Types of contract in the purchase of a property

Recommended contracts before signing the Title Deed

Let's see the different types of contracts most recommended, depending on their characteristics:

1.- Contract of promise of sale

It is the contract by which the parties, promising seller (who promises to sell) and promising buyer (who promises to buy) agree on the future sale of a property.

Unlike the sale, with this type of contract neither the buyer has to pay the price nor the seller deliver the property, but both are forced in the future to celebrate the sale, so that if one of the parties did not comply, the other may claim compliance or compensation for damages.

This contract is comes from the willingness of the parties to postpone the date of the future sale, either because they are interested or for some special reason, for example that the buyer is processing the financing of the operation, or that the house is not finished yet or that any procedure must be finalized.

In order for this to be valid, the essential elements of the future sale must be fixed, which are:

Identification of the property
Fixing of the Price
Signature Date

2.- Preliminary/deposit Contract

The precontract/deposit is an agreement whereby the buyer hands over to the seller an amount (deposit) intended to ensure the future conclusion of a sales contract.

We distinguish 3 different types of deposit contracts with very different effects.

Confirmatory or approbatory
What is paid as a deposit is part of the agreed price and without the possibility of the parties to not finalise the contract unilaterally. If a different purpose is not specified, it is understood that these are confirmatory.

If one of the parties does not comply with its obligations, the other party can demand the fulfilment of the contract, which means, if the seller fails to comply with the buyer, he can force him to grant the deed of sale and if the buyer fails, the seller can force him to pay the rest of the price.

The party that is willing to comply with its obligations can ask to finalise the contract with a compensation for damages. Said compensation is not initially quantified in the contract and will depend on the Judge.

Penalty Precontract
They are delivered as a guarantee of completion with the contract. In case of non-completion of one of the parties, the other may demand the faithful fulfilment of the agreed obligations or give the contract as resolved by demanding compensation already quantified, which is the amount agreed as a deposit. Precisely this, that means to say that the compensation is already quantified is the main difference with the confirmatory deposit. Equally as the previous the penalty deposit charges do not entitle any of the parties to unilaterally cancel the contract.

Penitential Precontract
They are the sample of celebration of a contract in which the future conditions of sale are fixed. Any of the parties can be relieve from the contract, the buyer losing the amount delivered as a deposit and the seller returning double of the amount received.

3.- Option contract of sale

It is a contract under which a party, called an Buyer, acquires the right but not the obligation to acquire a property from another party, called the Seller, who acquires the obligation to sell it. The price of the option is called "deposit".

The definitive purchase and sale will depend solely and exclusively on the Buyer, who in the established term must state whether or not he exercises the option. The owner during that period cannot sell the property to a third party.

The purchase option can be registered in the Land Registry, therefore:

There must be an agreement between the parties for registration
Must include the agreed price and the option premium
The period of exercise of the option may not exceed 4 years

4.- Differences between deposit and option. Legal and fiscal aspects

The purchase option and the deposit have very different legal and fiscal implications so the rights, obligations and taxes are very different in one or the other contract.

The main legal difference is that in the option contract, the final sale will depend solely and exclusively on the buyer, he is the beneficiary of the option and he will decide whether or not to exercise it in the established term, However, in the deposits, there must be agreement of both parties, so in the confirmatory or approbatory neither of the parties, buyer or seller, unilaterally, can be relieved from the contract and in the penitential any of the parties can terminate the contract of sale, without the other party being able to demand completion.

Let's see the tax differences.

The deposit when recorded in the contract that will be deducted from the purchase price will always have VAT and ITP (property transfer tax) as consideration for payment on account therefore:

In transmissions subject to VAT, that means, if the Grantor/seller is an businessperson or professional, the charge of the deposit will earn 10% VAT
In transmissions exempt from VAT, granted by individuals, the charge of the deposits will not accrue taxes, as the ITP only accrues with the delivery of the property and not with the payments on account
For purposes of IRPF (income tax) for the Grantor or Seller, the deposit contract has the character of simple payment on account and does not involve taxation until the sale occurs

In the purchase option contract, the concession of right of option:

If it is on the part of a businessperson or professional, it is considered a provision of services and is subject to 21% VAT (the premium). Subsequently VAT will be taxed only for the total agreed consideration, which will be the total price, discounted the amount already paid as option premium
Purchase options granted by individuals (not businessperson) are always taxed by ITP. The tax base will be the amount paid as an option premium, but with a minimum of 5% of the purchase price
For purposes of income tax, the purchase option, the finance office understands that the amounts received by the Grantor/Seller will be taxed in the personal income tax (which can be up to 42%) while the subsequent sale will be taxed on the basis of savings in a% ranging between 19 and 23%

5.- Conclusions

Each situation requires a specific type of contract for it, so it is important to have the advice of companies or professionals of recognized prestige and experience such as Berkshire Hathaway HomeServices Nova Mallorca Estate Agency can offer, however we can give some guidelines for action.

If the period required before signing the deed of sale is relatively short, between 15 days and one month and the parties want to be bound to sign a future sale, we recommend the contract of sale promise.

For longer periods of time, we recommend signing a deposit contract, basically for a fiscal issue, as the deposit is a payment on account and does not mean for the seller any taxes until the final sale or the seller is left with the deposit by breach of the buyer.

On the other hand, the amount received in the purchase option as an option premium is interpreted as a capital variation that must be declared in the IRPF in the general base, which can be quite burdensome for the Grantor/Seller.

For these reasons between option or deposit we favour the last, adapting the deposit type to the needs of each of the parties.

Types of recommended contracts