When selling a real estate property for substantial value it´s common to negotiate a deferred payment.
This is extremely convenient when selling real estate property to a professional investor. Let´s think about a plot of land, even if an old construction is already built on it. The Buyer would have seek for a split payment so that second or third payments are paid by using returns on their investment. This becomes extremely popular in attractive areas with lot of potential, such as Marbella, Majorca or Alicante.
One of the most recurrent questions from our clients are:
What happens if the Buyer fails to pay?
In most contractual disputes, where one party is in breach of its obligations under the contract, the “innocent” party will wish to claim damages for the loss it has suffered as a result of the “guilty” party’s breach. However, the clear priority from a Vendor´s point of view would be to terminate the contract as a whole so as to re-sell the property.
It is important to distinguish between rescission and termination of a contract for breach. Rescission is a very specific remedy which may be available in cases of misrepresentation, duress or mistake.
However, non-payment to a non-breaching party would entitle the latter to terminate the contract, which is separate to, and distinct from, any rights to rescind the contract.
When does a right to terminate the contract arise?
A right to terminate a contract is a contractual remedy. As such, this would only arise out of the express terms of the contract. A properly draft contract for the sale and purchase of property will usually incorporate an specific clause allowing termination upon breach of the payment clause.
Normally, termination would be subject to Court approval. However, this is exactly what the Vendor must avoid by all means: going to Court in Spain. It’s well known that going to Court in Spain is expensive, sometimes inefficient and it may take years until a ruling is issued.
Although sometimes disregarded, the Registrar at the Land Registry is entitled – if certain requirements apply – to revert the transaction and to put the property in the Vendor´s name in just a few weeks. This means an immediate termination with full effects avoiding Courts.
This specific procedure must be carefully applied by the Vendor´s advisors who shall act promptly and with sufficient determination before the matter goes to Court.
Why this matters
Delays on completion are common in property transactions. Under the Spanish legislation time is not of the essence in a contract, unless specified. Proper drafting can provide the Vendor with an express right of termination, so long as it follows the relevant legal procedure and gives the defaulting party a valid notice to complete.
In a rising market, sellers should be aware of the risks of delaying payment, where an opportunistic Buyer could seize the chance to retain the property and delay payment beyond the agreed date.
The legal principles underlying a contract termination might seem simple, but often misunderstood. This is just one of the many reasons why both Sellers and Buyers must be aware of their need of a proper legal advice in advance so as to understand the proposed transaction and its foreseeable implications.