidencing default and the intention to terminate
- The building permit together with the approved project documents
- Technical reports concerning the state of the works
- Witness statements
- Examination by a court-appointed expert
- An on-site examination to be conducted at the location
Matters such as whether the contractor has fallen into default, whether the works are defective, or whether construction was never begun at all are for the most part elucidated by examination by a court-appointed expert.
Court Fees and Litigation Costs
This type of action is as a rule subject to an ad valorem court fee. The fee is calculated by reference to the value of the land share or the immovable property that is the subject of the transfer and is paid when the action is brought. In the course of the proceedings, further items such as the expert’s fee, the cost of the on-site examination, service expenses and costs relating to witnesses may arise. As a rule, these costs are left at the end of the action to be borne by the losing party.
Attorney Fees
In files for annulment of title deed and registration founded on an allegation of concealing assets from the estate, the attorney fee is adjudicated on a proportional basis by reference to the value determined as a result of the assessment ordered by the court. In favour of the party succeeding in the action, an order is made for an attorney fee to be recovered from the opposing side within the framework of the Minimum Attorney Fee Tariff.
Apart from that, the attorney fee arising out of the contract between the party and its counsel constitutes a separate heading and may be claimed according to the outcome of the action.
Appellate Remedies
Judgments given in actions for annulment of title deed and registration are not final in nature but are open to review by the higher courts.
- Appeal: An application may be made to the Regional Court of Appeal within 2 weeks of service of the reasoned judgment.
- Appeal on points of law: Against the decision given by the regional appellate chamber, recourse may be had to the Court of Cassation within 2 weeks of the date of service. Whether that avenue is open is determined by reference to the monetary threshold, which is updated each year by the revaluation rate.
As regards the enforceability of the judgment, the Code of Civil Procedure No. 6100 contains a special rule:
Code of Civil Procedure No. 6100, Art. 367(2)
"Judgments concerning the law of persons, family law and rights in rem relating to immovable property may not be enforced unless they have become final."
For that reason, even if a judgment of annulment has been obtained, registration cannot be effected at the land registry until the appellate stages have been completed and the judgment has become final.
The Outcomes of the Action
The judgment to be given in an action for annulment of title deed and registration brought following termination directly affects the proprietary position of the immovable property and brings about the winding up of the relationship between the parties. In making its assessment the court has regard together to whether the contract was terminated for just cause, whether the legal ground for the transfer made to the contractor has fallen away, and to the legal position of third parties.
Annulment of the Entry in the Registry
If the court reaches the conclusion that the termination rested on a valid and just cause and that the registration created in the contractor’s name has accordingly lost its foundation, it orders the annulment of the entry. By that judgment, the registration which arose in the contractor’s favour and which is now legally without foundation is deleted. The removal of the entry is a consequence of a proprietary nature which brings about the elimination of the unlawful registration.
Registration of the Land Share in the Name of the Former Owner
Together with the decision annulling the entry, the registration of the land shares or the immovable property that is the subject of the transfer in the name of the claimant landowner is likewise adjudicated. The ownership is thereby re-established in conformity with the legal position prevailing before termination. The judgment of registration is constitutive in nature and brings about the direct acquisition of the right in rem.
The Winding Up of the Contractual Relationship
Although termination removes the relationship binding the parties with prospective effect, it requires the winding up of the performances rendered up to that moment. Within that scope, the value of the works carried out by the contractor, the performances rendered by the parties to one another and the benefits they have obtained are taken into account according to the circumstances of the particular case. In carrying out the winding up, the provisions on unjust enrichment and the principles arising from the distinctive character of the contract are applied together.
Claims for Damages
Following termination, claims for damages may also arise according to the fault of the parties. Losses suffered by the landowner by reason of the contractor’s default or conduct in breach of contract may be claimed within the framework of the general provisions. In the same way, if the termination was effected unjustly by the landowner, compensation for the contractor’s losses is likewise possible. The claim relationships arising between the parties are assessed separately with regard to the principles of unjust enrichment and compensatory justice.
The Independent Legal Assessment
In these disputes the real question that determines the fate of the file is not so much the claim for annulment of title deed as the justification for the termination. Unless the court reaches the conclusion that the contractor fell into default and that the gravity of the breach was such as to permit the contract to be brought to an end, it cannot be said that the entry in the registry has become unlawful. For that reason the content of the notices, the sufficiency of the period granted and the records documenting the actual level of construction must be prepared with care before the action is brought.
The loss most frequently encountered in practice is the land shares changing hands while the proceedings are under way. Since the passing of the shares to third parties acting in good faith may render the proprietary claim wholly fruitless, the interim relief stage is no less important than the merits of the action. In a particular file the following headings should be addressed as a matter of priority:
- The intention to terminate having been manifested after the conditions of default materialised and by a notice in due form
- The assertion, together with the statement of claim, of an application for an interim injunction directed at an annotation prohibiting transfer
- The recording of the physical rate of completion of the construction by way of an assessment and examination by a court-appointed expert
- The chain of transfers being extracted from the history of the title deed records and the claim being directed against all owners
- Counterclaims arising from the cost of the works and from unjust enrichment being anticipated from the outset
- The planning of a claim for damages against the possibility that the shares have passed to persons acting in good faith
Independent Legal provides advisory and litigation services at every stage of disputes arising out of construction contracts in return for flats, from the structuring of the termination process through to the correction of the title deed entry.