Kinds of purchase agreements in Spain: Purchase agreement, "arras" -deposit payment, option agreement.

Written by: Pelayo de Salvador Morell

13/07/2017 | Individuals and non-residents

In general, the process of buying a property is structured in two steps: a private contract (generally called "arras" although it can be of different types) and the subsequent execution of the public deed.

In this post we explain the differences between the most common types of private contracts.

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Kinds of purchase agreements in Spain: Purchase agreement, "arras" -deposit payment, option agreement.

The "irrelevance of the nomen iuris" is a legal principle that states that it makes no difference what the parties have decided to call a certain legal figure, since legal figures are defined by their configuration. In colloquial language, it is said that "things are what they are and not what the parties say they are".

We start with this reference because it is very common to find contracts that claim to be one thing and then turn out to be something else. Among the most flagrant cases that we see in our office is a so-called "lease with option to purchase contract" that was set up as a real sale and purchase with a deferred price, so that the client bought the property, when he thought he was only renting it.

Therefore, it is very important to analyse and review any document with a lawyer before signing: depending on the legal position (buyer or seller) the wording of the contract must be adapted in our defence, looking for the legal formula that best suits our needs.

Private purchase contract ("arras confirmatorias")

What is it?

A contract of sale is a contract whereby one of the contracting parties undertakes to deliver a certain thing and the other to pay a certain price for it, in money or a sign that represents it.

On signing a private contract for the sale of a property, a certain amount may be paid on account of the price, which may be called a confirmatory deposit, payment on account or payment and deposit. Confirmatory earnest money should not be confused with penitential earnest money, which will be dealt with later; confirmatory earnest money does not grant the right to withdraw from the contract.

The contract of sale obliges the parties to perform the contract, without the possibility of withdrawing from it.

From what we have pointed out, we see that the contract obliges the parties to do certain things (deliver the thing and the price), but that it does not necessarily imply the transfer of ownership, until the delivery of the good takes place (theory of title and mode).

In the case of real estate, this delivery of the property (called traditio or tradition) is done symbolically in the granting of the public deed, so that having a contract (title) and the mode (delivery), the full transfer of ownership is consummated.

What are the consequences of non-compliance?

The breach by either party entitles the other party, in accordance with Art. 1.124 CC, to choose between (i) demanding the fulfilment of the contract in its own terms or (ii) requesting the termination of the contract, with the right to compensation for damages.

This is why we say that the contract of sale implies the obligation to buy and sell because, in the event of non-performance, the performing party can force the purchase-sale to take place, without it being possible to withdraw from the contract "losing what has been delivered or paying double", as is the case in the contract of sale with earnest money.

Private contract of purchase with deposit ("Contrato de arras")

What is it?

The misnamed "contrato de arras" (earnest money contract) is actually a contract of sale in which a "earnest money agreement" is included by means of which a certain part of the price is delivered, which is given the configuration of a penitential earnest money, in accordance with article 1.454 CC.

In order for the "arras" or "deposit" contract to be considered as a penitential deposit (the most widespread), it must be expressly configured as such, since otherwise, it will be understood that the deposit is confirmatory.

The earnest money contract, like the private purchase contract, obliges the parties to deliver the thing (seller) and pay the price (buyer). However, the configuration of the earnest money as a penitential earnest money allows either of the parties to freely withdraw from the contract, without any consequences other than the economic damage caused by paying the "penitence" fixed in the earnest money.

Given the exception involved in granting the parties a power of withdrawal, the penitential earnest money must be expressly configured as such in the earnest money contract, in such a way that, if nothing is said about the configuration of the earnest money, it cannot be understood that they are penitential earnest money, but confirmatory earnest money.

In spite of being a real contract of sale, the importance of the configuration of the penitential earnest money means that one normally speaks of the "earnest money contract" or hears expressions such as "we have signed the earnest money".

What are the consequences of non-performance?

The penitential earnest money means that both parties are granted the right to withdraw from the contract of sale:

If it is the buyer who withdraws, he will lose the amount he has paid as earnest money.

On the other hand, if it is the seller who withdraws, he will have to return the deposit doubled, which will mean returning the amount he would have received from the buyer and paying the same amount out of his own pocket, as a "penitence".

And what about the penalty deposit?

Penalty deposits are those that are configured as a penalty clause, according to article 1.152 CC and subsequent articles.

Their effects are halfway between confirmatory and penitential deposits: in the event of non-performance, the non-performing party must pay the other party the fixed penalty (as in penitential deposits), but the performing party, in addition to receiving the payment of the penalty, may choose (as in confirmatory deposits) between (i) demanding performance or (ii) requesting the termination of the contract.

Option to purchase contract

What is an option to purchase?

An option to purchase contract is a contract under which one party (the grantor) grants the other (the optionor) the power to decide whether or not to enter into a contract of sale, within a specified time and under specified conditions.

As a consequence of the above, the option-to-buy contract only binds the grantor-seller, who has to keep the asset to which it relates within his assets and be in a position to sell it to the optionor-buyer.

In the call option, the optionor can freely decide whether he wants to buy or not, the seller being obliged to sell.

The call option contract may be granted free of charge or for a consideration, in which case the grantor receives a payment, called the "option premium", in consideration for the grant of the right.

The parties are free to agree whether this premium will be independent of the purchase price or whether, on the contrary, in case of exercise of the option, the amount paid as premium will be applied to the purchase price, reducing it, so that a proper drafting of the contract will be of great importance in order to avoid disputes.

What are the consequences of non-compliance?

For the optionor-buyer, there is no breach as such, since the purchase option does not bind him to anything. However, if he decides not to exercise the option, he will suffer financial consequences, since he will lose the amount paid as the option premium, so the result would not differ from the consequences that would derive from a deposit contract.

On the other hand, the grantor-seller can breach his obligations under the contract, since he is obliged to execute the deed of sale if the optionor-buyer so requires under the terms of the option contract.

In the event that the grantor-seller refuses to sell on the agreed terms, the optionor-buyer may, in accordance with Art. 1.124 CC, choose between (i) demanding performance of the contract on its own terms or (ii) requesting the termination of the contract, with the right to damages.

In any case, before signing any home purchase contract, even when they ask for a reduced payment to "signal" or "reserve" the property, it is necessary to know exactly what the document obliges.

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