In Spain, two types of real estate purchase agreements can be used to protect buyers and vendors from market volatility. Which party is better protected depends on which agreement is reached, its clauses, the amounts paid, and the wider market situation.
The most important step when exchanging property in Spain involves the parties granting a public deed before a notary, which is then entered into the Property Registry. This is necessary for the buyer to become publicly recognised as the owner of a property, and for them to hold full protection from any third-party intervention.
However, not many people are aware of the nature and consequences of so-called preliminary agreements.
In this article, we will understand the nature, main clauses and consequences of two types of preliminary agreement common in property transactions:
• Deposit agreements (contrato de arras)
• Private purchase agreements (private simply means that it isn’t a public deed signed before the notary, but just between the two parties, buyer and seller)
A deposit agreement contains the commitment by the buyer to purchase and the vendor to sell a given property at a price, deadline and terms agreed by both parties, inclusive of any additional clauses (i.e. mortgage, repairs, encumbrances, transfer to another buyer, etc.)
“The defining characteristics of the deposit agreement are the consequences should any of the parties decide to cancel it.”
In this type of agreement, the buyer pays the vendor a deposit between 10% and 20% of the agreed price (with this amount sometimes being held by a broker.) The vendor keeps the property until the public deed is signed before the deadline by the parties involved.
During this period, the parties prepare the transaction (e.g. by granting a POA, clearing encumbrances, or obtaining the necessary funds) and in most cases, the time it takes for the public deed to be signed is usually short (1-3 months at most.)
However, in some cases, the agreed period in this situation could be much longer, as the vendor may have to complete certain legal actions, including:
• Cancelling any encumbrances
• Amending the legal description of the property
• Terminating lease agreements
• Vacating the property
• Conducting maintenance and repairs to the property
The defining characteristics of the deposit agreement are the consequences should any of the parties decide to cancel it.
If the vendor refuses or fails to sell the property by the agreed date, they should reimburse the buyer double the deposit paid.
If the buyer fails to purchase, the buyer would keep the deposit, and in any case none of the would be entitled to claim any further damages. The vendor would be free to sell the property to a third party. In a wider market context of price deflation, a buyer might find that, after having signed a deposit agreement, the property is valued at less than the agreed price, or that their financial situation has worsened. In this case, they may prefer the vendor to keep the deposit amount that they already paid to avoid paying the remaining amount. The only option the vendor would have would be to keep the deposit amount, even if the property would have to be sold at a lower price.
On the other hand, during inflation, a vendor may be prepared to give twice the value of the deposit back to the buyer in order to sell the property to someone else. The buyer would be at a disadvantage as they would be unable to claim damages and must settle for a similar property at a higher price.
“A vendor may be prepared to give twice the value of the deposit back to the buyer in order to sell the property to someone else.”
Private Purchase Agreements
Private purchase agreements have a very different set of obligations and consequences. In this type of agreement, the buyer purchases the property from the vendor: a part of the price is paid at its signature, the terms to pay the rest of the price (normally in several instalments) are written, and the transfer of the possession can take place at a time agreed by the parties, but usually once the full price has been paid, and at this moment the public deed is granted. This option is widely used by developers when they sell properties that are still under construction.
The main feature of this type of agreement is that the parties cannot cancel it as easily as the deposit agreement. In the case of breach of contract, one party could even require the other to fulfil the terms of the contract (to buy or sell the property), pay compensation for damages or both.
For example, during the Covid-19 pandemic, many buyers who had entered into private purchase agreements with developers wanted to terminate these for various personal reasons, whereas developers often wanted to maintain the agreements. If the document signed had been a deposit agreement, it would be easy for the buyers to back out, but as they had signed a private purchase agreement, the vendor would be able to force them to complete the purchase.
Many developers faced the same situation after the real estate crash in 2008. Here, buyers would prefer to give up the amount they had already paid to avoid buying a property that had become more expensive than the market price. As a result, developers had to go to the Courts of Justice to force buyers to fulfil their obligations as per the private purchase agreement.
In summary, deposit agreements provide more flexibility to cancel a transaction, with both parties in agreement on the consequences of either doing so. Private purchase agreements have no exit route – and each party could force the other one to fulfil their side of the agreement.