Sometimes, to make viable a real estate transaction, the parties must agree to defer payment of part of the price, in such a way that not all the price is paid at the same time of the granting of the public deed of sale, but in terms And agreed conditions.
In these cases, in strict application of the theory of title and mode, even if the price is not paid in full, the property passes to the acquirer, and payment of the rest of the price is only a personal obligation imposed by the contract. Of course, the selling party has a personal action (not real action) against the buyer to demand the deferred payment that is owed.
The price can be paid after delivery of the property, in a single payment deferred, or in several. In the case of real estate purchase with deferred payment, it is usual for the buyer to give sufficient guarantee of the future fulfilment of their payment obligation.
In the event of a breach by the buyer, when the seller chooses to claim payment of the price (notwithstanding that he may choose to terminate the contract), he exercises a personal action to collect an ordinary credit. The seller cannot claim payment against third-party purchasers who inscribe their purchase title in the Registry, which brings cause of the title of the buyer-debtor, as these third parties have the protection of the public registry.
Procedure for the registration in the Land Registry of a purchase title deed with deferred price
The registration of the deferment of payment does not produce effects to the detriment of third parties, unless the payment is guaranteed by mortgage, or it is agreed that the non-payment will produce same effects as the resolutory condition.
In both cases, mortgage or resolutory condition, if the deferred price refers to the sale of two or more properties, the price assigned to each one must be determined.
On the other hand, if the deferred payment is not guaranteed using a mortgage or a resolutory condition, even if the price assigned to each property is not differentiated, there is no problem to register the deed of sale of two or more properties sold together for a single price.
The registered covenant of payment deferral, without an specific guarantee of payment, is a simple registration statement that does not affect third parties who purchase the property of the acquirer-debtor. The first acquirer is the only one obliged to pay the price, although, with the consent of the creditor, the assumption of the debt by the sub-buyer can be agreed upon. However, the sub-acquirer can always pay on behalf of his seller to avoid resolution, and subrogate himself on credit against him.
Guarantee of payment of the deferred price
It is usual to agree to payment guarantees when a deferred price is agreed in the sale, so that the seller, who is no longer the owner of the property, will be sure to collect the remaining money.
The payment guarantees are personal, when they consist of a personal obligation, or real, when they consist of a right over a property. The main ones are
a. the Payment Bond -FIANZA-
b. the Resolutory Condition -Condición Resolutoria Expresa-,
c. Bank Guarantee -Aval Bancario-
d. Domain Reservation Covenant -Pacto de Reserva de Dominio-
e. Mortgage – Garantía Hipotecaria-
A) Payment Bond (Fianza)
The bond -fianza- is a personal guarantee under which a person (guarantor) responds with his own assets of the obligation of payment of a debtor (in the sale, the buyer), in the case of not paying the latter. The bond must be expressly granted, cannot be presumed.
The guarantor must have the capacity to be bound, and sufficient assets to respond to the guaranteed obligation. If the guarantor becomes insolvent, the creditor may ask for another guarantor to replace him who is solvent, unless, when establishing a bond, the creditor has demanded and agreed on a certain guarantor.
The bond may be liable for all or part of the debt, but the guarantor cannot be bound by more than the principal debtor himself, both in quantity and in conditions.
A.1.- Persons involved in the payment bond
The creditor of the principal debtor, who demands to guarantee in his favour the fulfilment of the debt using the bond.
The principal debtor, person duty-bound to fulfil the payment obligation.
The guarantor, person who undertakes to fulfil a payment obligation of another person, if that person does not pay. The guarantor must have the capacity to be bound and sufficient assets to respond to the obligation he guarantees with all his present and future assets.
The bond is subsidiary to the obligation of the principal debtor since its enforceability requires the enforceability and maturity of the principal obligation, and the guarantor always pays instead of the principal debtor.
The bond has no effect on the guarantor’s real rights. The creditor does not have any real right over the assets of the guarantor, only the guarantee of payment of the obligation, even with the assets of the guarantor.
It is an ancillary obligation, which requires a valid principal obligation and a breach of that obligation to arise the guarantor’s obligation.
A.2.- Essential features of the payment bond
The bond is unilateral since only one of the parties is obliged to pay.
It is consensual, just the mere expression of the will of the guarantor and the acceptance of the creditor makes the contract become perfected.
Depending on the nature of the obligation assumed by the guarantor, the bond may be subsidiary or joint. It is a subsidiary guarantee when the guarantor agrees to pay if the debtor does not do so; In application of the “excusion” benefit, the creditor must first address the debtor and, if he does not pay, he has the right to demand, afterwards, to demand from the guarantor the payment of the debt.
