In recent years the Bulgarian government has tried to limit cash payments to combat money laundering and to increase tax receipts. In February 2011, the Parliament adopted a new law limiting cash payments according to which all payments above BGN 15,000 (ca. EUR 7,500) must be made by a bank transfer. Furthermore, as of 1 July 2011, new amendments to the Notary Act entered into force under which all real estate payments above BGN 10,000 (ca. EUR 5,000) must be made by bank transfer or into an escrow account opened with a notary public who certifies the transactions.
The escrow agreement and the escrow account
Before the above amendments to the Notary Act, the escrow account and the escrow agreement were not explicitly regulated by the Bulgarian law. The escrow agreement was classified as a type of mandate agreement (mandatum) where the bank or the notary public (for real estate transactions) acted as mandatary (assignee) and the seller and purchaser as mandators (assignors).
The most important issue, however, related to the specifications of the escrow account as its existence was regulated neither by the civil legislation nor by the specific bank regulations.
The Bulgarian banks and courts treated the escrow account as a type of payment account whose holder is usually the escrow agent (a bank or notary public). However, the law did not prohibit a creditor of the escrow agent (or, in case of an insolvency procedure, with respect to the bank) from putting a restraining order on the bank account, thus blocking the seller and purchaser from using the funds in the escrow account, or even causing them to lose them later.
New amendments to the notary act
For the first time in the Bulgarian legislation, the latest amendments to the Notary Act define to a certain extent the existence and use of the escrow agreement and, more importantly, the nature of the escrow account. According to these amendments (Art. 25a of the Notary Act), the terms and conditions for the payment of the purchase price between the parties and the notary public must be expressed in a written agreement. Previously, the parties to a real estate transaction either did not sign any formal agreement with the notary public or did not use an escrow account/agreement at all.
The most important regulation of the Notary Act relates to the nature of the escrow account. The new amendment does not allow a public execution against funds in an escrow account for personal obligations of the notary public. This will secure the interests of seller and purchaser that the purchase price is safe; it will also help notary publics as it will probably increase their use as an escrow agent in real estate transactions instead of using banks.
Up until now, notary publics were usually used as an escrow agent mostly for real estate transactions where the purchaser was a company (and only on rare occasions a natural person) acquiring real estate for a purchase price of up to EUR 500,000. For transactions of a higher value the parties preferred to work with a bank because: (i) of the higher probability that the bank would not go bankrupt (ie, the funds in the escrow account would not be subject to distress) and (ii) the parties considered it would be easier to get compensation from a bank than from a notary public in case of damages suffered due to default of the escrow agent.
But the first reason is no longer relevant – and has even become a reason for using a notary public. As the bank regulations do not have any specific provision about the nature of the escrow account, it is still treated as a special account where the holder is the bank; it is not clear what happens in case of insolvency.
For example, for high-value transactions, the purchasers and sellers usually agree with the bank (who is acting as an escrow agent) to open a specific bank account with the Bulgarian National Bank and that any funds in it will not to be seen as an asset of the bank.
It remains to be seen whether notaries will offer services as reasonably and efficiently as escrow agents do.
The most important regulation of the Notary Act relates to the nature of the escrow account. The new amendment does not allow a public execution against funds in an escrow account for personal obligations of the notary public.