Differences between private contracts and public deeds

Written by: Pelayo de Salvador Morell.

30/07/2017 | Individuals and non-residents

In this post we analyse the main differences between the private contract and the public deed, especially in cases of transfer of real estate, where it is common to use the two-step "contract-deed" system.

Reading time: 4 minutes

The principle of freedom of form

In Spanish law, there is freedom of form for the execution of contracts, so that contracts for the sale and purchase of real estate are perfectly valid, regardless of whether they are verbal or written, or whether they are in a private contract or in a public deed (before a notary).

Article 1.280 CC states that "The following must be recorded in a public deed: 1. Acts and contracts whose object is the creation, transfer, modification or extinction of rights in rem over real estate", although it is understood that this requirement of a public deed is a formal requirement to facilitate proof of the existence of the contract ("ad probationem"), but not an essential requirement, the lack of which would imply the invalidity of the business ("ad solemnitatem").

It is not compulsory to sign a public deed of sale in order to transfer a property, but it is highly advisable, for the effects we will see below.

In any case, it should be noted that, whatever their form (private contract or public deed), contracts are fully binding on the parties (art. 1.091 of the Civil Code), so they cannot be signed lightly, and it is advisable to have good legal advice before signing any document.

Additionally, it should be borne in mind that at the time of signing the private contract, in principle there will be no third party to control the legality of the act, so it is always advisable that a specialised lawyer controls certain aspects necessary for the validity of the act, and negotiates and drafts the contract on our behalf, defending our interests.

At the time of the execution of the deed, a legal professional, the notary, will intervene, but only controls the legality of the act and advises both parties, unlike the lawyer, who is the legal professional who only advises his client, defending his interests against the claims of the other party.

What are the differences between a private document and a public deed?

The differences between a private contract and a public deed are many and notable. For ease of reference, we have listed the main differences, separated into two categories: differences in form and differences in legal effects.

Differences in form

  • Signatory parties. Private contracts do not require the intervention of third parties and are therefore only signed between the parties. In a deed, on the other hand, the parties intervene before a notary, who attests to the act that is carried out.

  • Support. Any medium is valid for the private contract, and it can even be in electronic format. The deed, however, must be physically signed on stamped notarial paper.

  • Place of signature. Except in cases where the integrity of the document can be guaranteed (serialised paper or electronic signature), the parties must sign all the pages of a private contract. When a deed is executed, as it is already on stamped paper, only the last page is signed together with the notary.

  • Number of copies signed. In private contracts, as many copies are normally signed as there are parties to the transaction (except in the case of electronic signatures). In deeds, on the other hand, only one document is signed.

  • Documents for the parties. The original copy always remains at the notary's office, incorporated in the notarial protocol, and the parties receive an "authorised copy" or "simple copies".

Differences in effect

  • Evidentiary force. Unlike the public deed, the content of which is presumed to be true and has probative force with regard to the date of execution, persons, facts and statements it contains, the private document lacks this presumption of veracity, and therefore has the force to prove certain matters, which leads to differences in the enforceability of both.

  • Enforceability. A private document is not directly enforceable before the Courts, so that an initial declaratory procedure will be necessary before entering the enforcement phase, once the veracity of the document has been proven. On the other hand, thanks to the evidentiary presumptions, the public deed is directly enforceable before the courts.

  • Traditio ficta (sale of real estate). The deed has the capacity to replace the physical delivery of the property, thus producing the effects of traditio ficta which, together with the contract embodied in the document, allows the transfer of ownership. On the other hand, the private document alone does not have this capacity to transfer ownership, although it can do so if it is accompanied by the delivery of the property.

  • Possibility of registration in the Land Registry. A private deed (with few exceptions) cannot be entered in the Land Register. However, a public deed can be entered in the Land Register, as can other public documents (judgments and administrative acts).

Taxation.

On many occasions, people opt for a private contract to carry out certain actions, believing that, in this way, taxation can be avoided. However, it should be pointed out that the document in which it is found is irrelevant for most taxes (except for Stamp Duty). What is certain is that if the private document contains a taxable event, the corresponding taxes must be paid.

In this sense, for example, we cannot forget that lease contracts or sale and purchase contracts signed in a private document regulate taxable events for Transfer Tax (or VAT, in certain cases), and therefore have to pay these taxes, regardless of the form in which they have been drawn up.

Contrary to popular belief, a private document must also pay the corresponding taxes if it contains a taxable event for a certain tax, although this is more difficult to control.

Notwithstanding the above, it is true that a private document is much more difficult to control for the tax authorities, who will be unaware of its existence unless one of the parties informs them of it.

Purpose: the preparatory contract.

If the private contract is not exempt from taxation, is not enforceable and, on many occasions, will not even serve to "buy and sell" the property... why is the "private document-public deed" scheme still used in property sales?

This scheme is used because the private contract is used as a preparatory contract for the formalisation of the future deed of sale, on the understanding that the private document requires fewer formalities, although the absence of formalities does not detract from its legal effectiveness. Therefore, a private document is fully binding for the parties in the terms subscribed, so it is always advisable that the parties have negotiated it with the advice of their respective lawyers.

The private contract is fully binding on the parties, so it is advisable that, before signing, a lawyer has reviewed the situation of the estate and prepared a contract that protects our interests.

In addition, the private contract can be particularly useful when the sale and purchase is intended to be conditional on certain requirements (judicial authorisation for the sale, legal review of the property, obtaining financing, etc.), as it will establish the conditions that will bind the parties to the consummation of the sale and purchase at the signing of the deed, but will allow the signing of a "clean" and unconditional deed of sale and purchase.

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