A property deal: how to check the seller

A buyer usually checks the property itself: the register extract, encumbrances, unapproved alterations. The seller is checked far less often, and yet it is the seller who is most often the reason a claim lands a year later.

Insolvency is risk number one

If the seller is declared insolvent within three years of the deal, the transaction falls into the suspect period. The insolvency officer will examine the price, and if it was understated the deal will be set aside: the flat returns to the insolvency estate, and you recover your money as a creditor in the register.

What to check before the deal: the unified federal register of insolvency information, by surname and taxpayer number; the file of commercial court cases; the database of enforcement proceedings; the register of security interests over movable property.

Warning signs: several enforcement proceedings, court orders for the recovery of loans, tax arrears, urgency in selling and a willingness to give a discount for a quick settlement.

Legal capacity

A challenge on the basis that the seller did not understand the meaning of their own actions is the second most common storyline, especially with elderly sellers.

What reduces the risk: certificates from the psychiatric and the narcological clinics obtained on the day of the deal; notarial certification of the transaction; video recording of the signing with the terms read out; the presence of the seller's relatives.

The risk is never removed entirely: the expert examination is carried out posthumously and assesses the person's condition as at the date of the deal. But the body of evidence showing that you acted with care is what decides the outcome.

Third-party rights

Spouse. The notarised consent of a spouse is mandatory for deals involving property acquired during the marriage. If the seller is divorced but the property was acquired during the marriage, the former spouse's consent is still required, or a document recording the division of assets.

Children. If maternity capital was used, the children's shares must have been allocated to them. A deal made without that allocation can be challenged by the prosecutor's office or by the guardianship authorities.

Registered occupants. Obtain the statement of registered occupants: those who declined to take part in privatisation retain an indefinite right of use.

Heirs. If the property was recently inherited, see the separate risk of heirs coming forward.

Checking authority and documents

The seller's passport is checked for validity through the Interior Ministry's service. A power of attorney is checked against the register of notarial powers of attorney; buying through an attorney is not a defect in itself, but it calls for direct contact with the owner.

An extract from the register of real estate is ordered immediately before the deal, and again on the day the documents are filed. What matters is not only encumbrances, but also any entries recording court disputes and registration bans.

If the seller acquired the property recently, it is worth looking at the chain of past deals: frequent resale over a short period is a classic sign of a problem property.

Payment

A letter of credit, escrow, or a notary's deposit account. Cash against a receipt is the worst option: the receipt proves that money changed hands, but it does not prove that it was the money in question, and it gives no protection if the deal is challenged.

The full price is stated in the contract. Understating it to save tax leaves the buyer without protection: if the deal is set aside, what comes back is the sum written in the contract.

Payment before the transfer of title is registered is the buyer's risk; payment afterwards is the seller's. A letter of credit removes both: the bank releases the funds once registration has taken place.

Title insurance

Insurance against the loss of ownership. It costs a fraction of a per cent of the price and covers precisely those scenarios that no amount of checking can exclude: a hidden heir, lack of legal capacity, insolvency.

For deals involving inherited housing, elderly sellers, and properties that have changed hands several times over a short period, I regard it as essential.

This material is for information only and is not a substitute for advice on your particular matter.

If you are preparing a property deal and want the seller checked, write to us. The first consultation is free of charge if an engagement agreement is concluded.

Kristina Tsypkalo — advocate, partner of the Kovalev, Malyutov, Tsypkalo & Partners Moscow Bar Association