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Understand the Contrato de Reserva

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When it comes to buying real estate in Spain, making sure you fully grasp the property sales contract is essential.

Indeed, not fully understanding the document you will sign can lead to financial losses, including the forfeiture of deposits, payment of penalties, unexpected costs, legal expenses, and potential poor investment decisions.

We've heard countless stories of people making costly mistakes when signing their property agreement in Spain. We want to help you avoid the same experience.

We'll give here a very brief overview regarding the property sales contract in Spain ; if you want a full checklist, please check our property pack for Spain.

What is the Contrato de Arras / Contrato de Reserva in Spain?

In Spain, the property purchase agreement for real estate transactions is commonly known as "contrato de arras" or "contrato de reserva."

This agreement serves as a preliminary contract between the buyer and seller, outlining the terms and conditions of the property sale.

The "contrato de arras" is legally binding. It typically includes key details such as the property description, purchase price, and the timeline for the final sale. By signing this agreement, both the buyer and seller commit to the transaction under the agreed terms, making it a crucial document in the purchasing process.

For the buyer, this agreement acts as a guarantee that the seller will not sell the property to someone else, and for the seller, it ensures the buyer's commitment to purchase.

If either party backs out of the deal, there are financial repercussions. For instance, if the buyer withdraws, they lose their deposit. If the seller backs out, they must return the deposit in double.

International buyers or non-residents have the same legal rights as residents in property transactions in Spain.

However, they may face additional requirements, such as obtaining a foreigner identification number (NIE) and potentially dealing with more complex tax implications.

The "contrato de arras" is usually signed early in the purchasing process, often after the buyer has viewed the property and decided to proceed but before the completion of all legal checks and the final deed (escritura) signing.

Upon signing this agreement, the buyer typically pays a deposit, known as "arras."

This deposit is usually around 10% of the property's purchase price, though it can vary. The way property purchase agreements work in Spain can differ from other countries.

For example, in some countries, the initial agreement might not be as legally binding or might involve different financial implications if one party withdraws.

The specific use of a deposit as both a commitment and a penalty in case of withdrawal is particularly characteristic of the Spanish system.

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What should be included in the property purchase agreement in Spain?

In Spain, the requirements for a property purchase agreement, also known as "contrato de arras," are governed by the Spanish Civil Code, particularly under Articles 1454 to 1456.

This agreement should be comprehensive and include several key elements to ensure legality and clarity for both parties involved.

Firstly, the agreement should clearly identify both the buyer and seller, including their full names and identification details. It must also provide a detailed description of the property, including its location, size, and registry information.

The purchase price should be explicitly stated, along with the payment terms and schedule.

Mandatory clauses typically include the agreement's purpose, the property’s selling price, and the terms of the deposit (arras). The deposit is usually about 10% of the purchase price and is a critical part of this agreement.

There should also be clauses outlining the consequences if either party fails to comply with the agreement, the buyer would lose their deposit if they back out, while the seller would have to return the deposit amount doubled if they withdraw.

Additional clauses may cover aspects like the property's current condition, any included furnishings, or specific terms agreed upon by both parties.

It's common to include clauses related to the property being free of charges and encumbrances and any obligations for repairs or maintenance before the final sale.

Conditions or contingencies can also be included. These might relate to obtaining a mortgage, the results of a property inspection, or the completion of legal checks confirming the property’s legal status. These contingencies protect the parties, especially the buyer, from unforeseen issues.

Authentication of the contract by a notary is not mandatory for the "contrato de arras," but it's highly recommended, especially in transactions involving significant sums or complex terms.

The notarized agreement provides an extra layer of legal security and clarity.

Real estate agents in Spain play a facilitative role in these transactions. They may help in drafting the agreement, negotiating terms, and ensuring that both parties understand their rights and obligations.

However, they do not have legal authority over the agreement.

It's the responsibility of the buyer and seller, potentially with legal assistance, to ensure the contract's accuracy and compliance with Spanish law.

What's the signing process like?

The signing process of a property purchase agreement in Spain, known as "contrato de arras," is a crucial step in the real estate transaction.

Here's a breakdown of how it typically works.

The agreement is bilateral, meaning both the buyer and the seller need to sign it.

It's important to note that "the buyer" or "the seller" can indeed be several people. For instance, if a married couple is buying or selling the property, both individuals should sign the agreement.

This ensures that all parties with an interest in the property are legally bound by the terms of the contract.

Both parties need to provide certain documents and information. For the seller, this usually includes proof of ownership, property registry details, and possibly recent utility bills to prove the property's operational status.

The buyer typically needs to provide personal identification and, if applicable, proof of funds or mortgage approval.

The specific timeline can vary, but generally, it follows these steps:

Step Description

Initial Agreement

Once the buyer and seller agree on the terms, the "contrato de arras" is drafted.

Review Period

Both parties review the contract, often with legal counsel. This period can range from a few days to a couple of weeks, depending on the complexity of the transaction.

Signing the Agreement

After reviewing and agreeing to the terms, both parties sign the contract. This is often done in the presence of a notary, especially for high-value transactions, though it's not legally required.

Payment of Deposit

Upon signing, the buyer pays the deposit, typically around 10% of the purchase price.

Technological advancements and legal adaptations, especially post-pandemic, have made it possible for these agreements to be signed remotely in some cases. This can be particularly useful for international buyers or when one party cannot be physically present.

However, it's important to ensure that all legal requirements are met in these cases.

