Nowadays, in the economic crisis brought on by the pandemic, there are property purchases that do not end well because of problems such as the buyer’s inability to get a mortgage or the impossibility of sale by the buyer. To avoid taking unnecessary risks, Spanish law has a buying contract subject to a condition precedent. This condition only has a legal effect when the condition agreed by both parties is fulfilled. For example, the approval of a mortgage or obtaining the required legal authorization if one of the sellers is incapacitated.
What is a condition precedent?
In a buying contract with a condition precedent, the effectiveness of the contract depends on a future event. If this event takes place, it allows gives parties (buyer and seller) certain rights.
Know your legal terms
When a contract is subject to a future event, this is known as a condition precedent.
If the contract becomes void after a specific event happens, this is known as a resolutive condition.
Did you know? The best way to avoid problems when you buy property in Spain is to use an experienced and independent lawyer.
What kind of future events can be classed as condition precedent?
Many different circumstances can merit a condition precedent. As we mentioned in the introduction, the failure by the buyer to secure a mortgage loan is one example. Others include:
Required legal authorization if one of the sellers is incapacitated.
Required administrative ruling to clarify the planning situation of the property.
How does the condition precedent work?
Both the buyer and the seller can carry out the transaction, which is put on hold until the event takes place. A buying contract with condition precedent can be set out in a private document or even formalized with a notary in public deeds that can also be registered at the property register.
In this case, either the buyer or seller will specify the terms that bind them as long as the specific event impeding the purchase takes place. In which case, both parties are no longer bound by the contract because it depends on the fulfilment of the agreed condition.
Is the condition precedent usually in the buying contract?
This type of condition is usually included in the usual buying contract (contrato de arras in Spanish), but it has the disadvantage of not being able to specify a deadline for the signing of the deeds.
For this reason and in these cases, it’s preferable to use a buying contract with condition precedent (contrato de compraventa con condición suspensive in Spanish). This means that if the condition precedent happens, the buyer can easily recuperate all payments made previously. If both parties agreed to bind the contract with a condition precedent in the deeds, the notary will return the cheques paid by the buyer and left in deposit at the notary’s office.
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How about taxes on a purchase of a property with condition precedent?
Any property purchase has three taxes:
- Transfer tax (Impuesto sobre Transmisiones Patrimoniales/ ITP), paid by the buyer.
- Local capital gains tax (Plusvalía municipal), paid by the seller.
- Income tax, paid by the seller.
All taxes must be paid at the time that the purchase is formalized by the signing of the title deeds. This means that if the purchase is subject to the fulfilment of a condition precedent, neither the buyer nor seller is liable for taxes. These are only levied when the condition takes place.
If the condition does not take place, the seller is not liable for income tax on the amounts received as part of the price if he returns them to the buyer. However, if both parties agree to compensate the buyer if the sale does not go through, it’s a different story.
The income in this case, since it does not come from a property transfer, becomes part of the seller’s general taxable income.
What do I do next?
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