Preliminary sales contract (the arras)

Before the 15-30 days set out on the reservation agreement have run out, Frank and Diane will sign the sales contract that commits them to buying the property and the seller to sell it to them. There are several ways of doing this, for example with a preliminary sales contract (contrato privado de compraventa) or a down payment contract (contrato de paga y señal). However, for many overseas buyers it will be a deposit contract (contrato de arras) , which is sometimes translated as the ‘earnest money contract’).
The arras/earnest money contract is a private legal agreement which reserves the right to purchase the property at a set price at a set timetable and penalises the buyer or seller if they break the agreement.

  • It sets out the exact details of the housing to be sold – location, owner, basic features and known encumbrances. If there is furniture included, it will also have a detailed list of those items, ideally with photos.
  • It should also fix the final price, payment method and the maximum time for completing the sale.
  • It will mention the amount that has been already delivered as a deposit, specifying that the money is on account of the sale and will be deducted from the final price when the deed is constituted. Usually it will range between 10% and 20% of the final price. Ideally it will be held in an escrow account, but whoever is holding it, the money should not be transferred to the owner until the day of sale. Although the parties can agree not to include these conditions, the law establishes certain penalties for either party who breaches it:
  • If it is the buyer who breaches the agreement, he or she will lose the amount already paid.
  • If the seller is in breach they must return the deposit DOUBLED.

Frank and Diane’s lawyer goes over the contract with them, with a translation,
and they agree that the property and its description, location, price, boundaries and so on are exactly as they had expected and are as described in the building survey report. They and the owner (or their representatives) then sign the contract – there is no notary at this stage. They also arrange for the payment of 10% of the price to be transferred.

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BUYING TIP

Given that Frank and Diane are definite about buying the property, it might be in their interests to pay as high a deposit as possible, to dissuade the seller from backing out. On the other hand, if the seller is a non-resident and the money is not protected, you need to know that they will not disappear with your money, leaving the mortgage company to reclaim the property.
The payment method will also be agreed between parties. It will usually be a bank transfer or a bank cheque showing the name of the party receiving the money. The parties may sign a contrato privado de compraventa which creates a binding agreement and sets for a completion date as well as the terms and conditions of the sale (price, way of payments, contractual deadline…). If the seller breaches that agreement, the purchaser may take the option of fulfilling the agreement or may choose to withdraw from the sale and claim for damages incurred. The difference with the contrato de arras is the option to enforce compliance of the purchase agreement before applying for compensation.

Paying from a Tax Haven

If your money comes from a territory considered as a tax haven, you must inform and explain the projected investment to the Spanish Government at least six months in advance, using form DP2. Once the purchase has been formalised, you inform the Spanish Tax Of ce if the money comes from a tax haven, or if the amount exceeds €3,005,060, whatever the provenance of the invested capital might be.

Delaying the sale

Suppose the couple want to buy, but are not ready to commit to a final contract date? There are mechanisms for delaying the process.
The contract for ‘booking’ housing is a contract of sale, but one in which the buyer and seller postpone the sale. Its terms will vary between existing houses and off-plan sales. For off plan, if the house will not be ready in time, or indeed construction not even started, the seller must provide some guarantees for repayment of the advanced sums, plus the statutory interest. Note the following however:
– The specification of the property is fixed and neither the seller nor the buyer may change it except by mutual agreement. Some developers will try to offer a different property.
– The price is also fixed and the buyer is obliged to pay this sum. If they decide not to complete on the purchase they will lose any money they have already paid.
For existing homes, this is quite a common problem for buyers and can include the following scenarios, in both of which there is a sale contract, and both the seller and the buyer are obliged to deliver the house and the price:
– The buyer wants to buy but does not have the money. If the buyer is waiting for finance it may be better to book the contract, while waiting to get the mortgage loan.
– The buyer has the money, but the signing of the contract is delayed for some reason.
If Frank and Diane want time to think again or to obtain funding, while making sure that the seller will not sell “their” house to a third party, they could consider signing the contract but asking for a condition that the sale will be delayed until they have received financing. Then if the bank refuses the mortgage loan, the sale will be cancelled, with or without compensation to the seller, as the parties have agreed.

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Disclaimer: This guide was brought to you by AIPP / RICS / RDE




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