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Right of Preferential Purchase

1️⃣ The co-owner's right of preferential purchase only applies in relation to other co-owners and not to third parties.

2️⃣ A purchase made in violation of the right of pre-emption is not necessarily void. In such a case, the co-owner has the right to demand compensation for damages caused by the breach of obligation.

👉 Articles 173(4), 517, and 518 of the Civil Code of Georgia

👉 The Supreme Court of Georgia decision on November 21, 2006, in case No. AS-154-579-06

📌 Factual Circumstances

During their marriage, the plaintiff and the defendant purchased a cattle farm in Sighnaghi district. At the time of purchase, part of the real estate was registered in the name of the plaintiff, and the remaining part was registered in the name of his wife (the defendant). After their divorce, the plaintiff discovered that his ex-spouse had sold her share in the property to a shepherd employed on the same farm. According to the plaintiff, this sale violated his right of pre-emption. Consequently, the plaintiff filed a lawsuit against his ex-spouse, the farm purchaser, and the notary public who witnessed the transaction, seeking the annulment of the purchase agreement.

The defendants denied the claim, asserting that the true owner of the farm was the herdsman employed there from the beginning. They argued that the property was only formally registered in the plaintiff's name, and after the divorce, the defendant had transferred her own share in the farm to him. Therefore, according to the defendants, the farm shepherd also had the right to preemptively buy the share.

The first-instance court upheld the claim, a decision later affirmed by the appellate court. The court determined joint ownership of the disputed property based on the public register extract. According to Article 173(4) of the Civil Code, "every co-owner has the right to preemptive purchase of the share of common property." Additionally, Article 517 of the Civil Code stipulates the co-owner's obligation to provide notice to the owner of the pre-emptive right, allowing them to exercise this right. Consequently, the court deemed the contract, concluded in violation of these articles, invalid under Article 54 of the Civil Code.

📌 Summary of the Court's reasoning

The Supreme Court of Georgia disagreed with the lower courts' explanations. It annulled their decisions and refused to satisfy the claim with a new decision. The Supreme Court clarified that the right of preferential purchase, to some extent, limits contractual freedom but applies only in the relationship between co-owners. Therefore, the alienation of the co-owned item to a third party in violation of this right does not render the transaction invalid. The court emphasized Article 518 of the Civil Code, stating that "the existing agreement between the obligee and a third party is void if the purchase contract becomes dependent on the non-use of the right of pre-emption, or the obligee has the right to refuse the contract if the right of pre-emption is exercised." Regarding this article, the Supreme Court explained that it doesn't determine the contract's invalidity for the purchase of an item encumbered with the right of pre-emption between the obligated person and a third party. Instead, it invalidates the agreement between these parties on the non-use of the right of pre-emption. Consequently, a violation of the obligation to notify about the expected sale of the item by the obligated person does not lead to the invalidity of the purchase contract. In such a case, damages can be legally sought from the liable person.

📌 Comment

Until 2007, Article 173(4) of the Civil Code granted the co-owner the right of pre-emption for their share. However, the law of May 11, 2007, No. 4744-I changed the wording, establishing the right of preferential purchase only when there is an agreement between the parties.

Alongside this change, other amendments were made to the Code:

(1) Article 169, providing the person who owned the property for more than 10 years the right of preferential purchase, was removed.

(2) Article 209(1), granting the tenant who lived in the apartment for more than 3 years the right to purchase it, was also removed.

(3) An amendment to Article 959 removed the right of preferential purchase of other owners in the case of the sale of the shared object. Instead, such a right became dependent on the agreement of the parties.

(4) Article 1470(3), providing the right of preferential purchase of the co-heir's share, was removed. Consequently, Article 1471, stating that the right of preferential purchase would be terminated after the transfer of the share to the co-heir, was also removed from the Code.

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