If you have paid or received a deposit and you have also signed a purchase & reservation agreement, you should know that this type of contract can be cancelled at any time after it is signed, but such unilateral termination has some important legal consequences depending on what type of contract you have signed.
1) If the buyer cancels the purchase without any reasonable justification he will lose the deposit paid to the seller.
2) If the seller cancels the sale without such justification then he must return the deposit to the buyer and also compensate him with an equivalent amount.
Spanish law is very clear, in article 1454 of the Spanish Civil Code: “… If there is a deposit or reservation in the purchase and sale contract, then the contract may be terminated but the buyer shall lose the deposit, or the seller shall return it in duplicate …”.
In these moments in which COVID-19 is paralyzing all national economies worldwide and we are approaching an unprecedented global economic recession, doubts might arise for both contracting parties regarding the enforcement of such clause:
Can the buyer unilaterally cancel the sale contract due to force majeure?
Is the seller entitled to postpone the agreed date for the signing of the deed of sale before a notary due to force majeure?
Here are some tips for those who are in this situation and do not know how to act:
1.- You should consult a lawyer to determine if your contract is indeed a non-refundable deposit agreement (“arras penitenciales“) and is therefore affected by Article 1,454 of the Civil Code or, on the contrary, if it is a private purchase downpayment agreement (“arras confirmatorias“) in which case the Deposit must be considered as an advance of the total price that the parties agree in the private sale contract.
In this case the payment of the deposit works as a first instalment of the price. Therefore, the amount paid as downpayment is simply deducted from the final price.
Downpayment agreements are not expressly regulated in the Spanish Civil Code, so legal advice is required for the interpretation of the contract before any dispute might arise.
The solution is different depending on which or other is the case since to cancel a downpayment agreement (“arras confirmatorias“) article 1,124 of the Civil Code is applicable; article 1.454 of the Civil Code applies only to a non refundable deposit clause (“arras penitenciales“).
2.- It is important to understand that the current force majeure cause (COVID-19) affects both parties equally therefore the most logical and common sense solution to the problem (force majeure event that occurred before the contract expires) should be resolved by both parties by mutual agreement. You may find below some alternatives:
a) EXTENSION OF THE CONTRACT: If you want to maintain the contract until the situation improves, it would be usual to agree to an extension in writing of the signing date of the deed. However, in this extension document there must already be a provision in the event that the situation worsens or makes it impossible to sign the contract for any reason.
b) ALTERATION OF THE CONTRACT: You can also modify the contract adapting it to the new economic situation, delaying the property delivery period until the market stabilizes and returns to relative normality and even agreeing to a price reduction in line with the imminent economic recession that will undoubtedly affect the real estate market (especially in tourist areas)
c) NO AGREEMENT: If any of the parties refuses to adopt any of the above solutions, then the “rebus sic stantibus” principle would come into scene. This legal principle is widely recognized in international law and there are Spanish Supreme Court precedents “if there is a fundamental or extraordinary change in the circumstances existing at the time of signing the contract and the same produce a radical alteration in the obligations of the parties, then the injured party may allege the said change and suspend it or even cancel the contract“.
This last measure should be taken only with the advice of a lawyer, since its application is restrictive by the courts and, therefore, it is essential that the party that alleges it justifies before the judge that its application was not only reasonable but necessary, given the circumstances (pandemic and sudden economic recession).