The bond is joint when the guarantor undertakes to pay jointly with the debtor; The creditor can claim the payment of the debt indistinctly to any of them, or both at the same time. The joint bond is the most used since it is the one that offers greater guarantees of recovery to the creditor.
If the guarantors are jointly liable and have expressly waived the benefits of “excusion” and “division”, the action against the joint guarantor can be filed in court directly, without need to try to seize first the assets of the principal debtor; The guarantor then, is considered as the principal debtor, and as such assumes directly the obligations of the person whose responsibility for payment guarantees.
A.3.- Relations between guarantor and creditor
The means of defence available to the guarantor against the claim of the creditor are the benefit of “excusión” and the benefit of “division”.
A.3.1.- “Excusion” Benefit
If the secured obligation is not fulfilled, the creditor requests payment to the guarantor. First, the guarantor has the power to oppose the “excusion” benefit, which is to oblige the creditor, previously, to seize all the property of the debtor.
For this, the guarantor must designate the assets of the debtor within the Spanish territory that cover, in whole or in part, the debt . If the creditor fails to follow up on said assets, the guarantor’s liability is reduced by the value of those assets.
A.3.2.- “Division” Benefit
The “division” benefit requires that the debt is divided equally among the guarantors so that the creditor cannot claim each of the guarantors more than the proportional part that corresponds to pay.
This benefit implies several guarantors of the same obligation and debtor. It is required that the guarantors have not renounced the benefit of division, and that among the guarantors no joint liabilities has been agreed.
A.4.-Effects between guarantor and debtor
If the guarantor pays on behalf of the debtor, the guarantor becomes the principal creditor of the latter, and two legal actions against the debtor arise for him: the Refund Action and the Subrogation Action.
A.4.1.- Refund Action (Acción de Reembolso)
The Refund Action is a personal action that has the guarantor, to “repeating” against the debtor to reimburse him, as compensation, the following concepts:
a. The total debt;
b. The legal interest of the debt since the guarantor notifies the debtor to have made the payment to the creditor;
c. The expenses incurred by the guarantor since the creditor notified the request for payment;
d. The damages.
With the Refund Action, the guarantor can only claim the principal amount that the creditor was entitled to claim from the debtor. Therefore, if the guarantor pays more than it was owed, he can repeat against the debtor only for the initial debt, not for the overpayment. Besides, the guarantor may only demand repayment when the term of payment of the debt is due.
The debtor may plead some procedural exception to the guarantor’s claim:
a. If the guarantor pays without informing him beforehand, the debtor may use against him the procedural exceptions that could have been opposed against the creditor at the time of payment;
b. If the guarantor pays without informing the debtor in advance, and the debtor, ignoring the payment made by the guarantor, repays the creditor, the guarantor may claim restitution to the creditor for unjust enrichment, but will not have legal action against the debtor;
c. If the guarantor paid it before the expiration of the term, he could not demand repayment to the debtor until the term expires.
A.4.2.-Subrogation Action (Acción de Subrogación)
With the Subrogation Action, the guarantor who complies with the payment obligation becomes subrogated in all the rights that the creditor had against the debtor, and acquires the same legal actions that the creditor had against the debtor.
A.4.3.- Refund Action vs Subrogation Action
Essentially, the right of refund in favour of the guarantor who has paid, confers him an own right to be compensated for the damages that the forced payment caused. As a result, the right of credit of the guarantor who exercises the Refund Action, appears at the moment in which he makes the payment, which is what motivates his right to be compensated.
The right of subrogation, on the other hand, results in the full transfer for the guarantor of the right that the original creditor had vis-à-vis the debtor, with all the accessory rights such as guarantees, preferences and privileges (except personal privileges).
A.4.4.- Termination of the payment bond
The bond is extinguished:
a. By extinction of the principal obligation. If the main obligation secured is extinguished, also the extinction of the bond contract (accessory principle) occurs.
b. By releasing one of the guarantors. The release of the obligation made by the creditor to one of the guarantors, without the consent of the others, benefits everyone to the extent of the part of the guarantor released.
c. By extended payment term granted to the debtor by the creditor, without the consent of the guarantor. It will not apply when in the guaranteed obligation it was agreed that it could be extended to maturity. The mere fact that the creditor does not claim compliance with the obligation when it expires does not mean that such an extension has been granted.
d. Other causes of termination of the bond: The bond is extinguished, and the guarantor is released, when the creditor voluntarily accepts a property or other securities in payment of the debt, even if later he loses them as a result of eviction. The bond is also extinguished when, for any action taken by the creditor, the guarantor cannot substitute him in the rights, mortgages and privileges.
