When purchasing a property, there is an option for buyers who do not want to have to use external financing or pay the full amount of the purchase from the outset: the purchase of property by instalments.
What does the hire purchase of a property consist of?
This alternative to the traditional purchase consists of deferring the payment of the amount of the purchase in instalments (normally with monthly maturity) for a determined period of time (several years) and after this period, paying the rest of the outstanding amount of the operation.
How is a property purchase and sale by instalments carried out?
Buyer and seller will sign a private contract of sale where it is established:
- Amount of the purchase-sale
- The period during which the price will be paid in instalments.
- Date on which the outstanding purchase price is to be paid in full after the instalment period has expired
- Amount of the instalments
- Frequency of payment of the instalments
- Time at which title to the property is acquired
- Time at which the property is made available
- Taxation of the transaction
- Whether there is a condition precedent or resolutive condition
- If there is a reservation of title agreement
- If there are personal guarantees (guarantor or guarantor)
When transferring ownership of the property from seller to buyer, this will be done in a notary’s office, by means of a public deed of sale.
It is always advisable that all private agreements made in this type of transaction are made public (notarised), as otherwise they will not acquire the protection of the public registry faith and therefore their opposition before third parties, article 17 of the Mortgage Law:
“Once any title transferring or declaring ownership of the real estate or of the rights in rem imposed on the same has been registered or annotated preventively in the Register, no other title of the same or an earlier date may be registered or annotated that opposes it or is incompatible, by which the ownership of the same real estate or right in rem is transferred or encumbered.”
When is the property delivered to the buyer?
In the hire purchase of real estate there are 2 moments in which the buyer has the availability to use the property (possession of the property is handed over):
1.- At the moment of signing the private hire-purchase contract. Before starting to pay the instalments.
2.- At the moment of finalising the payment of the instalments, paying the rest of the amount of the pending purchase-sale. This moment coincides with the signing of the public deed of sale.
What is the meaning of a suspensive condition and a resolutive condition in this type of sale and purchase?
Our legal system determines the differences between the suspensive condition and the resolutive condition that can be established in a contract.
1.-The suspensive condition
This is a condition that is established in a contract and that determines that the contract (or certain obligation) will not take effect (will not enter into force) until the condition is fulfilled.
For example, a lease will not come into effect until a number of licences are granted (condition precedent). If the licences are not granted (the condition precedent is not fulfilled) it is as if the contract had never existed, since it has never entered into force.
2.- The resolutive condition
A contract subject to a resolutive or resolutory condition enters into force at the moment of its granting, taking full effect from that moment.
But if this type of condition is fulfilled, the contract ceases to be active, ending at that moment and ceasing to have legal effects.
In the previous example, if the lease is subject to a resolutive condition to obtain certain licences, if these licences are not obtained, the contract is terminated. But such a contract has already been in force, has already created obligations between the parties and has been taxed. Therefore, at that time, it will be necessary to request the restitution of the obligations and amounts paid to date and to request the refund of the taxes, duties and fees paid from the administrations and public bodies.
How do you ensure that the buyer pays the purchase-sale instalments?
The main risk of this operation is that the buyer does not pay the agreed instalments and its consequences on the sale and purchase process that is being carried out.
In order to safeguard this situation, different measures are articulated:
1.- The sale and purchase establishes a resolutive condition whereby, if the buyer fails to pay the instalments, the sale and purchase is terminated, the seller reacquires the property and the instalments paid up to that point are kept by the seller as compensation for damages for having terminated the sale and purchase.
2.- The hire purchase establishes a suspensive condition whereby it will not come into effect until the purchase price has been paid in full.
3.- To establish an agreement with reservation of title. The reservation of title pact consists of the seller continuing to retain ownership and title to the property until the buyer pays the full amount of the purchase price.
4.- The above measures are articulated as real guarantees, but there is also the possibility of securing the transaction by means of a personal guarantee, such as, for example, a joint and several guarantor. This joint and several guarantor will be required to pay the instalments in the event of non-payment by the buyer. Article 1852 of our Civil Code stipulates that:
“The guarantors, even if they are joint and several, are released from their obligation provided that due to some act of the creditor they cannot be subrogated to the rights, mortgages and privileges of the creditor”.
A small mention should be made of the compensation for damages for non-payment of quotas that we have been discussing throughout the article. This is made up of a percentage of the amount of the instalments paid and is based on the tenancy of the property and the deterioration caused to it.
It is important not to forget the taxation in this type of real estate transactions, as it can determine the choice of one or another modality within the purchase and sale of real estate on instalments.
If you need help when buying or selling a property in instalments, please contact us.
