José Antonio Pérez Breva March 21 2003 Overview (March 2003) Garrigues | Real Estate - Spain José Antonio Pérez Breva Real Estate Purchases Mortgages Lease of Business Premises This Overview summarizes the Spanish law relating to purchases, mortgages and leases. Specific legislation and regulations enacted by regional governments with competence to enact their own legislation in certain civil law matters (ie, real estate matters) are not covered.PurchasesThe acquisition of full ownership title over real estate requires (i) a valid title to acquire the real estate, and (ii) the effective transfer or conveyance of the real estate to the acquiror. Spanish law does not restrict the acquisition of real estate by foreign or non-resident purchasers, but may require that the acquiror comply with certain foreign investment and tax formalities.In this respect, title over real estate may be transferred (i) free of charge, by way of demise or donation, or (ii) in exchange for consideration, by way of a purchase contract. Preliminary agreements Due to UK and US influence and the varied nature and scope of real estate deals, Spain has adopted a varied practice of documenting preliminary undertakings between the parties prior to a purchase of real estate. As these arise before the purchase contract, they do not constitute a valid title of acquisition. Some common preliminary agreements are outlined below. Letter of intent Letters of intent are a common instrument used to reflect the parties' agreement to begin negotiations and to establish the terms that will guide such negotiations. As letters of intent are a binding undertaking between the parties, it is advisable to state expressly which clauses of the letter of intent are binding on the parties and which are merely commitments to negotiate. Promise to purchase and sell Under Spanish law the parties may reciprocally promise to enter into a sale and purchase agreement regarding real estate if they agree on the subject matter (ie, the real estate) and the price (under Section 1451 of the Spanish Civil Code).Breach of the promise by any of the parties will not entitle any party to claim the transfer of the real estate, but will give the other party the right (i) to execute a contract of purchase and sale, or (ii) to terminate the promise, with the right to seek redress from the other party in both cases.Option to purchase By granting an option to purchase the grantor irrevocably undertakes to sell the real estate under the agreed terms and conditions, while the optionee is granted the right to demand the performance of a contract at any time within a specified term.Exercise by the optionee of such a privilege, together with the grantor's irrevocable undertaking to sell, qualifies as a contract. Purchase contract By executing a purchase contract the seller agrees to deliver the real estate to the purchaser and the purchaser agrees to pay a certain price to the seller (under Section 1445 of the Civil Code). The Civil Code allows a variation of this, in which the purchaser offers a down payment to the seller and the parties grant each other a right to rescind the purchase. If the purchaser rescinds the contract it will lose the downpayment, while if the seller rescinds the contract it must return to the purchaser twice the amount offered as downpayment. This variation is commonly known as 'Arras Contract' under Section 1454 of the Civil Code. The acquisition of real estate requires two elements: (i) a valid title to acquire the real estate, and (ii) the effective transfer of the real estate. The execution of the purchse contract will vest the purchaser with a valid title to acquire the real estate, even if the parties agree that the transfer will occur at a later stage. Transfers Once the real estate is transferred, the seller is liable for clearance of title (unless contractually discharged from this obligation by the purchaser) and for hidden defects in the real estate.The transfer of proprietary rights over properties (eg, ownership) must be executed by way of a public document (eg, notarized deed), and registered in the Land Registry in order to have effect against third parties. The public document is construed as evidence of the effective transfer of the real estate (Section 1462 of the Civil Code).Under Spanish law the public document constitutes valid proof of the date and nature of the grant between the parties and with regard to any third party that has access thereto.Nevertheless, public documents do not ensure the protection of the purchaser's ownership title with regard to any third party. For an ownership title to be enforceable against a third party, the acquiror must register its ownership right with the Land Registry, which extends protection to any bona fide purchaser (Section 606 of the Civil Code and Section 34 of the Mortgage Act). Mortgages The owner of the real estate may impose any proprietary rights over the real estate or grant such rights to a third party, thus granting a right of enjoyment over the real estate to a third party (eg, a right to use or a ground lease) or attaching the real estate to the fulfilment of a debt (eg, a mortgage). Creating a mortgage Mortgages must be created by way of a notarized deed (Section 1280 of the Civil Code). However, the validity and enforceability of a mortgage is conditional on its compulsory registration with the Land Registry (Section 1875 of the Civil Code). Assets that are likely to be mortgaged The mortgage