Legal Effects of Off-Plan Sale on Both Contracting Parties

Developer’s Obligations and the Buyer’s Rights

An off-plan sale contract creates fundamental obligations on the developer’s side, matched by corresponding rights for the buyer. The most important are:

• The obligation to complete construction according to specifications as an obligation of result, meaning the developer’s liability is not discharged unless the construction is completed exactly as described. In the event of breach, the buyer may claim:

  • Specific performance, or rescission and compensation.

• The obligation to deliver the unit on the agreed date, and to deliver it fit for use and compliant with the specifications, with the consequence that any unjustified delay gives the buyer the right to:

  • Claim compensation, or rescind the contract, depending on the seriousness of the delay and its impact.

• The obligation to transfer ownership, complete procedures, and deliver documents after completion of construction and fulfillment of contractual conditions. The Court of Cassation (Court of Discrimination) has, in many of its decisions, settled on the principle that a contract relating to residential units is a valid contract because it has a special nature and is governed by the provisions of Investment Law No. 13 of 2006. Accordingly, the sale and purchase contract concluded between the parties is considered a valid contract producing its legal effects, even if the residential apartment has not been registered in the competent Real Estate Registration Directorate.

  As a result, the buyer has the right to demand:

  • Delivery of the residential apartment after completion of its construction

  • The buyer pays the full purchase price to the seller.

  In return for the buyer/claimant fulfilling this obligation, the seller/defendant must deliver the apartment voluntarily; otherwise, delivery may be compelled by the judiciary. This is because the issue of delivering the residential apartment concerns benefit and its enjoyment, not ownership for the seller or the buyer. Therefore, specific performance relating to obtaining the benefit of the property through delivery remains possible, as long as the contract concluded between the parties is considered valid.

  However, regarding the request to register the residential apartment, which is the subject of the sale and purchase contract, in the competent Real Estate Registration Directorate, this cannot be accepted or considered, because—even if the contract is valid due to its connection with the implementation of the Investment Law and as one of its outputs—the residential unit cannot be registered in the competent Real Estate Registration Directorate by compulsion against the seller. This is because a real estate sale contract is registered in the competent Real Estate Registration Directorate only with the seller’s will and consent. If the seller refuses registration, the buyer has the right to:

  • Request rescission of the sale contract (as it is a valid contract)

  • Claim compensation if there is a basis for it

  This is what has been established by the jurisprudence of the Federal Court of Cassation (Federal Court of Discrimination) in its decisions, including:

  • Decision No. 306 / Appellate Body – Real Estate / 2023

  • Decision No. 2055 / Appellate Body – Real Estate / 2024

  • Decision No. 1006 / Appellate Body – Real Estate / 2023

• Warranty against disturbance and eviction, preventing any dispute against the buyer’s right at delivery and thereafter, and guaranteeing:

  • The validity of the title deed

  • The project is free from restrictions that may hinder the transfer of ownership.

• Warranty for hidden defects after delivery, according to the general rules and any additional warranties stated in the contract, with remedies varying between:

  • Rescission

  • Price reduction, or repair depending on the seriousness of the defect.

In return, the buyer’s rights are highlighted in:

• Receiving the unit

• Transferring ownership

• Enjoying warranties

• The right to rescind and recover payments with compensation in cases of serious breach or project failure

• The right to resort to the judiciary to take precautionary measures when there is danger.

2- Buyer’s Obligations and the Developer’s Rights

The contract is not limited to protecting the buyer only; it also imposes essential obligations on the buyer, most notably:

• Payment of the price according to the agreed schedule (often installments linked to construction stages or time-based dates), and the consequences of failure to pay, which may include contractual sanctions such as:

  • Rescission

  • The developer retaining a compensatory percentage within the limits permitted by regulation or agreement.

• Receiving the unit upon its readiness within a reasonable period after notification, because refusal to receive may be considered a breach that grants the developer protective measures and rights against the buyer, as regulated by the contract and the law.

• Compliance with the contract terms and the project’s internal regulations, especially in joint projects, including (for example):

  • Service fees

  • Facility rules

  • Non-assignment before delivery except with approval, etc. In addition to bearing certain fees and expenses if the contract stipulates them.

