Introduction

Real estate financing is one of the most prominent means that have facilitated home ownership. However, this type of contract has created practical problems related to the responsibility of ensuring the property's soundness when defects appear. With the standardization of real estate financing contract forms by the Saudi Central Bank (SAMA), and with people's need and desire to own homes through financing, a fundamental problem has emerged at the core of the issue: if defects appear in the property purchased through financing, does the harmed party (the financing applicant) pursue the developer or the financing entity?

The Situation

If a person wishes to buy a property through financing, after identifying the property, they approach the bank to request financing to purchase it. The bank takes a purchase commitment from them, then approaches the real estate developer and buys the property from them – the bank is thus the buyer of the property. After the bank takes ownership of the property, it signs a financing sale contract with the financing applicant to buy the property – the bank is thus the seller of the property. If a defect appears in the property after it is financed, the question arises: should a lawsuit for compensation be filed against the bank as the direct seller to the client, or against the real estate developer as the first seller and the party with the original obligation to guarantee the soundness of the sold item?

Reason for Writing the Article

A client visited the company who had suffered damage from structural defects in a property purchased through financing. He had previously filed a lawsuit for compensation for the damage against the bank from which the property was purchased, but the lawsuit was dismissed due to a clause in the financing purchase contract between the bank and the client stating 'exemption from all defects.' Judicial precedent – a decision by the Supreme Court – has established the permissibility of this clause and its application.

Filing the Lawsuit

After studying the issue, examining the contracts (between the bank and the real estate developer, and between the client and the bank), and consulting with the company's team, we proceeded to file a lawsuit for compensation for the damage against the real estate developer (the first seller). We established their capacity in the lawsuit through several aspects – which will be explained later. Capacity in a lawsuit means: 'the lawsuit and defense must be by the rights holder or their representative. It is required that the lawsuit, claim, and defense be by the direct rights holder, whether they are the plaintiff, defendant, or an intervener.'

Grounds for Directing the Lawsuit Against the Real Estate Developer

The real estate developer (the first seller) has legal standing in the lawsuit through several aspects, the most prominent of which are:

First: The Civil Transactions Law

The Civil Transactions Law has guaranteed the right of subsequent parties to pursue obligations against the first party. A private successor, as defined by legal scholars, is one who acquires a specific, existing right that was previously owed by their predecessor and has now transferred to them, such as someone who buys a specific house or movable property. It makes no difference whether the right acquired by the private successor is a real right or a personal right. In this case, the buyer of the property from the bank is the private successor. Among the most prominent provisions of the law that guarantee this right are:

• Paragraph two of Article ninety-eight of the Civil Transactions Law states: 'If the contract creates personal obligations and rights related to an asset that is subsequently transferred to a private successor, these obligations and rights are transferred to them at the time the asset is transferred.'
• Article ninety-nine of the Civil Transactions Law also states that: 'A contract does not create an obligation on a third party, but it may grant them a right.' This is confirmed by Article two hundred and forty-one of the same law concerning the transfer of obligations, which states that 'the right is transferred to the assignee with its attributes, dependencies, and guarantees.'

This is what is stipulated in the contract concluded between the bank and the financing buyer, as it grants the buyer the right to pursue the real estate developer for defects – as will be explained in the second aspect.

Second: Modern Banking Formulations for Real Estate Purchase Contracts with Financing

In recent years, banks have developed real estate financing contract forms in a way that reflects advanced legal understanding of the problems that have emerged in judicial practice, and an increasing awareness of the real estate developer's responsibility towards the bank's successors, especially the financing applicant. This enhances the buyer's ability to directly pursue the real estate developer for damages. This includes:

• Article thirteen of the contract between the bank and the financing buyer, in paragraph four, states: 'The beneficiary's signature on the aforementioned certificates does not affect their right to claim compensation from the first seller of the financed asset, from whom the financier purchased the asset, or from the real estate developer, for technical or structural defects, whether apparent or hidden, in the financed asset.'
• In the same vein, Article twenty-three of the contract between the bank and the financing buyer, in paragraph two, states: 'The beneficiary has the right, in case of a defect appearing in the financed asset, to demand that the real estate developer or the first seller of the financed asset, from whom the financier purchased the asset, repair that defect or compensate for it.'

The judge accepted the lawsuit and acknowledged the real estate developer's standing as a defendant, and acknowledged the grounds we presented and argued for establishing standing. The ruling was in favor of the damaged client for compensation for the defects, and this was upheld by the Court of Appeal, praise be to God.

Conclusion and Legal Guidance

It is clear from the foregoing that the real estate developer (the first seller) has the legal standing in lawsuits for compensation for defects, even if the direct transaction in the financing contract was with the bank.

Therefore, the correct legal path for those who have suffered damages is to file the lawsuit initially against the real estate developer, based on the provisions of the Civil Transactions Law and the financing contracts themselves.

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