itself is a proprietary right which attaches the mortgaged assets to the peformance of the secured obligations (Section 1879 of the Civil Code). Mortgages may be established over real estate or a transferable proprietary right, such as a ground lease (Section 1874 of the Civil Code).The principle of determination requires that the mortgaged real estate (or assets, if other than real estate) must be specified in advance. Obligations that a mortgage can secure Mortgages can secure all kinds of payment obligations, whether current, future or conditional. Mortgages can secure a mortgagor's own debts or third-party debts.Mortgages cannot take the form of a charge that secures all future debt assumed by the mortgagor. The principle of determination requires that (i) obligations secured under a mortgage must be determined, regardless of whether they are current, future or conditional, and (ii) the sums that may be claimed against the mortgaged asset must be specifically determined beforehand (Section 12 of the Mortgage Act).Assigning a mortgage Mortgages are strictly collateral and are therefore ancillary to one existing debt (Section 1857 of the Civil Code and Section 104 of the Mortgage Act). Thus, they cannot be assigned by the mortgagee separately from the underlying claim that the mortgage secures.However, the mortgagor, having entered into a mortgage loan with a credit institution, may request the subrogation of another credit institution in the creditor's position without the mortgagee's consent (Article 1 of Act 2/1994 on the subrogation of mortgage loans) by having the new credit institution pay the outstanding loan amount. This mechanism is often used when the new credit institution offers a better interest rate to the mortgagor. In the performance of a subrogation the parties are only entitled to amend the initial interest rate (ordinary and/or on arrears). The subrogation and amendment of a mortgage loan require the execution of a public deed. They are exempt from indirect taxation and benefit from reductions on notary and registry fees. Foreclosing a mortgage The right to dispose of the mortgaged assets in order to redeem the outstanding obligations with the proceeds is an essential characteristic of the mortgage (Section 1858 of the Civil Code). However, this is counterbalanced by a prohibition on the appropriation of mortgaged assets by creditors (Section 1859 of the Civil Code).Thereafter, the mortgagee may seek foreclosure through court proceedings or through out-of-court proceedings.Court proceedings Court proceedings are heard in the courts of the place where the real estate is located. The foreclosure proceeding is initiated with the relevant writ of claim submitted by the mortgagee to the competent court, which will then notify the mortgagor, and the mortgagor's creditors ranked below the mortgagee, of the commencement of such proceedings. While the proceedings are ongoing, the mortgagee may request to be entrusted with the interim administration of the real estate.The disposal of the real estate or the mortgaged asset (if not a real estate) may then be made in the following ways, including: a specific proceeding that mortgagee and mortgagor may agree on and the court may approve (Section 640 of the Civil Procedure Act); by a third party with knowledge and expertise in the market, at the mortgagee's or mortgagor's request and subject to the court's approval (Section 641 of the Civil Procedure Act); or through public auction (Section 643 of the Civil Procedure Act); Out-of-court proceedings Out-of-court proceedings consist in the sale of the mortgaged real estate before a notary public of the place where the real estate is located, through a public auction called by the notary in line with the requirements for court proceedings.Lease of Business PremisesThe Urban Leases Act (29/1994) governs the lease of real estate for business or commercial purposes, which fall within the broader category of "leases for use other than residential use".This act sets down the legal regime that will apply to the lease in default of the parties' agreement, and includes: an obligation on the landlord to maintain the premises fit for use and an obligation on the tenant to perform ordinary maintenance on the premises; a prohibition on the tenant from carrying out work in the premises; the freedom to assign and sublet subject to an increase in rent, the tenant's right of first refusal over the premises; and the tenant's right to be indemnified at the end of his tenancy in case of non-renewal by the landlord (only if the tenant carries on retail sale or wholesale activities on the premises). To the extent that this legal regime applies in default of the parties' agreement, it is usual practice to exclude its application and to agree expressly on the terms and provisions of the lease. However, this is without prejudice to two imperative provisions. First, the landlord has the right to request payment by tenant of a legal deposit in the amount of two months' rent and the obligation to deliver it to the competent regional authorities. Second, an exclusive jurisdiction to hear eviction proceedings lies with the courts of the place where the premises are located. For further information on this topic please contact Maria Teresa Hernández Falcó or José Antonio Pérez at Garrigues Abogados & Asesores Tributarios by telephone (+34 93 253 3700) or by fax (+34 93 253 3750) or by email ([email protected] or [email protected]).