THE BUYING PROCESS 

The private purchase contract

The proper contractual relationship starts when the property and the price have been determined and agreed by the parties. A private purchase contract (Contrato Privado de Compraventa) may be drafted at this point and the parties should fully understand and agree the nature of the obligations and rights arising from this contract, before signing it and make it executable. In Spain there is no requirement to witness the signature of the parties to a private contract.

The private contract serves as the legal instrument to clarify the will of the parties, with the intervention of their respective lawyers. The signed private contract (signed always on all the pages), is fully executable and valid according to Spanish Law, although the ownership will not be deemed to be transferred to the purchaser until the property is actually conveyed. This may happen in a number of ways, the most usual being the signature of the Public Deed (see below).The legal rule is that the signature of the Public Deed will entail the conveyance of the property to the purchaser, unless clearly indicated to the contrary in the Public Deed.

The Purchasing Contract is an agreement between two parties, the vendor,offering the property and the purchaser,accepting it. The agreement is made on the transferring of a clearly defined property by receiving a payment as a counterpart. The transferring of the property and the payment do not need to happen simultaneously, and specific terms may be negotiated on that aspect.

One of the more conflictive areas is the down payment requested to reserve the property.The most habitual legal form of this deposit is the payment of a signal (arras o señal), often included in the Private Purchase Contract, or as an independent contract by itself.The signal is an amount paid as a token, usually 5 or 10% of the price to guarantee the transaction.This signal, if the agreement is properly drafted, may be considered as a forfeit which can be lost if the purchaser defaults any term, however double the amount of the signal is refundable by the seller if he defaults the terms.The purchaser may retain in most circumstances the right to redress.

If the sale is agreed, this type of deposit is described as a down payment or deposit and will constitute the first instalment of the final sale price.There is substantial case law intending to define this element and it is crucial to draft this agreement properly.

When paying any monies on account for properties under construction, proper bank guarantees or insurance policies should be arranged. There are statutory provisions (Spanish Laws L 38/1999 and L 57/1968) for the developers and agents to guarantee the payments on account for properties in progress, until the completion stage.These statutory provisions also establish the developer’s obligation to guarantee the properties themselves against any building defects up to ten years after the construction date.

The signature of the Public Deed

The private purchase contract cannot be registered in the Land Registry without the intervention of a Public Notary (Notario), who is the only person entitled to grant a Public Deed (Escritura de Compraventa) based on the terms privately negotiated by the parties in the private purchase contract.

The Escritura de Compraventa is technically the public transfer deed, and it cannot be compared with the concept of deed of title in the English system. There are no title deeds as such in Spain and proof of ownership is provided and guaranteed by registration of the deed of transfer at the Land Registry (Registro de la Propiedad). The original deed of transfer is retained indefinitely by the Notary, who would be able to issue copies as requested.

The registration of the Escritura de Compraventa in the Land Registry is the step needed for the purchaser to be acknowledged as owner by third parties,other than the seller,as well as to be entitled to specific legal protection provided by the Land Registry regulations.The Land Registry can issue a certified copy of the entries in the Registry (Nota o Certificado Registral), however this will not act as deed of title.

The role of the Notary is to draft and authenticate the contract, to witness the signature,as well as to advise the parties of some of the statutory civil, administrative and tax provisions. The Notary will thereafter send to the Tax administration the relevant tax information concerning the transaction.The Notary will only witness that the price of the property has been actually paid if the payment takes place before him (for instance, hand over of a bank cheque to the seller). If the property is going to be mortgaged, it can be done at this stage, as well as to cancel pre-existing mortgages or charges.

The Notary in Spain fulfils a very important role in the transaction and his function can be summarised as:

• To prepare the document, based on the instructions of the lawyers to make sure that the intention of the parties is clearly represented.
• To identify the parties and determine their legal capacity to complete this transaction and witness the date and signature of the document, giving it probationary status.
• Give the information needed to comply with certain legal, tax and administrative regulations governing the transfer of property and ownership,including the need to declare the true price of the transaction and the applicable taxes to be paid.
• To retain the original deed in his register and issue certified copies.
  

The Land Registry

After signature, the notarised deed needs to be submitted to the local Land Registry (Registro de la Propiedad), once the relevant indirect taxes have been paid. The registration of the deed provides the highest public level of protection.

The registration in the Land Registry is the only public record available to demonstrate the ownership of the property.The local Land Registry keeps historic records of all the charges related to every single property in that location. Registration is fundamental to protect the purchaser against third party claims against the vendor.

It is worth noting that deeds attested by UK Public Notaries can enter the Land Registry in Spain if they are properly drafted according to Spanish Law, attaching the official translation and being duly legalised with The Hague Apostille stamp from the UK Foreign and Commonwealth Office.

Purchase by a Company

It is also possible to purchase property with a company if the property is going to be shared between a number of owners. A limited company (Sociedad Limitada, SL) or a public one (Sociedad Anonima, SA) can be formed in Spain to own the property. If the company is not trading according to certain requirements it is considered a property investment company (Sociedad de mera tenencia de bienes), subject to a special tax regime affecting the individual resident shareholders.

The company acquiring the property can be registered in the UK or offshore. However there are different tax consequences in Spain and the UK for the companies and the shareholders. Offshore companies owning property in Spain and registered in a country with no Double Tax Treaty with Spain, will be charged a 3% annual tax on a deemed income based on the rateable value.Tax planning should be undertaken prior to proceeding with any corporate scheme (see ‘Tax planning considerations’ below). Finally it is important to mention that the Trust as a legal entity is not recognised in Spanish legislation. Trusts cannot own property in Spain unless the acquisition is made by a corporate structure owned by the Trust. Otherwise, the trustees, beneficiary or settlor should make private arrangements to acquire the property in their own name, overriding the legal or tax advantages of the trust in England. Anyone contemplating purchasing on behalf of a Trust should discuss the details involved in both jurisdictions.