Once you have done all the checks that are appropriate in your case, and have been given the all clear by your lawyer, you can commit by signing a private contract and paying a deposit. As shall be explained below this is not the only way to proceed but it is the most common.
In some cases you may be able to skip the private contract stage altogether and go straight to signing the public deeds before Notary. This is the case if you are in a position to do the due diligence quickly, and can move onto signing the public deeds in under a month. In essence all the private contract does is buy you (or sometimes the vendor) time to be get prepared for signing the deeds. If both you and the vendor can move quickly then there is not point in signing private contracts, as they are nothing more than a step on the road to signing the deeds.
There are various ‘private’ contracts you can sign before you get to the ‘public’ contract (the deeds you sign before a Notary). Private contracts are no less binding on the buyer and seller than the public deeds, but they can’t be inscribed in the land register without the Notary’s signature, and they are not binding on 3rd parties, such as the vendor’s creditors. Never sign any contract, public or private, without your lawyer checking it first and giving you the go-ahead.
Option contract – Contrato de opción de compra
With this contract you pay an agreed amount to the vendor – say 5%, though it could be as high as 10%, of the agreed price – and in return the vendor commits to sell you the property at the agreed price if you exercise the option to buy within the timeframe agreed. If you exercise the option to buy then the contract becomes, in effect, a fully binding private contract of sale, and your payment counts towards the full price. However if you don’t exercise the option in the agreed timeframe, then you lose the money you have paid for the option, and the vendor is no longer contractually obliged to sell you the property. That would be the end of the matter and you would have no grounds to dispute the contract in court. For this reason this contract is popular with vendors. However you should only sign this contract and pay the option amount if you are sure that you want to proceed. You need to do a full due diligence before proceeding to sign this type of contract.
Reservation contract – Documento de reserva
This contract requires that you pay a deposit to reserve a property for a specified period of time – usually 30 days. At the end of this period you either back out and lose your deposit or proceed to a more substantial contract that commits you to buying, such as a deposit contract, a private sale contract or even the public deeds. If you proceed, the vendor is contractually obliged to sell you the property at the agreed price. The deposit is usually between 3,000 and 6,000 Euros, and counts towards the final price of the property.
British buyers will almost certainly be asked to sign a reservation contract when buying from a developer, and estate agents may also try and get British buyers to sign a reservation contract when buying resale property. There is a good reason for this and not one that favours the buyer. Estate agents want to turn the momentum and enthusiasm of your visit into a commitment as quickly as possible. If you go home having signed a reservation contract and paid a non-refundable deposit of 6,000 Euros you are more likely to proceed with the purchase than if you go home having seen a property that you plan to buy, but without having made any commitment. The deposit makes a change of mind more costly, so on average fewer people change their mind if they have paid one.
The truth is that reservation contracts do buyers few favours. They involve a substantial financial commitment of 3,000 to 6,000 Euros before any due diligence is done, and they are usually very basic and vaguely drafted documents that give the buyer little protection. You are much better off doing an appropriate due diligence and then signing a more substantial contract, even if this takes longer. If you really feel the need to take a property of the market for a period of time (when buying from a private individual) then propose using the option contract described above. In any event never sign a reservation contract without checking with your lawyer first, and try and avoid this contract altogether.
Note that some agents and networks insist that you pay a deposit of around 6,000 Euros just to communicate an offer to the vendor. Always check with estate agents in advance if they have this policy, and avoid dealing with them if they do.
Deposit contract – Contrato de arras penitenciales
This contract requires that you pay a deposit – normally 10% of the agreed price – when the contract is signed. If you fail to go through with the purchase having signed the deposit contract you will lose all of your deposit to the vendor. However if the vendor backs out before signing the deeds then the vendor will have to pay you back double the deposit. Therefore this contract makes it expensive for either side to back out, but at the same time it does leave the door ajar should either side wish to do so. Unlike the contracts discussed below you cannot be forced to go through with the sale, though you lose your deposit if you don’t.
You should only sign a deposit contract once you have done the necessary due diligence and been given the all clear from your lawyer, as you may lose the entire deposit if any problems subsequently emerge. Spaniards often use the deposit contract when buying property, unlike the reserve contract, which the Spanish have never typically used. This is the contract you are most likely to be asked to sign.
Down payment contract – Contrato de paga y señal
The down payment contract is very similar to the deposit contract and contains much the same information. The big difference being that there is no mechanism for backing out unless both sides agree to call of the transaction. Neither of the parties can back out unilaterally so you will be forced to go through with the purchase if the vendor is unwilling to tear up the contract and return your down payment.
Private purchase contract – Contrato privado de compraventa
Like the down payment contract the private purchase contract is a binding contract with no mechanism for backing out unless both sides agree to tear up the contract. However in this case you pay no down payment at the time of signing the contract, which means you have to pay the full amount of the purchase at the signing of deeds before Notary. The private contract is just as legally binding as the public deeds. The difference is that the private contract can’t be inscribed in the property register because it hasn’t been authorised by a Notary.
As a British buyer it is very unlikely that you will sign a private purchase contract if there is no deposit or down payment involved. When the buyer is foreign, the vendor will always insist on a deposit or down payment, as otherwise it is too easy for the buyer to walk away from the contract. Although this would be breach of contract, the vendor would have difficulty enforcing the contract on a buyer in a different country. This means that, as a British buyer, you will only ever be offered a down payment or deposit contract.
It is important to realise that the full amount you have agreed to pay the vendor will be noted in whichever private contract you sign, even if you have agreed to pay part of the price under the table in cash. However the public deeds you sign before Notary will only mention the amount you have agreed to declare, which is what the tax authorities will see. Private contracts that can be used to prove a discrepancy between the agreed price and the declared price are usually destroyed after the deeds have been signed and the sale completed.
Lastly, whenever you sign a contract that involves making a payment, this should be clearly noted in the document you sign, or you should be given a signed receipt. All these contracts should also provide unambiguous detail on the buyer, the vendor, the property, the price agreed, the deadline for signing the deeds, vacant possession, debt-free title, how the transaction costs will be paid, clauses that allocate responsibilities, conditional clauses that need to be met for the contract to be valid, and how disputes will be resolved. If you are buying any furniture or other items from the vendor these should be included in an inventory attached to the contract.