There isn’t a fixed deadline for signing the "contrato de arras" as it depends on mutual agreement between the buyer and seller.

Once signed, the contract remains valid until the final deed is signed or the transaction is otherwise completed or terminated according to the terms of the contract.

The "contrato de arras" itself is typically not registered with local authorities. The final deed of sale, however, must be registered with the local property registry.

This registration is crucial as it legally transfers ownership and is part of the final steps in the property buying process.

Any amendments to the contract after it has been signed require the consent of both parties. It's not uncommon for minor amendments to be made, but they must be agreed upon and documented properly.

After signing the "contrato de arras," the typical timeframe to complete all necessary paperwork and approvals varies.

It can take a few weeks to several months, depending on the complexity of the transaction, the efficiency of the local property registry, and whether there are any issues (like obtaining a mortgage or resolving property irregularities).

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How is the payment handled when signing a property purchase contract in Spain?

In a real estate transaction in Spain, understanding the financial aspects related to the property purchase agreement, known as "contrato de arras," is essential.

Here’s a detailed look into the financial elements involved.

When signing the "contrato de arras," you typically need to pay a deposit, often referred to as "arras." This amount is usually around 10% of the property's sale price.

However, the exact percentage can vary based on the agreement between the buyer and the seller.

Besides the deposit, there may be additional upfront costs. These can include legal fees if you have engaged an attorney, and possibly a fee for a real estate agent, if one is involved in the transaction.

The payment is generally made directly to the seller.

However, in some cases, especially when a real estate agent or a legal representative is involved, it might be held in an escrow account until certain conditions of the sales agreement are fulfilled.

The deposit is usually due immediately upon signing the "contrato de arras." This payment signifies your commitment to the purchase and binds you to the terms of the agreement.

The deposit itself doesn’t typically have direct tax implications.

However, the overall property purchase does attract property transfer taxes. These taxes vary depending on the region in Spain but usually range from 6% to 10% of the property’s sale price. This tax is payable upon completion of the sale.

The down payment amount can sometimes be negotiated with the seller. This negotiation depends on various factors, including the property's demand, the seller's urgency, and market conditions.

If the sale falls through, the refundability of the down payment depends on who breaches the agreement. If the buyer backs out, they typically lose the deposit. If the seller backs out, they are usually required to refund the deposit in double.

The contract might include specific clauses for refundability under certain conditions, such as a failed inspection or inability to secure financing. These contingencies should be clearly stated in the agreement.

Generally, the down payment comes from personal funds.

However, you might be able to arrange a separate loan or financing solution for the down payment, but this is less common and may complicate the transaction.

An attorney or real estate agent can provide crucial assistance in the payment process, ensuring legal compliance and safeguarding your interests. They can manage the payment transaction, ensuring it aligns with the contractual obligations.

You should request a receipt or confirmation of payment when making the down payment. This serves as proof of your compliance with the agreement terms.

For the buyer, apart from property transfer taxes, there may also be VAT (IVA) in case of new properties.

For the seller, capital gains tax is a consideration, as they are taxed on the profit made from the sale.

What are the potentials risks and pitfalls?

You might be interested in reading our article about the common risks and pitfalls surrounding a property transaction in Spain.

In Spain, the property purchase agreement, known as "contrato de arras," carries certain risks and potential pitfalls for both buyers and sellers.

Both the buyer and the seller can withdraw from the agreement, but not without financial repercussions. If the buyer withdraws, they typically lose their deposit. Conversely, if the seller withdraws, they are usually obligated to return the deposit in double.

Spanish law does not typically provide a cooling-off period for private property sales once the "contrato de arras" is signed.

Therefore, once you sign the agreement, you are immediately bound by its terms.

There is no requirement for a 'valid motive' to withdraw from the agreement. The consequences of withdrawal are financial, as mentioned above, regardless of the reason.

If a buyer cannot secure financing and this was not stipulated as a contingency in the agreement, they would still lose their deposit if they back out. It’s crucial to include such contingencies in the contract if financing is uncertain.

If one party fails to meet their obligations as outlined in the contract, it constitutes a breach of contract. The penalties are usually stipulated in the agreement, often involving the loss or doubling of the deposit, depending on who breaches the contract.

In the case of a breach, the penalties are typically financial, as described above. The money (deposit) is either forfeited by the buyer or returned in double by the seller.

The process in Spain, particularly the use of the "contrato de arras," can be quite different from other countries.

For example, in some countries, there is a formal cooling-off period after signing a sales agreement, and the penalties for withdrawal might be less stringent or dependent on specific conditions being met.

Key risks include the lack of a cooling-off period, the potential loss of the deposit, and the possibility of undisclosed property defects. It's essential to conduct thorough due diligence and possibly include specific contingencies in the contract.

Disputes are not uncommon, especially concerning property conditions, boundaries, or fulfillment of contractual terms. These are often resolved through negotiation, but legal recourse is available if necessary.

Disputes during the signing period are typically resolved through direct negotiation or mediation. If unresolved, they can escalate to legal action, where a court or arbitrator will make a binding decision.

If defects or issues with the property are discovered after signing, the buyer may seek redress if these were not disclosed prior to sale.

The course of action can depend on the nature of the defect and the terms of the contract.

This article is for informational purposes only and should not be considered financial advice. Readers are advised to consult with a qualified professional before making any investment decisions. We do not assume any liability for actions taken based on the information provided.