Author: María Gracia Moreno Vegas
In the Spanish legal system, especially in the articles of the Civil Code dedicated to the regulation of contracts and sale and purchase, the possibility of setting conditions or suspensive and resolutive clauses of contractual obligations is foreseen. That is to say, conditions that either suspend the execution of the contractual obligation depending on the capacity of satisfaction of the conditioned action, or that empower the parties (both or only one of them) to terminate the contract and, after unsuccessfully demanding the performance of the obligation, to extinguish it.
Difference between condition precedent and resolutory condition
Conditions are allowed in law, but their inclusion in the contract requires that both parties, buyer and seller, agree. However, not all conditions are admissible, and to be valid they must meet a series of legal requirements:
1.-The event contemplated as a condition must be possible (an impossible condition would imply the permanent unfeasibility of the contract coming into effect, and would therefore be null and void).
2.- It cannot be contrary to the laws or to the good customs.
3.- It cannot depend on the will of one of the parties, since this would imply leaving exclusively in their hands the possibility of the contract being fulfilled.
The Civil Code contemplates two types of conditions: the resolutory condition and the suspensive condition, whose consequences are totally divergent.
The difference between the suspensive and resolutory condition is that the suspensive one is the one on whose fulfillment depends the effectiveness of the act, while the resolutory one implies the extinction of the legal effects.
A property is bought for an amount of 130,000 euros being delivered in the act of the signature of the contract 60,000 euros and agreeing that the remaining 70,000 will be paid at the end of three months. If a resolutory condition is established, the sale is consummated as of now, the property belongs to the buyer from the moment of the signature, and, in case the rest of the price is not paid after three months, the sale is terminated and the property returns to the seller. If a suspensive condition is established, the sale will not take effect and will not be considered consummated until the second installment is paid. In the meantime, the property remains the property of the seller.
What are the effects of a suspensive condition?
In order to understand the regulation of the suspensive conditions we must take into account the following articles:
–Article 1114, Civil Code. This provides that in conditional obligations, the acquisition of rights, as well as the termination or loss of those already acquired, will depend on the events constituting the condition.
–Article 1115, Civil Code. It is established that when the fulfillment of the condition depends on the exclusive will of the debtor, the conditional obligation will be null and void. In the event that it depends on the fate or the will of a third party, the obligation shall have its effects in accordance with the provisions of this Code.
–Article 1117, Civil Code. In this article it is determined that the condition that some event occurs in a certain time, will extinguish the obligation since the time has passed or, well, there is no doubt that such event will occur.
–Article 1256, Civil Code. It is defined that the validity or performance of contracts cannot be imposed by the contracting parties.
The main difference between suspensive and resolutory condition, is the consequence of the fulfillment of the constitutive event of the condition.
The effect of the suspensive condition consists, precisely, in leaving in suspense or paralyzing the effects of the contract, until the constituent event of the condition occurs. But once that conditional event occurs, the contract will unfold all its effects and the parties must fulfill their respective obligations.
Thus, in a sale subject to suspensive condition, when the condition is fulfilled, the obligations arising from the contract become enforceable, i.e., the obligation to deliver the property on the part of the seller, and the obligation to pay the agreed price, on the part of the buyer.
In a case of sale and purchase of a portion of a piece of land that, previously, must be segregated from a larger estate. The suspensive condition of the contract of sale would be, in this case, that the legal act of segregation is carried out. Once the condition is fulfilled (segregation of the plot of land), the contract of sale of the segregated portion is activated, and the obligations to deliver the land and pay the price are born.
What are the effects of the resolutory condition?
Found its regulation in art. 1504 of the Civil Code, it is understood that: “in the sale of real estate, even when it has been stipulated that for lack of payment of the price within the agreed time, the termination of the contract will take place as of right, the buyer may pay, even after the expiration of the term, as long as he has not been requested by court or by notarial act. Once the requirement has been made, the judge may not grant a new term”.
Continuing with the differences between suspensive and resolutory conditions, the unfulfillment of a resolutory condition implies that the contract becomes ineffective; in other words, the production of the event that constitutes the condition extinguishes the effectiveness of a contract already born, based on the occurrence of a future or probable event.
This implies that, in the event of the fulfillment of the resolutory condition, the services rendered by each of the parties under the contract will have to be returned: the seller will recover the property and will have to return the price paid by the buyer.
Usually, a resolutory condition is configured as a guarantee of payment in the purchase-sale with deferred payment of the price, so that the breach of the payment or of some term of this one brings along, as consequence, the resolution of this purchase-sale, recovering the seller the property object of the transaction.
In this case, the contract comes to produce its effects: delivery of the property and payment of part of the price, but will cease to do so if the condition is fulfilled (failure to pay the rest), so that the seller recovers ownership of the property and the part of the price already paid is returned.