B. Resolutory condition (Spanish Civil Code art.1504 and 1124).
The resolutory condition is a guarantee of the fulfilment by the buyer of his duty to pay , in those contracts of sale with deferred payment. The parties agree that failure to pay the price, or any of its terms, will result in the full resolution of the purchase contract.
The resolution condition obliges the mutual restitution of the property and the price paid in case of failure to pay. Although the seller cannot automatically resolve the sale, but must obtain, after a notary or judicial request for payment to the buyer, a judicial decision declaring the termination of the contract.
This covenant, known as the “comisorio pact” -confiscatory covenant- allows that, in the event of default by the debtor, the creditor can proceed to the confiscation or direct and immediate appropriation of the related property as a guarantee of compliance with the obligation.
If the resolutory condition is inscribed in the Land Registry, through a marginal note, it also has effects on a third party.
The non-fulfilment in the real estate sale (CC art.1504) is different from the generic contractual breach (CC art.1124), being a prerequisite for the first one the judicial or the notary request of payment, in order to execute the resolution or termination of the contract; until the payment request is notified, the debtor can pay the debt.
For this reason, it seems that the breach in the real estate purchase is softer than in the general case, when authorizing to pay even if the term has expired until the request is executed in due form; But once the request has been made, the default on the purchase of real estate is more severe, since it determines the resolution, without admitting justificatory causes and expressly prohibiting the grant of a new term to fulfil the obligation.
B.1.- The application of the express resolution condition requires:
a. Must be a contract for the sale of real estate with deferred payments.
b. The buyer defaults the payment within the agreed term. The default can be total or partial.
c. A buyer’s will to resist compliance is sufficient to frustrate the economic purpose of the contract.
d. The buyer must be judicially or notarially requested to pay. It must be a resolutory requirement, in which the seller notifies to the buyer his will to terminate the contract, for non-payment within the agreed term. A requirement that contains a simple claim for payment is not sufficient. If the requirement is deemed resolutory, the payment that the buyer intends to make will be out of time and may be rejected by the seller. However, if the seller accepts the payment, the requirement will lose its effectiveness. If the requirement has been limited to a simple claim of the price, the subsequent payment made by the buyer will prevent the exercise of the resolutory action.
Art.1504 of the Spanish Civil Code does not admit freedom of form for the resolutory request, but requires one of these two forms:
A. Judicial. It may take place in the document issued by the court summoning the buyer to a preliminar hearinf of conciliation, in the civil action or the counterclaim.
B. Notarial. The omission, in the notarial requirement, of the notarial custom of granting the debtor a term of grace or courtesy does not impede the effectiveness of the resolutory action.
Therefore, if the price is not paid in the agreed term, the seller who imposed the condition in the guarantee of the payment can initiate the resolution of the sale. The termination of the sale contract damages any third party acquirer only if the resolutory condition is registered in the Property Registry. If so, it implies the cancellation of the seats for the subsequent purchasers.
B.2.- Breach of the resolutory condition.
For the cancellation of the buyer’s right and re-registration of the right for the seller, the seller must submit to the Registry:
A. The judicial or notarial notice of being declared resolved the sale.
B. The seller’s title, in which the Registrar will note the new registration in his favour.
C. The document justifying the consignment of the quantities to be returned by the seller to the buyer, deducting any deductions that may be applicable.
D. In the absence of a judicial decision, the request for resolution, without any opposition of the buyer, within the legal term of reply to the notification made by the seller.
B.- Compliance with the condition through full payment.
Once the entire price is paid, the guarantee is extinguished and must be cancelled at the Land Registry through a marginal note, using one of the following procedures:
a. By means of “payment letter” granted in a public deed by the seller, in which he consents to the cancellation of the guarantee.
b. By the end of the period for the seller to exercise the resolutory power, without exercising it, a period agreed in the public deed of purchase.
c. By means of a file releasing the levies that have been prescribed according to the civil legislation, according to the date that was registered in the Property Registry.
C. Bank guarantee
It is very frequent in practice that the deferred price of a real estate purchase is guaranteed by bank guarantee, for the security offered to the seller; And by the cost savings for the buyer, compared to the costs of the mortgage guarantee or express resolution condition, as both entail the payment of notary, registry and fiscal expenses.
