Buying an apartment that hasn’t been built yet?
When you buy an apartment under construction, you are protected against developer delays only if that protection is written into the contract. The Law on Obligations (LoO) provides the framework, but it does not grant a contractual penalty for delay on its own. The penalty exists only if it is included in the contract, and in the form the law requires.
Buyers usually pay most of the price up front and receive the apartment months or years later. When the developer is late, the buyer often ends up paying rent and a mortgage instalment at the same time. In this article, we explain how a contractual penalty works under Montenegrin law, where buyers most often lose their rights, and what to check before signing.
What is a contractual penalty?
A contractual penalty is an amount the developer owes the buyer if it fails to perform an obligation or performs it late. The buyer does not have to prove any loss. It is enough that the deadline has been missed.
The Montenegrin Law on Obligations regulates contractual penalties in Articles 277–283. The most important rules for buyers are:
- Presumed to cover delay: unless the contract says otherwise, the penalty is presumed to have been agreed for the case of late performance.
- Only for non-monetary obligations: a contractual penalty cannot be agreed for a monetary obligation. The developer’s obligation to build and hand over the apartment is non-monetary, so a penalty can be agreed for it. If the buyer is late with a payment, statutory default interest applies instead (Article 284).
- Amount: the parties are free to set the amount, as a lump sum, a percentage, or an amount per day or month of delay. In practice, the amount is often set to match the monthly rent of a comparable apartment.
- Form: the penalty must be agreed in the same form required for the contract that created the obligation. A real estate sale contract is concluded as a notarial deed, so the penalty must be included in that deed. A verbal agreement or an informal annex is not enough.
- Performance and penalty together: with a penalty for delay, the buyer can demand both the handover of the apartment and the penalty. There is no need to choose between them.
When the developer does not owe the penalty
The developer is in default as soon as it fails to perform within the agreed deadline, and the contractual penalty starts to run from that day. This is why the handover deadline must be set as a clear date, not with wording such as “after the occupancy permit is issued”.
The developer is released only if it proves that the delay was caused by circumstances it is not responsible for. In that case, the penalty agreement has no legal effect. Typical defences are force majeure, delays by authorities in issuing permits, and weather conditions. The burden of proof is on the developer.
A well-drafted contract narrows that room. It should state:
- which events count as force majeure and which do not (for example, rising material costs, problems with the contractor or with financing);
- the deadline by which the developer must notify the buyer of force majeure in writing;
- that the deadline is extended only for the actual duration of the disruption;
- the maximum total extension, after which the buyer may terminate the contract.
The biggest trap: the handover of the apartment
The buyer loses the right to the penalty if they accept the apartment without immediately stating that they reserve the right to the contractual penalty. The Supreme Court of Montenegro has confirmed this rule:
“Where the debtor is late in performing an obligation, a creditor who has accepted performance without informing the debtor that they reserve the right to the contractual penalty is not entitled to payment of the contractual penalty.”
Judgment of the Supreme Court of Montenegro, Rev. IP. No. 179/19 of 19 November 2019
In practice: write this sentence into the handover record: “The buyer reserves the right to the contractual penalty for the delay in handing over the apartment.” If the developer refuses to include it, send them a written statement the same day by registered mail or email.
Can a court reduce the penalty, and what if the loss is greater?
At the developer’s request, a court may reduce the penalty if it is excessively high compared to the loss the buyer has suffered.
For the buyer, this means the amount of the penalty should be justified. A penalty equal to market rent or a mortgage instalment is easy to defend as a reasonable estimate of the loss.
On the other hand, the penalty does not limit the buyer:
- the buyer is entitled to the penalty even if they suffered no loss, or if the loss is smaller than the penalty;
- if the loss is greater than the penalty, the buyer can claim the difference up to full compensation, but must then prove that greater loss.
This is why you should keep lease agreements, rent payment receipts and evidence of any other costs caused by the delay.
Due diligence: what to check before signing
Most of the buyer’s protection is decided before signing, by checking the developer, the project and the contract itself.
The developer and the project
- Who the developer is: an extract from the Central Register of Business Entities (CRPS), the authorised representative, and any account freezes or bankruptcy proceedings.
- Rights to the land: the title deed (property certificate), encumbrances (mortgages, notes of pending disputes) and who owns the plot.
- Building permit: whether it exists, who it is issued to, and whether the apartment on offer matches the main design.
- Financing: whether the project is mortgaged to a bank and how the apartment will be released from that encumbrance.
The contract
- A handover deadline set as a date, not tied to an event that depends on the developer.
- A contractual penalty for delay, with a clear calculation (per day or per month), included in the notarial deed.
- A precise definition of force majeure, with a deadline for notifying the buyer and a maximum duration.
- The buyer’s right to terminate the contract and get their payments back if the delay exceeds a set period.
- A payment schedule tied to construction stages, with part of the price withheld until handover.
- Security for the return of the buyer’s money (a bank guarantee, a mortgage, or registration of the contract in the cadastre).
Conclusion
A contract for buying an apartment under construction is usually drafted by the developer, and it protects the developer. The contractual penalty is the buyer’s strongest tool, but only if it is properly agreed and the buyer does not give it up by oversight at handover.
That is why due diligence should never be skipped. Checking the developer, the land, the permits and the draft contract before signing is the most reliable way for a buyer to know what they are investing in, and to protect themselves while they still can.
Sources
This article is for information only and does not constitute legal advice for any specific case.
Adžić & Knežević Law Firm
