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IurisConsulting Property Lawyers Payment Guarantees II |
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| The Pledge Covenant (Pacto de Arras)
The "arras" are the sum of money that, without constituting the whole of the price, delivers the purchaser to the vendor in the moment of signing a Real Estate Purchase Contract.
The pledge can have the effect of a Confirmatory Clause (an advance of the price and expression of the binding force of the contract, not authorizing to discharge the contract), a Penalty Clause (establishing a guarantee of the fulfillment of the contract, by means of the loss of the pledge or its double return, in case of nonfeasance, but with the alternative possibility of claiming the strict fulfillment of the contract) or a Penitential –opt·out or waiver- clause, (being a licit way for the parties for discharging the contract, by means of the abandonment of the pledge in the case of the buyer or the double restitution in the case of the vendor).
In spite of their similarity, the last two cases have fundamental differences: the penal pledge suppose an illicit nonfeasance; the penitential ones implies licit nonfeasance. In the Penalty Pledge the nonfeasance is not legitimized, but at least insures the compensation to the vendor (or the purchaser, depending who opts out), granting a minimal indemnification, for whose securing is not necessary to prove the damages
The Spanish Civil Code considers the pledge as opt-out clause: the contract can be cancelled accepting the buyer to lose what he paid or the seller to return it duplicated. So that the penitential effect takes place, a clear will of the parts is necessary in this sense. In the opposite case, the pledge has to be considered as confirmatory, as part of the price or early payment. Moreover, the courts understand that the use of the expression «as sign» does not mean by itself the penitential character of the pledge. The penitential character must be pointed out expressly in the purchase contract. Covenant of Domain’s Reservation(Pacto de Reserva de Dominio)
If the covenant of Domain’s Reservation is included in the contract or in the notarised Deed, the purchaser does not acquire the property until the price is completely paid. The conveying or transmitting effect is, this way, suspended, although temporarily (because the transfer does not take place until the full payment is done).
The Covenant of Domain’s Reservation lacks specific regulation in the Spanish legislation, but it derives from the general principle of freedom of covenants; in fact, its fundamental elements have been defined by the jurisprudence. The purchaser acquires, with the possession’s handover, the use of the Real Estate, but he is not yet proprietary. If he pays, and therefore fulfills the condition, receives automatically the property, without much ado requisites. The vendor, on the other hand, although he continues being the owner, does not have the use of the Real Estate, but the domain. It constitutes, therefore, a strong guarantee for the cashing. In fact, it works as a purchase subjected to the suspensive condition (of the efficacy of the contract) that the buyer pays the integrity of the price. As soon as the condition is fulfilled, the property of the Real Estate is transferred automatically to the buyer, and the effects are backdated to the day the contract was granted. The covenant of Domain’s Reservation is registered in the Property Registry as a suspensive condition. In the case that the buyer does not pay, the property remains inscribed in favor of the seller, and proceeds, simply, the cancellation of the entry of the Covenant of Domain’s Reservation, without need of assent of the purchaser. It is similar to the resale covenant and to the Defeasance Clause (Resolutory Condition), but differs in essencial aspects. The purchase with covenant of repurchase is perfected and completed, with the inherent effects of the conveyance. The repurchase of domain does not presuppose nonfeasance of the purchaser (this will be studied in a future article). In the case of Defeasance Clause, the conveyance has been completed, although the contract can be discharged as void, if the full price is not paid, by means of previous court order of payment or duly attested summons.
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