The bank guarantee, or bank guarantee to first demand, is a guarantee that is constituted autonomously to the main obligation, as a separate and autonomous contract but linked to it through the fulfilment or non-fulfilment of the obligation to pay the main contract. The bank guarantee may cover all or part of the principal debt, but not beyond its limit.
The fulfilment of the payment obligation will not depend on the obligor, since in the case of non-compliance the guarantee is executed directly.
With the Banking Guarantee, a bank agrees to pay a sum of money at the same time as the beneficiary of the guarantee claims it, under the terms set in the guarantee. Once certain formal requirements have been met, such as the presentation of a written request accompanied by certain documents, the bank cannot discuss or avoid payment.
D. Covenant of Domain Reservation (Pacto de Reserva de Dominio)
By means of the Covenant of Domain Reservation the buyer does not acquire the full domain on the property sold until completing payment. Excludes, temporarily, the transfer of the domain of the property, pending compliance by the buyer’s of his payment duty.
The seller does not transfer to the buyer the domain of the sold property, until the total payment is confirmed; And, even if the possession of the property is handed over, the property is not yet transmitted to him; It is, therefore, another form of guarantee for the payment of the deferred price, whose full payment acts as a condition precedent to the acquisition. Once the full payment of the price has been confirmed, the transfer of the domain takes place.
The pact “reserve domain” cannot be used as an obstacle to delivery to the purchaser possession of the property itself.
D.1.- Effects of the Covenant of Domain Reservation
The purpose of this agreement is to guarantee the payment of the price and to assure the seller, as it remains its owner, the recovery of the property in case of breach of contract by the buyer.
The delivery of the property to the buyer provides him with his use and enjoyment, but he cannot perform acts of disposition, nor acquire his property by usucapión, and must maintain its integrity.
On the opposite side, therefore, the seller lacks the use of the property, as long as full payment is not fulfilled.
The risks (destruction by fire, for example) of the property correspond to the buyer since the delivery takes place because he is the one who, from that moment, has the obligation to take care of it.
Once the condition is met, i.e., when the buyer pays the entire price, the property is automatically transferred to the buyer.
D.2.- Registration procedure of the Covenant of Domain Reservation
The Covenant of Domain Reservation must be registered in the Register as a precedent or suspensive condition.
The fulfilment or non-fulfilment of the guaranteed payment condition must be recorded either by means of a marginal note, if the acquisition of the right is completed, or by a new registration in favor of the seller, if the resolution or termination occurs.
If the buyer does not pay, and therefore breaches the contract, the property is still registered in favor of the transferor, and it is necessary to proceed with the cancellation of the seat in which the pact of reservation of domain.
The cancellation of the entry of the inscription under suspensive condition can occur without having to obtain a final judgment, and without the consent of the interested party, when the registered right is extinguished by virtue of the agreements contained in the title that caused that inscription, which is now cancelled.
D.3.- Tax Treatment of the Domain Reservation Agreement
For the purposes of payment of the property transfer tax, the transmission is considered to be subject to a resolutory condition of the contract.
In these contracts under a resolutory condition, the property transfer tax must be paid, with the right, if the condition is met, to request a refund, according to the transmission tax regulations.
E. Real Estate Mortgage
The Real Estate Mortgage is a real right of guarantee that is constituted on a property owned by the mortgagee and that grants the creditor bank an expropriatory power, effective against third parties. The creditor acquires a real right that limits the right of the owner of the property.
Mortgage is a real right and as such it attributes to its beneficiary a situation of certain power over the mortgaged property, and has effectiveness against all (in Latin, erga omnes). It is an ancillary right, which implies that it is linked to the obligation it guarantees and ensures.
It is a real right of guarantee that gives the creditor bank an expropriatory power, effective against third parties, that falls on the immovable property. The constitution of the mortgage right does not imply the dispossession of the mortgaged property, which remains in the ownership and possession of the mortgage debtor.
It is indivisible. The mortgage remains in full, as long as it is not cancelled, even if the guaranteed obligation is reduced.
When the debtor, in addition, by virtue of the universal patrimonial responsibility responds with all his present and future assets.
Essential requirements to be able to constitute the mortgage (CC art.1857):
a. Must be constituted to ensure compliance with a principal obligation.
b. The mortgaged property must belong to the person who mortgaged it, who must be entitled to the free disposal of their property.
c. That the mortgage is constituted in public deed. From this moment it has effects for the grantors and their assignees.
d. That the mortgage public deed is registered in the Land Registry. Now, its effects extend also to third parties from registration.