Before purchasing property, buyers must verify the seller's ownership and any encumbrances, as legal defects in the seller's previous acquisition can affect the buyer's title. If a seller's acquisition is proven defective, a lawsuit can be initiated against the purchaser, particularly if they acted in bad faith. It's crucial for buyers to conduct thorough due diligence on the seller's acquisition history and seek warranties for lawful ownership to mitigate risks.

1. MAKING SURE YOU
LEGALLY ACQUIRE
PROPERTY
Tal Rappleyea

2. • Before purchasing a real property it is obvious that
the purchaser examines whether the seller is the
registered owner of the property and whether the
title deed lists any encumbrances relating to the
property.
• If the investigation stops at this point and does not
cover the transaction on the basis of which the seller
acquired the property, the purchaser may face some
unpleasant surprises.

3. • According to the principles of the civil law,
ownership rights can only be acquired from the
owner. This principle applies to properties as well:
the purchaser can only acquire ownership if the
seller was the owner of the property. As the land
registry authentically certifies who the owner of the
property is, it seems easy to check the owner of a
real property.

4. ACTING IN GOOD OR BAD
FAITH?

5. • An obvious question arises: does it affect the new
purchaser of a property if its seller is the registered
owner upon the acquisition but, later, the preceding
acquisition of the property by the seller proves to be
invalid or defective in any other manner?
• Unfortunately, the answer is yes.

6. • In case the contract on the basis of which the seller
acquired the ownership of the property is legally
defective then a lawsuit can also be initiated to
cancel the ownership of the purchaser who
acquired the property from the seller.
• Regarding the preconditions of such lawsuit the law
differentiates whether the purchaser acted in good
faith or in bad faith: whether, upon the acquisition
the purchaser knew or should have known that the
previous acquisition of its seller was defective.

7. • The situation is different if the purchaser acted in
bad faith at the time of the acquisition, i.e. it knew
or should have known that the previous acquisition
of its seller was invalid. In this case, the lawsuit to
cancel the ownership of the purchaser can be
initiated without time limits.
• This rule is somewhat justified: if the purchaser
already knew at the time of its acquisition that its
seller’s ownership right was defective then it is
reasonable that the purchaser is not exempted from
the related adverse consequences.

8. !
THE EFFECTS OF A RIGHT
OF RESCISSION

9. !
• Similar problems may arise if the agreement on the
basis of which the seller previously acquired the
ownership of the property ensured a right of
rescission to the previous seller. Is the purchaser in
risk if a right of rescission has been reserved against
its seller? Does, upon the exercise of such right, the
purchaser lose its ownership of the property?

10. !
• According to the prevailing judicial practice if the right
of rescission is exercised following the date the
purchaser duly acquired the property then such right of
the previous owner will not affect the ownership right of
the purchaser. The purchaser is, however, in risk as long
as its ownership is not registered in the land registry.
• Even if the sale and purchase agreement has been
executed and the purchaser has paid the purchase price,
the former seller will still be able to exercise its right of
rescission until the new purchaser is recorded in the
land registry. Accordingly, should this happen, the new
purchaser cannot acquire the property.

11. PROCEEDING

12. !
• As noted above, even if the seller is registered in the land registry
as the owner of the property, the purchaser could still face various
legal risks – depending on how and under what conditions the
seller acquired the ownership of the property. The legal defects in
the acquisition of the property by the seller or a right of rescission
can prevent the purchaser from acquiring the property.
• As a consequence, during the course of a legal due diligence it is
essential to examine the circumstances and documents of the
transaction by which the seller acquired the property in the past.
This is particularly important if less than three years have passed
since the acquisition of the property by the seller. It is also justified
that the purchaser requests warranties in the course of the
transaction regarding the lawfulness and completeness of the
acquisition of the property by the seller, associated with some form
of financial guarantees.