In return, the developer enjoys key rights, including:

• Receiving the price

• Requesting rescission in the event of material breach

• Claiming compensation within agreed limits

• The right to withhold delivery or transfer of ownership until full payment is made

• Other reasonable contractual rights that do not empty the developer’s obligations of their substance.

The Financier in the Controls Governing the Holding of the Escrow Account for the Real Estate Developer

Defining the concept of the financier is considered one of the essential elements in the controls governing the holding of the escrow account for the real estate developer. The term financier appears in Article (1/Second) when defining the Real Estate Development Escrow Account, and in Article (1/D) which defined the financier as any party that contributes to the financing process of real estate development projects, whether it is the real estate developer itself or any party that participates with it in financing, whether a natural person or a legal person. This concept is directly linked to the financing structure of real estate development projects and to the parties through which the financial resources necessary to complete the project flow.

By referring to the general juristic (doctrinal) meaning, it is observed that the definition of “financier” within the scope of real estate financing often refers to the entity that practices financing activity by granting loans to applicants in return for guarantees, with the financing amount and what branches from it—such as interest and expenses—being recovered through periodic installments.

Another definition also appears, focusing on the core of the financier’s function, describing it as the party that “places at the disposal” of the financing applicant a sum of money to pay its obligations arising from a legal transaction falling within the scope of real estate financing.

Sometimes, the concept is reduced to being the party that “lends money” to financing applicants.

However, the controls governing the holding of the real estate development escrow account adopt a broader and more comprehensive definition than the common definitions in the field of traditional real estate financing. Article (1/D) defined the financier as:

• “Any party that contributes to the financing process of real estate development projects, whether it is the real estate developer or any party that participates with it in financing, whether a natural person or a legal person.”

It is understood from this text that the criterion for describing a party as a financier is not based solely on the nature of banking activity or the characteristic of “lending,” but rather on contributing to financing the real estate development project in any form whatsoever.

This definition results in three main interpretive outcomes:

1. Expansion of the circle of financiers
   The financier is not limited to banks or finance companies; rather, it includes every party that contributes financing, whether it is the developer itself or a financing partner with the developer.

2. Inclusion of natural persons
   The controls allow treating a natural person as a financier within this framework, as explicitly confirmed by the wording of the text (“a natural person or a legal person”).

3. The controls’ definition differs from the traditional real estate financing approach
   The literature related to real estate financing indicates that the financier (in its usual technical form) is often linked to licensed entities and an institutional nature, with the note that legislations regulating real estate financing may not allow natural persons to engage in real estate financing activity.

Accordingly, the financier in Article (1/D) of the controls governing the holding of the escrow account for the real estate developer means any party that contributes to financing the real estate development project—by any form of financing—whether the real estate developer itself or a financing partner, and whether this financier is a natural person or a legal person, as long as the financing contribution is connected to the project that is the subject of the escrow account.

Conclusion

The Escrow Account represents a fundamental pillar in the structure of modern Iraqi economic security. Through it, the legislator and the Central Bank were able to create an “artificial environment of trust” that compensates for the lack of personal trust between contracting parties. The precise distinction between it and both the letter of credit and the letter of guarantee reveals its unique “supervisory” role, which goes beyond mere financial security to ensuring technical performance.

Perhaps the most prominent achievement in this area is the “bold judicial jurisprudence” of the Federal Court of Cassation (Federal Court of Discrimination), which succeeded in harmonizing the rigidity of civil texts (the formality of registration) with the requirements of investment (stability of transactions) by conferring legitimacy on off-plan sale contracts and considering them valid contracts that require specific performance or adequate compensation.

To ensure the sustainability of this success, it is recommended that a special, unified law be enacted for “Escrow Accounts and Off-Plan Sales”, bringing together the dispersed controls and judicial decisions into a single binding instrument that ends the state of ambiguity and provides a safe haven for both the investor and the citizen alike.

For tailored legal guidance on escrow accounts and off-plan sales, contact Osama Tuma for Legal Services and Advisory, a trusted law firm in Iraq, to protect your rights and investments.