Editor’s note: As a result of Spain’s on-going ‘recession’, unique opportunities arise in today’s market, which is still a buyer’s market in both the residential and commercial sectors. In this column, regular legal contributor Raymundo Larraín Nesbitt explains the particularities of buying commercial property in Spain for investors looking to take advantage of this sector.
Lawyer – Abogado
4th of July 2014
The following article is the fourth on my five-part series ‘How to Buy Property in Spain Safely‘. You may also be interested in reading Buying Resale in Spain, Buying Off-Plan Property in Spain, Buying Distressed Property in Spain or How to Buy Rural Property in Spain.
Commercial properties share multiple common aspects on what I had already written on How to Buy Resale Property in Spain. In fact this whole article may be regarded as redundant but just for completion’s sake I’ve decided to go ahead and write it anyway. Most of the points raised for resale property hold true and can likewise be applied to commercial properties. After all commercial properties branch out from resale property and are but a part of it (same rings true for rural property).
Due to the legal business nature of commercial premises a few nuances are introduced (specifically on taxation, opening licence and holding deposit) that a businessperson should be aware of as opposed to standard private property (resales).
Buyer’s Preliminary Checklist
This will be carried out routinely by the conveyance lawyer you appoint. The following list is open-ended and by no means exclusive:
- Is the property under the vendor’s name?
- Is it under a company’s name? A Due Diligence may be required
- Does the vendor have the faculties (i.e. power of attorney) to sell on the property?
- Is the vendor’s Title deed clean? Are there charges, encumbrances, liens or debts against the property? Specific focus on judicial embargoes against the property. If there are any one can negotiate the vendor cancels them prior to completion or even deduct money at completion stage to secure these are effectively removed
- Verify the property’s Planning status with the local town hall. Is if fit for commercial use?
- Check that local taxes (IBI) are up-to-date
- Cross-check the cadastral record for inconsistencies
- Check the Community of Owners’ fees are up-to-date
- Check utilities are up-to-date
Examples of Commercial Property
- This includes storage rooms (trastero) and car parks (plaza de garaje) sold individually and legally separate from a dwelling.
- Commercial premises.
PROFILE ON THE BUYING PROCESS
The buying process can be outlined in three steps. A buyer can skip the first two stages and jump straight to completion.
Stage 1: Deposit Agreement (“Señal”)
You will be expected to pay an initial deposit to strike the property off the market. The amount typically ranges from €3,000 to €6,000. This is normally paid to the estate agency and accounts towards the final sales price of the property. Until you pay this initial deposit an estate agency is free to offer it to anyone else.
A reservation contract is very short, spanning normally only a couple of paragraphs at most, and should ideally outline the following bullet points briefly:
• Vendor’s details
• Succinct property description
The initial reservation fee is normally non-refundable. This reservation contract offers little to no legal protection as it’s very vague. This is why I strongly recommend you appoint a lawyer prior to signing and handing over the initial deposit. A lawyer will be able to carry out a minimum due diligence on the Title Deed before you pay the non-refundable deposit. Moreover, a lawyer can add protective clauses at this preliminary stage such as “subject to finance being granted”. This clause, for example, helps to offset the potential risk of forfeiting this deposit should finance be unattainable at a later stage. Securing finance from lenders should not be taken for granted in today’s market.
Stage 2: Exchange of Private Purchase Contracts (“Contrato Privado de Compraventa”)
The PPC or preliminary agreement reflects and collates all that’s been negotiated by the parties in detail prior to completion. Completion before a Notary Public will in fact be a mere transcript of what’s been agreed at this key stage. It should state amongst other things:
• Buyer’s details
• Vendor’s details
• Full property description
• Legal status of property
• Holding deposit or option to buy agreement
• Agreed price and its breakdown (stage payments)
• Expected completion date
Either a holding deposit or an option to buy can be agreed upon at this stage:
1. Holding Deposit. Normally amounts to 10% of the property’s asking price (this percentage varies hinging on the foreseen length of time to complete as well as other factors). This deposit is normally non-refundable. You may want to think carefully before committing yourself to sign on a PPC’s dotted line.
There is absolute freedom on deciding how to negotiate and draft such clauses. Bottom line, one should avoid acting rashly and must carefully take the time to decide on what’s been negotiated prior to handing over the deposit.
To put an example of what a lawyer can do for a buyer at this stage. In the case where a buyer relies on finance to close a deal a lawyer can add a clause whereby if the buyer fails to secure mortgage finance the withholding 10% deposit is refunded in full. Think for example of substantial commercial property (in the millions) on a high street in Madrid or Barcelona. The inclusion of such a clause could save a buyer several hundred thousand euros if the deal falls through for lack of finance.
A holding deposit usually takes two different forms depending on what’s agreed:
• “Arras confirmatorias”: The 10% down payment accounts towards the sales price and is deducted at completion. If a buyer decides to rescind the agreement he forfeits the down payment. A buyer has no right to claim it back. Likewise a vendor opting out will be forced to handover a sum of money equating to the deposit. This deposit is deducted in full at completion and forms part of the price.
• “Arras penitienciales”: the 10% down payment is likewise deducted from the sales price at completion. If the buyer opts out he forfeits the down payment in full. However should the vendor opt out he will be forced to pay double the holding deposit. This clause is applied restrictively and obviously benefits a buyer more than a vendor.
I strongly advise (understatement) that this money is paid only into a reputable law firm’s account (usually the vendor’s law firm). This will not technically be an escrow account, unlike in the United Kingdom, but nonetheless lawyers are legally bound to withhold the amounts safely until completion (at no extra cost to the parties).