In a hire-purchase contract with a resolutive condition for non-payment of the deferred price, the signing of the contract determines that the parties have to fulfill their obligations: the seller has to deliver the property and the buyer has to make the first payment. If the buyer fails to meet any of the agreed deadlines, the contract will cease to be effective and the seller will recover ownership of the property.
How is this termination of the contract of sale executed?
Having given the non-payment of one of the installments, the seller will have to request it notarially or judicially.
Once the resolutory condition is applied, the buyer will no longer have the option to make the payment and will have lost the ownership of the property.
The sale is extinguished and the parties are obliged to return the consideration received.
The buyer returns the property and the seller the amounts received, provided that the contract does not contemplate that in case of non-payment the seller keeps all or part of the amount received as compensation for damages caused by the breach.
What happens in contracts of sale with earnest money or deposit?
As we have already explained in an article of our blog on this subject, there are three types of earnest money that are entitled to guarantee the termination of the contract (penitential earnest money) due to withdrawal of one of the parties, or that are designed to reflect the perfection of the purchase contract itself (confirmatory earnest money) and the execution of the contractual obligation (penal earnest money).
In order to illustrate how the suspensive and resolutory conditions of this type of contracts work, we will take the example of a contract of earnest money conditioned to the obtaining of financing for the purchase and sale of the property:
Both in the event of not obtaining the conformity of the financial entity to the subrogation of the buyer in the mortgage guarantee and in the personal obligation derived from the loan, and in the case of not obtaining the mortgage credit requested, the buyer is obliged to pay to the seller the total amount foreseen for said loan within the term of. From the notification to the buyer of the denial of the loan and, in any case, up to the moment of handing over the keys and when required to do so after the completion of the works. Failure to comply with this obligation shall be cause for termination of this contract at the request of the seller.
However, the buyer may choose to terminate the contract at the moment he becomes aware of the financial institution’s non-conformity with the subrogation or the non-granting of the loan requested, with the return of all the amounts paid on account within the same period as provided for in the previous paragraph.
In this way the buyer is allowed to recover the amounts paid if the operation could not be carried out due to the non-granting of the loan.
The confirmatory earnest money and as pointed out by the Supreme Court “are an expression of a contract with binding forces that do not empower, therefore, to resolve the contracted obligation, which normally correspond to the deliveries or advances on account of the price.”
In other words, they are proof of the perfection of the contract of sale. They guarantee that the sale is going to be carried out and they represent an advance payment, so that the delivery is on account of the price. It is important to bear in mind that the confirmatory deposits do not grant a power of withdrawal from the contract, therefore if the contract is breached, the aggrieved party will have two options:
-The termination of the obligation, which will also be accompanied by compensation for damages and payment of interest, when such damages are proven, all in accordance with the provisions of Article 1124 of the Civil Code.
In the event that nothing is specified in the contract, it will be understood that the agreed deposits are confirmatory.
The penitential earnest money, also known as a withdrawal earnest money, differs from the confirmatory ones precisely in that it allows either party to freely withdraw from the contract, i.e., the signing of such contract does not imply either an obligation to sell or an obligation to buy.
On this occasion, the consequences of such withdrawal are to pay the amount previously fixed in the earnest money. For this reason, the contract must indicate the amount to be paid in the event of cancellation. The consequences will be different depending on whether the buyer or the seller defaults, as recognized in article 1454 of the Civil Code.
In the event of default by the buyer, the buyer shall forfeit the amount delivered.
If the breach is attributable to the seller, he will return double the amount received.
In the case of the penal down payment, in the event of default by the buyer, the latter will lose the amount delivered; whereas if it were to occur on the part of the seller, he will return double the amount he received. But in addition, they do not prevent the enforceability of the obligation: the fact that the obligation has been waived does not imply that the obligation disappears. Therefore:
It is a fixed amount that is understood as a penalty clause, and according to article 1152 of the Civil Code, in obligations with penalty clause, in case of non-performance and if nothing else has been agreed, the penalty will replace the compensation of damages and the payment of interest. However, the judge may modify the penalty if, for example, the non-performance is partial.
As the penalty does not prevent enforceability, it may also be claimed that the contract be effectively performed.
Therefore, in the case of penalty deposits, the model contract must include a penalty clause stating that, in the event of default by the seller, the latter must return to the buyer double the amount received as deposit or down payment; and if the buyer fails to comply with the obligations set forth in the contract, the buyer will lose the amounts paid as deposit or down payment, and the seller will keep them. The possibility for the non-performing party to terminate the contract or to demand its performance, with the pertinent indemnities, must also be reflected.
If you would like to obtain more information on suspensive or resolutive contractual conditions, please contact us.