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Preliminary agreement for real estate transaction without a shareholder resolution?

A company may enter into a preliminary agreement to buy or sell real estate without obtaining shareholder approval, but the lack of a shareholder resolution will prevent the parties from seeking a court order enforcing the promise to go through with the transfer.

In a real estate transaction, a preliminary agreement is typically used when the parties need to agree on the terms of the future sale but there is some barrier to signing the final agreement immediately or a need to postpone the signing. Under Art. 389 §1 of the Polish Civil Code, a preliminary agreement must define the objectively essential terms of the final agreement. In the case of a sale agreement, this means it is necessary to identify the parties, the subject of the sale, and the price. If one of the parties later refuses to enter into the promised sale, the other may seek damages based on the expectation of entering into the final agreement (referred to as the “weaker effect” of a preliminary agreement, under Civil Code Art. 390 §1). However, if the preliminary agreement meets the requirements for validity of the final agreement, particularly with respect to form, the party may seek specific performance, i.e. a court order concluding the final agreement as such (the “stronger effect” of a preliminary agreement, under Civil Code Art. 390 §2).

Under the construction used in Polish law, when a party seeks to enforce the stronger effect of the preliminary agreement, it applies to the court for issuance of a constitutive ruling under Civil Code Art. 64, under which the legally final ruling by the court upholding the defendant’s obligation to submit a declaration of intent to enter into the final agreement takes the place of the defendant’s actual submission of such declaration—resulting in conclusion of the final agreement in a substitute form, by court order. The terms of the final agreement are established by the court on the basis of the terms set forth in the preliminary agreement.

In the context of agreements connected with transfer of ownership of real estate, it is important to note the corporate consents required for conclusion of the dispositive agreement. Under Art. 228(4) or 393(4) of the Commercial Companies Code, acquisition or disposal of real estate, perpetual usufruct or a share in real estate by a limited-liability company or joint-stock company requires a shareholders’ resolution, unless otherwise provided by the articles of association or statute, respectively. Under Art. 17 §1 of the code, when the law requires a shareholders’ resolution for a transaction by the company, a transaction conducted without a shareholders’ resolution is invalid. Thus, unless otherwise provided by the articles of association or statute, a dispositive agreement by a limited-liability company or joint-stock company acquiring or disposing of real estate requires a resolution of the shareholders, and without a resolution the dispositive agreement will be invalid.

Applying these requirements to a preliminary agreement, the Polish Supreme Court has held that “neither commencement of negotiations by the management board on acquisition of real estate (or perpetual usufruct of land) nor conclusion of a preliminary agreement, even with far-reaching effect (Civil Code Art. 390 §2), but not resulting in acquisition of ownership of the real estate, does not require a resolution of the general meeting” (judgment of 6 February 2009, Case No. IV CSK 271/08). From the formal point of view, this holding of the Supreme Court is correct, because no regulation imposes on the parties a requirement to hold a corporate resolution at the stage of entering into a preliminary agreement on acquisition or disposal of real estate. The consequences of the lack of the relevant resolutions when a preliminary agreement is concluded are a separate issue, however. In practice, the lack of such resolution essentially prevents specific enforcement of the preliminary agreement. Thus if one party to the transaction refuses to enter into the final agreement, the lack of the required consent of the party’s relevant corporate authority prevents the other party from obtaining an order from the court substituting for the defaulting party’s declaration of intent to conclude the final agreement. While a court order may take the place of a declaration by the body authorised to represent a party, it may not take the place of a shareholders’ resolution that is required by law. The lack of such resolution renders the transaction invalid by operation of law, and in this situation the court has no authority to issue an order substituting for the party’s declaration of intent.

In such a case, the plaintiff may only exercise the weaker effect of the preliminary agreement and seek damages for the injury it has suffered in expectation of concluding the final agreement. However, such damages are limited to reimbursement of the out-of-pocket expenses of preparing and concluding the preliminary agreement, and do not in the least include the benefits the plaintiff would have obtained if the final agreement were concluded. The parties to a preliminary agreement may stipulate a different measure of damages, however (Civil Code Art. 390 §1).

In consequence, even though at the stage of entering into a preliminary agreement for acquisition or disposal of real estate, a limited-liability company or joint-stock company is not formally required to obtain a shareholders’ resolution approving the transaction, the other party should nonetheless request a resolution so that in the future it may seek specific performance. This will be the case even if the preliminary agreement is signed in the form of a notarial deed.

The question then arises whether the preliminary agreement will be fully enforceable if the required resolution is presented only after the preliminary agreement is signed, or, since it was concluded without a resolution, its enforceability will continue to be limited only to the weaker effect. The first answer is correct. As discussed above, the resolution is a necessary condition for the validity of the final agreement, not the preliminary agreement, and it is irrelevant at what time before conclusion of the agreement transferring ownership (or perpetual usufruct) of real estate the resolution was adopted. A party entering into a preliminary agreement with a company that is acting without holding the required resolution may, for example, demand that the resolution be presented within a certain time after the preliminary agreement is signed or it will renounce the agreement due to the fault of the other party. Such a clause could also impose contractual penalties.

Stefan Jacyno, Real Estate & Construction practice, Wardyński & Partners

Kinga Ziemnicka, Corporate Law, Restructuring and Business-to-Business Contracts practices, Wardyński & Partners