2. Option to Buy Agreement: a buyer may be interested in having an option to buy the property. The option normally equates to 10 or 15% of the agreed sales price and only sets obligations for the vendor. A vendor, on agreeing, commits himself to sell the property within a pre-agreed time frame to the buyer. If the buyer exercises his option it is deducted from the sales figure at completion. Should the buyer decide not to go ahead with the purchase and exercise his option he forfeits in full the down payment he made.
Stage 3: Completion (“Escritura”)
The third and final phase is to complete before a Notary Public. The two previous steps have set the stage leading to this crucial moment. Once a Public Deed of sale – Escritura in Spanish – is signed, the buyer is given a copy of the Title Deed to the property (“Escritura Pública de Compraventa”). All associated taxes (i.e. Stamp Duty, Transfer Tax and VAT) need to be paid first before being able to register a property. This goes to explain why a property takes several months to be registered. Post-completion the buyer’s lawyer will lodge the Title Deed at the Land Registry. Registration grants protection erga omnes (against third parties); the strongest type of public protection available.
Spain is divided administratively into seventeen Autonomous Communities. The state has empowered communities by devolving tax competencies. Devolution implies communities hold full competence to rule on certain tax aspects and accounts for regional tax variations from one Autonomous Community to the next. Listing exhaustively all possible tax permutations in minutiae relating to Spain’s seventeen communities blatantly exceeds the goal of a divulgative article which is why I purposely keep it clean and simple and adopt a holistic approach. As a word of caution, sound legal and financial advice should be sought to obtain a tailored breakdown of all taxes (and expenses) incurred by a buyer given their own personal circumstances. The following is a simplification of the tax liability borne by a buyer on acquiring commercial property.
|Tax||Buying from Private Individual||Buying from Developer or Professional|
|Property Transfer Tax (ITP)||7 – 10 %|
|VAT (IVA)||21 %|
|Stamp Duty (AJD)||0.5 – 1.5 %|
Additionally Plusvalía tax (municipal tax on the increase of value of the land) may be paid by a buyer. The law stipulates it’s the vendor that pays for it but it is commonplace to agree a buyer pays it.
Associated Buying Expenses
Besides paying the above taxes, a buyer is bound to pay the following fees:
• Notary fees: 0.1 – 2 %
• Land Registry fees: 0.1 – 2 %
• Lawyer’s fees: 1 – 2 %
• Gestoría fees (optional): 0.5 – 1 %
• Mortgage fees (optional): 1 – 2 %
A property normally takes two to three months to be registered at the Land Registry. A buyer can ensure everything is above board on requesting a Nota Simple. I would advise requesting one only after three months have elapsed since completion.
You should open a Spanish bank account if you haven’t done so already. Utility companies do not accept overseas payments and like setting invoices as standing orders against your Spanish account. You should set at least as standing orders all the following:
• IBI tax set-up. Paid annually (akin to the UK’s Council tax)
• Garbage collection. Paid twice or once a year depending on the Town Hall
• Utility bills (invoiced quarterly in the case of water and monthly with electricity)
• Community fees (only if you’ve purchased in a Community of Owners). Usually quarterly but can vary
Finally, on owning property, I cannot stress enough how advisable it is that you make a Spanish Will to dispose of your Spanish estate. This will not preclude any other made in your home country and is limited exclusively to your Spanish assets. It will save your beneficiaries time, money and hassle at a time of bereavement.
Conclusion on How to Buy Commercial Property in Spain
Commercial, Rural and Distressed property are all but specialities of buying Resale property in Spain. I write separate articles on all four because each one sports its own unique nuances which I reckon ought to be fully dissected and explained. I regard Off-Plan property as a different animal altogether that requires its own space as it introduces multiple unique key concepts which are not shared by its resale cousins.
Hiring a reputable lawyer is highly advisable to ensure, as much as possible, a smooth conveyance procedure. Property purchase can quickly turn into a minefield without someone qualified to guide you through the pitfalls safely.
“It often requires more courage to dare to do right than to fear to do wrong” – Abraham Lincoln.
American 16th US President (1809 – 1865). He steadfastly ensured a pro-union victory and brought about the emancipation of slaves.
How to Buy Property in Spain – Advice by the Foreign & Commonwealth Office
Buying Distressed Property in Spain – 8th August 2011
Buying Resale Property in Spain – 21st February 2013
Escritura – Title Deeds FAQ – 8th June 2013
Nota Simple: What is it and how do you get one? – 8th June 2013
Buying Off-Plan Property in Spain – 8th of June 2013
Investor Guide to Spain’s Golden Visa Law – 8th November 2013
Bank Repossessions in Spain – 21st February 2014
Buying and Owning Spanish Property through Companies: Pros and Cons (Dispelling Spanish Inheritance Tax Myths) – 7th March 2014
How to Buy Rural Property in Spain – 8th August 2014
How to Buy Property in Spain Safely – 10th October 2014
Taxes on Selling Spanish Property – 8th December 2014
La Complementaria or Bargain Hunter Tax – 8th May 2015
House Hunting in Spain – The New York Times. June 2015
Taxes on Buying Spanish Property – 8th July 2015
Resurgent Spain: Málaga Sees Strong Sales – Mansion Global (The Wall Street Journal). December 2015
Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarising, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.
2014 © Raymundo Larraín Nesbitt. All rights reserved.