Financial & legal repercussions of breaching an option’s contract

Raymundo Larraín Nesbitt, March, 11. 2021

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By Raymundo Larraín Nesbitt
Lawyer - abogado
11^th of March 2021

On buying property in Spain, you will be presented with multiple options. The most frequent one is to sign a sales contract (contrato de arras), whereby you pay a seller 10% of the agreed sales price. Once you complete at a notary, you pay the balance, and the 10% goes towards the final sales price. The gist of this short article is to highlight that the 10% deposit handed over to a seller is always non-refundable.

However, what happens if - for whatever reason - the buyer pulls out and does not carry on with his purchase? It is important to understand that on pulling out of a sales contract, the buyer automatically breaches the Private Purchase Contract (exchanges). The immediate legal repercussion this has is that the seller legally pockets the buyer’s 10% and the property can now be put into the market once more, and sold to someone else.

The seller, or his legal representative, will attend the notary on the day it was contractually stipulated agreed the buyer would complete and will raise a deed, which a notary will witness, stating the buyer has breached the contract as they have failed to attend completion on the agreed day and time and pay the sales price as was agreed. The seller will then proceed to withhold the 10% option as penalty for contract unfulfillment. The notary will then send a letter by recorded delivery to the seller, or his legal representative, of this deed for notification purposes. There is no point in challenging this at court as a buyer is almost guaranteed to lose.

Where am I getting with this? The reason on why I’m writing this post is because some buyers naively think that only because to their minds they have a justified reason to pull out and not go ahead with a purchase (i.e. family member dies, their financial circumstances change drastically, they are laid off, they fail to secure a mortgage loan, life-threatening disease, flight bans, divorce, etc), that does not justify a refund of the 10% they’ve already paid as an option to buy. Normally, the only way to ‘recover’ this 10% is simply to complete on the property at a notary, period.

Moreover, in some extreme cases, depending on how the arras contract was worded, a buyer legally commits to buy the property. Meaning, that even if they pull out of the contract, they can in fact be taken to court to complete on the full property price! Arras contracts should always be drafted by the buyer's lawyer, not by the sellers.

This post is simply a gentle reminder on the gravity of signing such a contract whereby a buyer in fact legally commits to buy a property in Spain. And if he doesn’t, there is a price to pay in the form of the 10% already handed over to the seller on signing the PPC.

The lesson we can glean from this is that buyers should only sign a sales contract if they are resolute and committed, being fully aware of the legal and financial consequences of signing such a contract.

At LNA we can assist you buying, selling or renting out your property in Spain. We have 18 years’ experience in conveyance & tax. We are also specialized in Immigration & Residency permits.

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