Posted in: Deeds Issues, Legal
Buying a property in Spain is an exciting time, but it is also important to understand exactly what happens if either the buyer or the seller pulls out of a property sale in Spain. If they change their mind after a deposit has been paid.
Buying a property in Spain can be very different from buying a property in your home country, particularly when it comes to deposits.
A common misunderstanding is that a buyer can always walk away from a purchase simply by losing their deposit. Or a seller who changes their mind only has to return the buyer’s money. It does not work like that in Spain.
What happens depends upon the type of agreement signed and what that agreement actually says. The power of a deal is in the wording. For this reason, buyers should obtain legal advice before signing a reservation or deposit agreement and before paying any money.
The first document you are asked to sign may be a reservation agreement.
For example, an estate agent may ask you to pay €3,000 or €5,000 to reserve the property and take it off the market while the next stage of the purchase is arranged. It is important not to think of this as “just a reservation form”.
A reservation agreement can create legal obligations and the money you pay may not automatically be refundable.
The agreement should make clear:
• how much you are paying and who will hold the money;
• whether the property will be taken off the market;
• when the deposit is refundable or non-refundable;
• what happens if legal or planning problems are discovered;
• what happens if you need a mortgage and cannot obtain one; and
• what happens if either the buyer or seller decides not to proceed.
For example, if you pay a €5,000 reservation deposit and your solicitor later discovers a serious legal problem with the property, you should not simply assume in Spain that you will automatically receive your €5,000 back.
There is no single process that every Spanish property purchase must follow, but a transaction may have three stages:
Reservation – the buyer pays a relatively small amount to reserve the property.
Private purchase or arras contract – the buyer and seller sign a more detailed agreement and the buyer will often pay a larger deposit.
Completion before the Notary – the public deed of sale is signed, the balance of the purchase price is normally paid and the purchase is completed.
A reservation agreement or arras agreement is not required in every transaction. The important point is that each document can have legal consequences and should be checked before it is signed.
You may be asked to sign a contrato de arras and pay a larger deposit towards the purchase price. For example:
Purchase price: €300,000
Deposit: €30,000
Balance to pay: €270,000
If the purchase goes ahead normally, the €30,000 forms part of the €300,000 purchase price.
But what happens if the buyer or seller changes their mind? This depends upon the type of arras agreed.
One particular type of Spanish deposit arrangement is called arras penitenciales. If the buyer and seller clearly agree that the deposit is arras penitenciales then if the buyer changes their mind, the buyer can withdraw but normally loses the deposit.
If the seller changes their mind, the seller can withdraw but normally has to pay the buyer twice the amount of the deposit.
For example, imagine that the buyer pays €30,000 as arras penitenciales.
If the buyer simply changes their mind and withdraws, they can lose the €30,000. If the seller changes their mind and withdraws, the seller would normally have to pay the buyer €60,000 — the original €30,000 plus another €30,000.
This arrangement comes from Article 1454 of the Spanish Civil Code. So please be aware things are very different in Spain and you need be aware of what you are doing when purchasing a property and take legal advice.
It can be particularly important where a seller receives a better offer after signing the agreement. The seller cannot necessarily just return the buyer’s original deposit and sell the property to somebody else.
No. This is extremely important. The “buyer loses the deposit, seller returns double” arrangement does not automatically apply to every deposit paid in Spain.
Spanish law recognises different types of arras, commonly described as arras penitenciales, arras confirmatorias and arras penales, and their consequences can be very different. This is why the wording of the contract matters so much.
Refusing to complete sometimes and pulling out could amount to a breach of contract, depending upon the agreement and circumstances.
Changing your mind is different from discovering a genuine legal problem. For example, your solicitor might discover a problem with ownership, planning or building alterations, a debt or charge affecting the property, or missing documentation. Whether you can withdraw and recover your deposit will depend upon the contract and the particular circumstances.
Where appropriate, the agreement should protect the buyer by explaining what happens if the legal checks reveal an unacceptable problem. The same applies if the purchase depends upon obtaining a mortgage.
Do not assume that being refused a mortgage automatically entitles you to your deposit back.
If finance is essential to the purchase, the contract should deal with what happens if the required mortgage cannot be obtained. This is very important.
Buyers should also consider carefully where their money will be held. If a substantial deposit is paid directly to the seller or an estate agent and the transaction later falls apart, recovering that money can become more difficult if the seller refuses or is unable to repay it.
Where appropriate and properly agreed, a solicitor may be able to hold the deposit as client funds until the agreed conditions for releasing it have been satisfied.
This can provide useful protection, but it does not remove every risk. Have the contract checked before you sign. One of the biggest mistakes an overseas buyer can make is to find a property they love and immediately sign a reservation or arras agreement because they are worried that somebody else will buy it. Then a problem arises and they come to a solicitor late.
Before signing or paying a deposit, you should know:
• what type of agreement you are signing;
• how much you are paying and who will hold the money;
• when the deposit is refundable or non-refundable;
• what happens if legal or planning problems are discovered;
• what happens if you cannot obtain your mortgage;
• what happens if either party changes their mind; and
• when the purchase must be completed.
Do not assume that an estate agent’s reservation document is simply paperwork which your solicitor can deal with later.
By then, you may already have paid money and entered into legal obligations.
The most important point to remember is simple:
A reservation deposit, arras penitenciales and a payment made under another type of private purchase agreement can have very different consequences.
Do not assume:
“If I pull out, I just lose my deposit.”
And do not assume:
“If the seller pulls out, I automatically receive double.”
It depends upon the agreement you have signed.
At Molina Solicitors, we advise overseas buyers and sellers on Spanish property purchases, including reservation agreements, arras contracts and private purchase contracts.
Our advice is simple: if possible, have the agreement checked before you sign it or pay the deposit — not after.
If you are buying or selling a property in Spain and would like advice before committing yourself, contact Molina Solicitors.