Home ownership Irrevocable promise to pay: what you should know

An irrevocable promise to pay ensures that payment will be made by a bank or other mortgage lender

by UBS Insights 04 Jul 2024 10 min read

Content:

An irrevocable promise to pay is when one party, usually a bank, undertakes to make a specific payment. The agreement plays an important role in the purchase and sale of real estate, as well as in the repayment of mortgages.

Definition: irrevocable promise to pay

When purchasing real estate, an irrevocable promise to pay is binding proof that someone will pay for a property or that the purchase price will actually be financed. The corresponding document is usually provided by the mortgage lender. This means that the mortgage lender undertakes to pay the sales price of a property and gives the seller the certainty that the payment will be made.

An irrevocable promise to pay is also necessary if you want to repay your mortgage and switch to another mortgage lender. The new bank will issue an irrevocable promise to pay to the previous mortgage lender, who will then hand over the mortgage note underlying the mortgage to the new bank. Once the new mortgage lender has received the mortgage note, it will repay the mortgage taken out with the previous lender.

An irrevocable promise to pay as opposed to other means of guaranteeing a payment

In principle, there are various alternatives that can be used to guarantee a payment. An irrevocable promise to pay is a type of bank guarantee. However, a bank guarantee is not a precisely defined term. It can serve as a generic term to refer to various different types of hedging transactions. What they all have in common is the guarantor’s promise to assume responsibility for the payment of a debt or the fulfillment of a service in the event of default by the principal.

Advantages and risks of the irrevocable promise to pay

An irrevocable promise to pay is binding when validly issued. The advantage is that this strengthens trust between the buyer and seller.

However, there are contractual conditions to take into account when using an irrevocable promise to pay. Some issuers of promises to pay provide the promise to pay early, but impose additional conditions. In order to avoid disadvantages for the seller, the entry in the land register is only made once all the relevant points have been clarified. This involves setting a fixed date with the notary. If the conditions have not been met by this date, this usually results in the cancellation of the purchase contract and all associated rights and obligations.

How an irrevocable promise to pay works

An irrevocable promise to pay is essentially always used in the same way.

The procedure is as follows:

  1. Before the promise to pay is issued, the issuer checks the real estate transaction. This includes estimating the market value and checking the affordability of the financing, for example.
  2. The next step is to sign the mortgage agreement and deposit the agreed equity.
  3. As the buyer, you must now have a mortgage note issued by the notary’s office. This will serve as collateral for the mortgage lender. The mortgage note must cover the agreed mortgage amount at the very least.
  4. If these conditions are met, the mortgage lender will then issue the irrevocable promise to pay.
  5. The irrevocable promise to pay must be handed over to the seller at the latest when the purchase contract is signed at the notary’s office or at the land registry. The date for the transfer of the purchase amount is normally set on the date agreed for the entry of the purchase in the land register.
  6. The bank will therefore transfer the purchase price to the buyer on this date. Now it is also clear why the equity must have been deposited, the mortgage contract signed and the bank in possession of the mortgage note beforehand. All these conditions guarantee that the bank will recover the money it has invested.

What happens in the event of refusal to pay?

Given that an irrevocable promise to pay is legally binding if it has been validly issued, legal action can be taken to enforce it if payment is refused. This includes initiation of debt collection proceedings. To ensure that everything runs smoothly, legal support should generally be sought, for example from a lawyer.

Home purchase checklist: key information at a glance

From making a successful offer to moving in

Buying a property is an important milestone. The first step is to make a successful offer. But what happens next? The procedure is explained step by step below.

Purchase, down payment and preliminary contract

The law stipulates that the transfer of ownership must be authenticated by notary. For their mutual protection, both contractual parties often agree on a reservation contract in advance (also called a “purchase commitment”). This can be very brief and consist of the following:

  • the designation of the property
  • the agreed purchase price
  • the allocation of land registry costs
  • the date of transfer of ownership and the amount of any down payment – including a provision in case the buyer or seller withdraws from the contract

Notary and purchase contract

Notaries’ offices are organized differently depending on the canton. In some cantons, notaries are freelancers, in others they are employed by the state.
The notary usually draws up the draft purchase contract. Both the buyer and the seller should study the documents thoroughly and have the chance to ask questions or request changes if necessary. The notary is available to both parties to the contract to provide neutral advice.

