This article outlines the nature of a ‘sale and purchase’ type contract as used in Spanish property transactions. It outlines the nature of a ‘breach’ of contract and the right to cancel for the party which has fulfilled its’ obligations.
Breach of contract clause
Most of you who have had contact with the Spanish real estate market will be familiar with the standard breach-of-contract clause inserted in almost all of the contracts related to the sale and purchase of property and similar documents.
The stipulation basically states that;
“In the case that any party breaches the contract, the party which has fulfilled their obligations will be entitled to either enforce the fulfilment of the contract or cancel the contract whilst receiving compensation for damages in both cases.”
What does this mean?
Contracts spell out the obligations (duties) which the parties (the term for the people named in the contract) both take upon themselves and owe to the other party. Contracts relevant to property purchase (a sale and purchase contract) are structured in a manner which dictates that certain mutual actions (duties) will follow in a sequence, resulting in a transfer of ownership of the property. But taking into account that the transfer of property happens only when the contract (“title”) is linked to a possession transfer properly. So, title plus possession means property transfer. Not only the contract (the contract is only the title on this equation) as explained in more detail in another post.
In these contracts, the duty of one party is the cause of the other’s party duty. This means that ultimately the seller has to deliver the asset sold because they want the price and the purchaser has to pay the agreed price, because they want to buy the asset (the property). It is essential and natural that any party will be able to cancel the contract if the other party breaches it and therefore does not fulfil their duty. There is no need to include this stipulation in the sale and purchase contract, despite it being the usual practice, as the law understands that the cancellation faculty is embeded in this type of contract with reciprocal duties.
Cancellation of contract
In order to ask for the cancellation of the contract there are some conditions to fulfil:
(i) The mutual duties shall be enforceable by the other party. So, the seller cannot cancel the contract if the purchaser has not yet paid the agreed price, where there is provision for a delay in the payment according to the contract, for instance.
(ii) Whoever asks for the cancellation must have fulfilled their duties already. One party cannot ask the other party to fulfil if they have not fulfilled themselves.
(iii) The nonfulfillment must be “severe and essential”. This means basically that the nonfulfillment has to frustrate the reasonable expectations from the party who has fulfilled their duties. The reasonable expectations would be receiving payment on the part of the seller and receiving the legal ownership of the property on the part of the buyer. There is no requirement that the party who has not fulfilled has acted in bad-faith (deliberate dishonesty) but obviously if they had, that would show a clearer reason to ask for the cancellation of the contract.
If you are involved in either the purchase or sale of a property in Spain you need to know;
- your duties and obligations under the contract;
- the damages you would be liable for if you breach the terms of the contract;
- the circumstances under which the contract could be cancelled;
the duties and obligations of the other party.
Thank you for your time and attention and I hope this information is of use. You are very welcome to share if you liked it. You might be interested in this other posts on penalty clauses, taking a property off the market and “arras penitenciales”.
Please, note that this is general information. This is not specific legal advice. It is advisable to seek legal advice for any specific legal issue.