A recent judgement of the Italian Supreme Court published in February 2018 is the epilogue of a sad story of the Italian couple, who delayed the completion of their property acquisition, only to see their property being taken away from them and purchase price they had paid lost in the whirlwind of their vendor`s insolvency.

It can only serve as a reminder to anyone contemplating the purchase of an Italian property, not to “save” on formalities, and not to delay on completing the acquisition. Once you sign a preliminary contract and pay the deposit, you should aim to complete the acquisition as soon as possible. If you cannot do so, you should take precautions.

The Italian proceedings relate to the saga of a young Italian couple who in 1994, signed a preliminary contract, paid the full purchase price and were allowed into the property by the vendor, an Italian builder. They did not register (Trascrizione del Preliminare) their preliminary contract, as provided for by legislation that at the time had recently been introduced in the Italian Civil Code, they did not bother to complete their acquisition with the notarial deed of purchase (Compravendita), or may be more likely, they did not have the funds to pay Italian taxes due on the purchase and registration of Italian properties.

Presumably, having paid the full purchase price and being in actual position of the property, their new home, made them feel safe. A seriously misleading impression.

The couple eventually finalised their acquisition, only in 1997 by signing the notarial purchase deed, more than three years later. By this time, their vendor was showing signs of insolvency, data relating to their vendor`s unpaid bills of exchange / cheques (Protesti) was entered in the local public records (of which the buyers were deemed to have notice).

Their vendor, the builder, was eventually declared bankrupt (Fallito) a few months later (28.11.1997).

The Trustee of the vendor`s bankruptcy applied to repossess the property, and the local courts (Tribunale di Ascoli Piceno) in January 2003 granted the application. The couple had effectively, lost their property.

An appeal was lodged with the Corte di Appello di Ancona, with the result that in November 2010 the ruling in first instance was confirmed. The unfortunate couple appealed to the Italian Supreme Court (Corte di Cassazione) in Rome and was disappointed to see their application rejected in February 2018. A very sad story indeed.

The legal background

Under Italian law only limited companies, commercial concerns and entrepreneurs (Imprenditori commerciali) are subject to insolvency legislation.

Detail from the Italian Supreme Court

Detail from the Italian Supreme Court

Where insolvency is formally declared, under legislation that has subsequently been amended, any contract involving monetary consideration (Atti a titolo oneroso) made within a year before the declaration of bankruptcy can be declared null and void by the courts on the application (Azione revocatoria) of the vendor`s trustee in bankruptcy (Curatore fallimentare).

In property matters, the actual contract for the transfer of the legal title to the Italian property can only (with one exception) be made by notarial deed of purchase (Compravendita). A preliminary contract (Compromesso) on itself is not usually sufficient.

Until the notarial deed of purchase is actually signed in front of a local Italian notary and actually registered at the Italian land registry, however many years earlier a preliminary contract may have been signed, however many years earlier the full price was paid and the buyer was allowed into the property, agains with some exceptions, there is no actual transfer of the legal title of the Italian property to the buyer.

So, when under Italian Insolvency law there is a “risk period” of one year before the date of actual declaration of the vendor`s insolvency, time does not start to run for the buyer, even if the buyers signed the preliminary contract, paid the full price and was allowed into the property many years earlier. Under Italian insolvency law, the one year`s window of risk is still left open, if no notarial deed of purchase was actually signed and duly registered at least one year earlier. An opportunity for the vendor`s trustee in bankruptcy.

In practice what would happen (and the risk is still there, albeit in a reduced form under the current legislation) is that where Italian insolvency law applies, and the one year`s deadline has not lapsed, the court will usually declare the sale null and void. The property would then revert back to the vendor / his liquidator in bankruptcy, and the unwitting buyer (who in this case had already paid the whole of the purchase price, many years earlier) would be listed among the unsecured creditors, whether or not he / she was allowed in possession. The chances of recovering the purchase price paid, being negligible !

A double whammy for the buyers in this case.

They lost their property, and very probably also the full purchase price they paid for it. The Italian Supreme Court ruled that it did not matter when the preliminary contract was actually signed and the deposit / full purchase price was paid (1994), the property contract had actually and legally been made only when the purchase had been completed in front of a notary and duly registered at the Italian land registry, in June 1997. Critically, only a few months and less than a year before the vendor`s bankruptcy was declared at the end of November 1997. By then, it was too late, the buyers were doomed.

The relevant Italian insolvency provision is still in the Civil Code, even if amended, so this story can at least serve as a warning to other buyers of Italian properties.

Also, any sale completed six months before the declaration of bankruptcy may now be declared null and void, subject to a number of conditions. Special caution should still be taken, when buying property from a builder / commercial entrepreneur / a company.
It is important to note that similar risks attend purchases from private individuals, who although not subject to insolvency law in Italy, are certainly subject to enforcement proceedings by unpaid creditors.

Precautions available to Italian property buyers
So, what can be done to avoid the pitfall illustrated by this recent judgement of the Italian Supreme Court? There are several options you should discuss with your Italian lawyer:

a) Stick to the usual purchasing procedure of a preliminary contract with payment of a small (10% deposit), quickly followed by the notarial deed of sale (Compravendita). Do not delay. Do not pay a large deposit / the full purchase price on exchange of contracts.
b) Take advantage of the provisions in the Italian Civil Code (article 1461) that allow a buyer to suspend performance of a contract, where the other party` finances have deteriorated to the extent that the contract may not be further performed. However unpleasant, it is better to lose the deposit, than to lose the property and the whole price paid for it.
c) If you really cannot complete your acquisition with a notarial deed of sale, shortly after exchange of contracts, make sure that you register your preliminary contract (Trascrizione del Preliminare) as expressly requested by the Italian Civil Code. If the vendor is later bankrupt, the prospective buyer may still lose the property, however will have priority (legal protection) for the money paid to the vendor, over the vendor`s unsecured creditors.

The wise words of Marcus Cato, ancient Roman statesman and orator, are still true today: “He who hesitates is lost”!

Dr Claudio Del Giudice

23.05.2018 – Copyrights reserved