Pursuant to Art. 1601-13 of the Civil Code, the off-plan sale of buildings (as well as less frequent and less practical forward sales) may only be preceded with a view to the reservation of a building by the purchaser by “a preliminary contracy whereby, in exchange for a security deposit made to a special account opened in the name of the reservation beneficiary, the seller commits to reserving for the purchaser a building or a portion of a building”. This is what is known as a “reservation agreement”. [1]

The same article specifies that the security deposit funds must be unavailable, inaccessible and untouchable, until the entry into the sales agreement and above all that “the amount of the security deposit cannot excede two percent of the provisional sales price”.

In practice, however, it is not unusual to see, on the one hand, reservation agreements with no security deposit at all, and on the other hand, reservation agreements with penalty clauses for various amounts.

What are the consequences of such deviations from the law?

  • Absence of a security deposit

Pursuant to caselaw, the developer who makes the reservation may waive requiring a security deposit from the purchaser-reservation beneficiary:

“Article 1601-13 of the Civil Code does not say that a security deposit is mandatory. The provisions of Article 1601-13 of the Civil Code were designed in the spirit of protection of the beneficiary of the reservation; the person who makes the reservation, who the law does not intend to protect against what the law itself deems appropriate, is free to waive a security deposit” (Court of Appeal, 4th Chamber, 9 December 2009, Docket No. 33501; Diekirch District Court, 19 March 2019, Docket No. 22392).

In that case, the reservation agreement would be valid and the developer who makes the reservation may not avail itself of the absence of a security deposit to obtain the nullity of its own commitments under the terms of the reservation agreement (Court of Appeal, 4th Chamber, 9 December 2009, Docket No. 33501).

That said, if the purchaser-reservation beneficiary refuses to have passed the notarised sales deed, the developer who makes the reservation may neither make a claim in that regard nor a fortiori obtain any compensation.

  • The insertion of a penalty clause

The developer who makes the reservation’s inability to be compensated should the purchaser-reservation beneficiary refuse to have the deed passed by a notary shall remain in force even if, instead of a security deposit, the developer who makes the reservation had a penalty clause inserted in the reservation agreement.

Pursuant to caselaw, given that the legislation provided solely for the option of a security deposit to be provided by the purchaser-reservation beneficiary on a special account, which would be retained by the developer making the reservation should the purchaser-reservation beneficiary withdraw from the agreement (Luxembourg District Court, 10th Chamber, 30 January 2015, Civil Judgment No. 25/2015, Docket No. 160271), the very idea of a penalty clause, in the event that one of the parties unilaterally terminates the agreement, is incompatible with the very essence of a reservation agreement which excludes any firm commitment by the purchaser (Luxembourg District Court, 10th Chamber, 30 January 2015, Civil Judgment No. 25/2015, Docked No. 160271, and Luxembourg District Court, 1st Chamber, 23 January 2013, Civil Judgment No. 15/2013, Docket No. 120448).

However, pursuant to Article 1601-14 of the Civil Code, any reservation agreement clause that is contrary to the provisions of Article 1601-13 governing the preliminary agreement and the security deposit is deemed unwritten and thus not applicable.

Consequently, courts hold that penalty clauses in reservation agreements preceeding the sale of buildings to be constructed are deemed unwritten and thus exclude their application.

  • Conclusion

To reduce as much as possible the economic loss associated with the purchaser-reservation beneficiary’s refusal to close the sale for which the reservation agreement is drafted, it can only be recommended to developers making the reservation to ensure that their reservation agreements comply with the law and require that a security deposit equivalent to 2% of the sales price be made on a special account opened in the name of the purchaser-reservation beneficiary. [2]

[1] We remind readers that in this regard, any other agreement aiming at the reservation of building is nul and void.

[2] And under no circumstances on the account of the developer making the reservation because that could constitute a criminal infraction under Article VII of the Law of 28 December 1976 on the sale of buildings to be constructed and the obligation for construction defect guarantees.