Depending on the transaction, the individual contractual provisions vary. They usually include:

  • name of the buyer and seller
  • detailed description of the land or property
  • purchase price repayment (agreed purchase price and planned payment procedure)
  • date of transfer of ownership
  • liability for defects
  • allocation of real estate transfer and notary’s fees

It is important to avoid drawing up and signing the contract under time pressure. And remember: the content of the contract is always authoritative. Any prospectuses, sales documents or oral discussions are irrelevant from a legal perspective.

The fees for the notary’s office and the land registry differ from canton to canton and are based on the tariff in force in the relevant canton. Often the buyer and seller share the costs, in some cantons they are borne by the buyer alone.

Authentication by notary

The authentication also takes place at the notary’s office. This is a very formal act. Depending on the canton and notary, the wording of the contract is read out and discussed again, one point at a time. You will be given another opportunity to ask technical questions. However, the formalities must have already been clarified and any negotiations on the content be settled by this point.

  • As a buyer, you should, for example, have thoroughly checked whether certain details concerning the property in question, i.e. easements and encumbrances such as rights of way in favor of neighbors, have been entered in the land register. This information can be essential for the future use and development of the plot of land.
  • You must have submitted binding proof that the purchase price can actually be financed. This may be an irrevocable promise to pay from your mortgage lender. In some cases, a binding verification of a financing application from the mortgage lender is also sufficient.

If all the documents are complete, the purchase contract is signed by both parties and by the notary.

Transfer of ownership

Transfer of ownership is when the property passes from the hands of the seller into those of the buyer. At this point, the mortgage notes required to secure financing must have been issued and be available.

Legally speaking, the transfer of ownership and the authentication of the purchase contract are two different processes. Depending on the procedure, the property may change hands immediately after authentication by the notary. However, there may also be a considerable delay between the authentication of the purchase contract and the actual transfer of ownership. This can lead to problems, which is why it should be stipulated in the purchase contract exactly when the transfer and authentication should take place. If possible, the sale should be organized so that both events occur simultaneously.

Payment of the mortgage

For the bank to pay out the mortgage, several conditions must be met:

  • The client must have chosen a suitable mortgage and signed the mortgage contract with the bank.
  • The client must have paid in the equity capital, which represents their share of the purchase price, usually 20 percent of the total amount.
  • All the collateral required for the loan must have been provided: mortgage notes, any additional collateral, pledges, etc.
  • The purchase contract must have been authenticated by notary.

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Report and handover of the property

In principle, the following rule applies: the buyer takes over the property in exactly the same condition as they found it during the viewing. It has long been customary in the real estate sector to exclude any liability for defects in purchase contracts for real estate properties – especially older buildings. This means that the seller cannot be called to account if, a few weeks after the handover, the heating is found to be defective or a leak is discovered in the roof. The omissions not permitted by law are “fraudulently concealed defects” (article 199 of the Swiss Code of Obligations). This would be the case, for example, if the seller knew that the heating was broken.

To ensure that you are well protected, you should therefore have the property checked thoroughly by a trusted specialist before you buy, for example by consulting an architect or building expert. Depending on the situation, it is possible to have specific characteristics or a certain condition of the property guaranteed in the contract. In any case, a detailed report should always be drawn up when the property is transferred.

With a new building you are generally in a stronger position than with an older property: you can invoke the usual guarantees for construction work and hold the workmen responsible for carrying out immaculate work, for example.

Settlement of incidental expenses

It is the responsibility of the seller – or, in the case of condominium ownership, of the management – to settle the accounts for any payments already made on the date of transfer. These include:

  • the cost of supplies remaining in an oil tank
  • premiums paid in advance for building insurance (fire and natural hazards) or building water insurance
  • garbage charges or other public fees

Unless the date of the handover falls at the end of the year, these costs will be invoiced pro rata temporis.

Finally, any plans, guarantee certificates, operating instructions etc. should be handed over when the property changes hands – and the house should be clean. Again, the rule is that it is best for the buyer and seller to agree in advance on the formalities of the transfer.

How much are the ancillary costs of a property? The answer can be found here

Conclusion

Irrevocable promises to pay are commonplace for real estate purchases in Switzerland: they give the seller security, as the mortgage lender provides a binding guarantee that payment will be made. This strengthens trust and is legally binding. Consequently, an irrevocable promise to pay creates a reliable basis for the successful sale of the property.

Important: you should always check the contractual conditions carefully.

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