Design Process
Example of a deposit agreement for a plot of land
Once we have found the perfect plot of land, following our advice for buying land to build a house, we begin the procedures to formalize the purchase. This process can take several weeks or even months; for this reason, it is important to guarantee the reservation of our land through a down payment. This process is known as the delivery of earnest money and is formalized with the so-called deposit agreement. Today, however, we go into detail on the formalization of this process and show you an example of a deposit agreement for a plot of land.
What is a deposit agreement?
Once it is clear that we want to buy a specific plot of land, we begin the legal procedures to make it possible. This land purchase comprises two phases of financial disbursement: the initial down payment and later the effective purchase. This is done because the administrative and legal procedures to carry out the purchase usually take several weeks or even months, and during this time, to prevent either party from changing their mind and harming the other, a down payment is signed that commits both parties.
Thus, a deposit agreement is a private agreement between a buyer and a seller intended to reserve the right of purchase through the delivery of a down payment, providing a timeframe to formalize the final payment and committing the seller and the buyer to carry out the operation to the end under penalty of losing the down payment—in the case of the buyer—or returning it twofold—in the case of the seller. However, all clauses agreed upon by both buyer and seller can be added to anticipate future events or misunderstandings.
What information should a deposit agreement contain?
Below, we will detail all the essential information that a deposit agreement can contain, as well as that which is common or likely to be added. Furthermore, with the example of a deposit agreement for a plot of land included at the end of this article, all doubts will be clarified.
Broadly speaking and without going into detail, the minimum data that a deposit agreement must contain are the following:
1 Personal details of the buyer and seller of the land
2 Identification of the land for sale
3 Final price and method of payment
4 Financial amount to be paid
5 Deadline to formalize the sale
6 Possible property encumbrances
7 Distribution of purchase and sale expenses
8 Penalties in case of breach of contract
9 Signature
1 Personal details of the buyer and seller of the land
The deposit agreement must include the personal details of both the party wishing to buy the land and the party selling it. As buyers, the purchase price is significantly affected by whether the land is in the name of a company or an individual, as we will pay one type of tax or another depending on this.
If the land is owned by a company, we must pay 21% VAT; if the land is in the name of an individual, we must pay ITP (Property Transfer Tax), which is 10%.
We have access to this information through the Property Registry, where we can request a “nota simple” (land registry certificate) of the land to identify the real owner and where we will also find other information such as encumbrances or easements.
2 Identification of the land for sale
Of course, it will be essential for the contract to define the property to be purchased, with a minimum key piece of data called the cadastral reference.
This reference consists of a number that identifies all plots in the national territory and can be obtained online at the Electronic Office of the Cadastre.
Additionally, a series of additional data that both buyer and seller consider relevant can be provided, such as the address, the number of m2 of the plot, or any applicable urban planning regulations that will affect our future design process.
3 Final price and method of payment
An essential aspect in the process of signing a deposit agreement for a plot of land is setting a final purchase price, as well as the method of payment. This ensures that the land for which a down payment is being made will not increase in price during the timeframe necessary to formalize its final purchase.
The method of payment for the total value of the land at the time of making the sale effective will also be defined. The disbursement of this amount of money can be made via check at the time of signing or via transfer after the signing of the contract, in which case, the contract must include a clause indicating that the contract will not take effect until the down payment is deposited into the seller’s account.
4 Financial amount to be paid
Simultaneously, the financial amount to be paid in the deposit agreement must be stipulated as a percentage of the final price. If we analyze an example of a deposit agreement for a plot of land, this monetary amount usually represents between 10% and 20% of the total cost of the land. However, the amount may vary as it is freely agreed upon between the seller and the buyer.
5 Deadline to formalize the sale
Every example of a deposit agreement for a plot of land that we have advised on in the firm usually defines a maximum period of between 2 and 6 months between the signing of the deposit agreement and the final purchase of the land. This period is always negotiable, so it is important to assess with the buyer their ability to obtain the necessary liquidity for the purchase. The important thing is to ensure that during this period the land will not increase in price, as would normally happen with the speculation processes currently occurring in Spain.
Mortgage clause
There are cases where the buyer, before signing a deposit agreement, does not have sufficient savings and must therefore negotiate with the bank to obtain financing. In this sense, it will be important to know how much money we have saved and how much the bank will lend us.
