"The acquisition of a flat involves a significant number of procedures with which you may not be familiar. Some of these take place before the formalization of the sale, such as the housing reservation contract and the earnest money contract. These are two different procedures, even though both serve as guarantees in the purchase of the property you desire.
As we have already mentioned, despite having the same purpose, they do not develop in the same way. What is the main difference between the reservation contract and the earnest money contract? The reservation contract for a property is an agreement in itself and cannot be canceled unless such rescission is included in the contract. The earnest money contract, on the other hand, is stipulated in the Civil Code and is simply a legal agreement, allowing for its cancellation once the agreed-upon terms have been paid.
The best way to distinguish these two operations is to describe each of them separately so that you can determine which one is more suitable for you if you wish to acquire a property.
What is a PPC contract?
When we talk about a 'housing reservation contract,' we refer to the agreement that helps secure the sale of a property, both for the buyer and the seller. This contract allows the buyer to reserve the desired property in exchange for a deposit, typically ranging from 1% to 5% of the property's sale price. Upon signing this contract, the seller commits to finalizing the sale once the deposit has been paid.
Once the 'housing reservation contract' is formalized, the deposit provided by the buyer is deducted from the total amount. In case of a breach of this contract, it becomes mandatory to pay compensation for damages. This type of contract is ideal if you wish to sell your property to purchase another.
Since it is a contract, it is a legally binding agreement that cannot be rescinded. Real estate agencies and construction companies are the entities that most frequently use this type of contract to guarantee the sale of their properties. This legal framework is regulated by the Law on Installment Sales of Movable Property 28/1998, which is reflected in the Official State Gazette (BOE) of July 14, 1998.
The basic details that should always appear in the clauses of a property reservation contract are:
- Identification of the parties: This should include the full names (or names of companies) and contact information (addresses, phone numbers, email addresses, etc.) of both the buyer and the seller.
- Description of the property: It should provide the complete address of the property being reserved, including any additional information necessary for its identification.
- Agreed-upon price: It should specify the agreed-upon sale price for the property.
- Deposit or down payment: It should indicate the amount of the deposit or down payment that the buyer will provide to the seller as a guarantee of their interest in the purchase. The conditions for the return or deduction of this amount in case of compliance or breach of the contract should also be established.
- Terms and conditions of the transaction: The specific terms and conditions governing the transaction should be defined, such as the date of signing the final sales contract, the payment method, and any other relevant conditions.
- Default clauses: The consequences of default by either party should be established, including compensation for damages.
- Expenses and costs: It may include who will bear the expenses associated with the transaction, such as notary fees, registration costs, taxes, etc.
- Applicable law: The law under which the contract will be governed and any jurisdiction in case of disputes should be specified.
- Signature and date: The signatures of both parties and the date on which the contract is formalized should be included.
Differences between these two contracts
It is true that although both documents, the earnest money contract and the reservation contract, are valid in the process of buying and selling a property, they have significant differences in the consequences of their rescission and in their legal framework:
- Legal framework: The earnest money contract is regulated by the Civil Code, which provides it with a solid legal foundation. In contrast, the reservation contract is not regulated in the same way, making it less legally solid.
- Legal security: Due to its regulation in the Civil Code, the earnest money contract usually offers greater legal security for both parties, as the legal implications are clearly defined.
- Rescission: In the case of the housing reservation contract, it generally cannot be rescinded unless expressly stated in one of its clauses. On the other hand, the earnest money contract can be rescinded, but this usually involves the payment of compensation as agreed upon in the contract.
- Purpose: The housing reservation contract is used to reserve a property and prevent the seller from seeking other buyers during a specific period. The earnest money contract, on the other hand, is a further step in the buying and selling process and typically involves a firmer commitment from both parties to complete the transaction.
In summary, the choice between a reservation contract and an earnest money contract depends on the level of security and commitment that both the buyer and the seller want to assume in the buying process. It is important to consider the legal implications and the specific circumstances of the transaction before deciding on one or the other.
When to use a reservation contract
As mentioned earlier, the choice between a housing reservation contract and a sales contract with a resolutive condition depends on your specific needs and circumstances in the property purchase process. Here is a summary of suitable situations for each type of contract:
Housing Reservation Contract:
If you want to buy time and prevent the property of your interest from being sold to other buyers while you make a decision. If you plan to sell your current property and acquire another one immediately, allowing you to reserve the new property while completing the sale of the current one.
Sales Contract with Resolutive Condition:
If you want the option to cancel the sale in case you do not secure a mortgage loan. If you seek a more flexible agreement that allows you to decide whether or not to compensate the seller in case of breach.
In any case, it is essential to seek the guidance of a legal professional before signing any type of contract. A lawyer specializing in real estate transactions can assist you in drafting and fully understanding the contract terms, ensuring that it meets your needs and complies with applicable local laws and regulations. Professional advice is essential to protect your interests and avoid future legal issues."
