Problems with Investments in Construction Projects: A Guide to Protecting Buyers’ Rights

Investing in real estate and large construction projects, often described as buying “off-plan”, has traditionally been a preferred way to preserve and grow capital. However, when the investment company or developer fails to perform its obligations, buyers may find themselves in a vulnerable position, with their money tied up and no asset actually acquired.

The most common investment problems

When a company experiences financial or organisational difficulties, the problems usually escalate as follows:

• Repeated construction delays: completion deadlines for the different stages (Acts 14, 15 and 16 under Bulgarian construction law) are postponed repeatedly for various reasons, from administrative obstacles to shortages of materials.

• Suspension of work: the project is completely frozen, while communication with the investor’s representatives becomes difficult or impossible.

• Requests for additional payments (indexation): the investor demands that annexes increasing the price be signed because of “inflation” or “higher material costs”, often under threat of terminating the contract.

• Risk of insolvency: public information appears showing that the company’s accounts have been attached by other creditors or suppliers.

• Defective performance: even when completed, the property is handed over with numerous hidden or visible defects that the investor refuses to remedy.

If you have invested in a project showing signs of instability, a swift and appropriate response is essential. The following legal steps may be considered:

1. Detailed review of the preliminary contract

Your relationship with the investor is based on the preliminary contract under Article 19 of the Bulgarian Obligations and Contracts Act. The first step is a thorough legal review:

• Deadlines and penalties: check the exact handover dates and the contractual penalties owed by the developer in the event of delay.

• Termination clauses: analyse the conditions under which you may unilaterally terminate the contract because of the investor’s culpable non-performance.

• Unfair terms: if you are an individual, you qualify as a consumer. Terms that significantly prejudice your rights in favour of the trader may be declared void under the Consumer Protection Act.

2. Out-of-court action and negotiations

Before going to court, it is advisable to attempt an amicable settlement:

• Sending a notarial notice: this is a formal way to give the investor an appropriate time to perform, for example 14 or 30 days, with a warning that after its expiry you will consider the contract terminated under Article 87 of the Obligations and Contracts Act.

• Renegotiation and security: if the company is experiencing temporary difficulties but intends to complete the project, an agreement may be concluded. You should require additional security, such as a mortgage in your favour over another property owned by the company.

3. Judicial protection: termination and recovery of payments

If out-of-court efforts fail, the next step is to bring a court claim. You may seek:

• Restitution of payments: recovery of all instalments paid to date due to culpable non-performance.

• Contractual penalties and interest: payment of the agreed penalties for delay, together with statutory interest from the date of default.

• Damages: if your loss exceeds the contractual penalty, you may also claim the excess, provided it can be proved.

4. Securing the claim

Court proceedings may take years. To ensure that assets remain available from which a future judgment can be enforced, you should ask the court for security for an intended or already filed claim.

• Registration of an injunction over the investor’s real estate.

• Attachment of the company’s bank accounts. This measure helps prevent a dishonest developer from disposing of its assets while the court case is pending.

Preventive measures for future investments

To avoid these problems in future transactions, follow these key rules:

1. Legal and financial due diligence: before signing anything, check the company in the Commercial Register and the Property Register. Are there pending cases against it? Are there attachments imposed by the National Revenue Agency or banks?

2. Use of escrow accounts: arrange for your payments to be deposited in a special bank account from which the developer may withdraw funds only after proving completion of a specific construction stage.

3. Your own lawyer: never rely solely on the investor’s lawyer or broker; they protect the investor’s interests. Engage an independent lawyer to protect yours.

In conclusion, real estate investment carries risks, particularly when it relies on promises of future construction. Protecting your money does not mean avoiding investment, but entering into carefully drafted contracts and responding promptly and firmly at the first sign of a problem. If you suspect improper conduct by the investment company, immediate consultation with a lawyer specialising in property and contract law is one of the best investments you can make in your own security.

Related articles: See our analysis of legal uncertainty surrounding construction projects on the Varna coast and our guidance on creditors’ claims in insolvency proceedings.

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