We must bear in mind that a bank does not usually lend money to buy land. However, some banks do provide financing for the land and house together if 20% of the total operation is available, but in this case, they will request an architectural project with a building permit to grant financing for the land portion.
Here the temporal aspect we mentioned comes into play: we must know how long it will take us to obtain a building permit, as it is not usually a quick process, as we see in the article on how long it takes to build a house.
Since we cannot guarantee 100% if the bank will grant us a mortgage including the land, it is highly recommended to add a clause in the deposit agreement that conditions the purchase of the land on obtaining the mortgage, so that the buyer does not lose the deposited money if they fail to secure it.
6 Possible property encumbrances
Properties, whether land or a house, can accumulate debts resulting from mortgages, seizures, or pending taxes. One of the recommended checks when buying land is to verify that it is free of debts; otherwise, the buyer will find that they must assume them in the future. The encumbrances on a plot of land can be checked in the same way we check land ownership, through a “nota simple” at the Property Registry.
Including a clause stating that the land is free of encumbrances is a way to protect the buyer, so that if encumbrances appear during the review of the legal documentation, they can withdraw from the purchase.
7 Distribution of purchase and sale expenses
The expenses derived from the purchase and sale of the land are the most likely to be overlooked and can be a source of numerous misunderstandings. It is normally established that the buyer takes charge of the expenses related to obtaining the public deed, registration in the Property Registry, and the Property Transfer Tax or, failing that, VAT (depending on whether the owner is a company or an individual). For their part, the seller must pay the amount corresponding to the Tax on the Increase in Value of Urban Land, the so-called Municipal Capital Gains Tax, but this formula may vary according to the private agreement between both parties.
8 Penalties in case of breach of contract
As we have previously mentioned, any example of a deposit agreement for a plot of land represents a pact involving a large amount of money, so the most important thing is to perfectly understand each of the points signed and the legal implications of a breach.
First of all, it is important to remember that an earnest money contract is a private agreement between two parties. If there is goodwill, small delays or setbacks can always be accommodated if both parties wish to maintain the initial agreement.
But it is also true that it is a contract that involves penalties and that if one of the parties breaches what was agreed, the other party is fully within their right to implement the agreed penalties.
Dealing with such a large amount of money and fairly long timeframes, it could be the case that one of the parties withdraws, whether in the case of the buyer due to lack of financing or due to another series of external circumstances. In any case, this fact will constitute a breach of contract and will have a series of penalties that must be stated in writing within it.
It is very important to be clear about our rights as a buyer but also the responsibilities we adopt when signing a deposit agreement. In any example of a deposit agreement for a plot of land, it is usually established that if it is the buying party that breaks the contract, they lose all the money paid, unless it involves a so-called hidden defect which we will describe in the next section. In any case, it is a form of financial commitment, the indispensable requirement of which is intrinsic to the very definition of a deposit agreement.
If, on the contrary, it is the seller who breaches the contract, it is generally established that the buyer recovers not only the amount paid as a down payment, but double that amount. All in all, we see that the implications for breach of contract are very serious and entail the loss of a very significant amount of money.
Hidden defects
The so-called hidden defects can also be called latent defects and represent anomalies in the process that were not identified prior to the signing of the deposit agreement.
An example would be a technical property of the land, such as land sold as stable that later turns out to have a very unstable composition, which will drastically increase the costs of soil containment and foundations. Another example seen in some examples of deposit agreements for a plot of land would be acquiring a plot in perfect condition and subsequently discovering that it is affected by some urban planning scheme, thus complicating its construction.
In any case, these are serious defects that have been identified within a period of 6 months from the signing of the contract. If this occurs, it is established that the buyer can recover the full amount of the financial contribution.
9 Signature
The contract must be signed by both parties: the buyer and the seller, whose personal details have been specified at the beginning of the document.
Regarding who signs for the buying party, it is important to note that if it is a marriage under the community property regime, it will be sufficient for one of the two members of the couple to sign. On the other hand, if it is a marriage with separation of property, both members of the couple must sign.
Example of a deposit agreement for a plot of land
Below, we attach a specific example of a deposit agreement so that you can observe how all the clauses containing the essential information we numbered at the beginning of the article and detailed throughout it are drafted. We have taken the trouble to annotate each of the points as they appear in the text to facilitate their identification.
PURCHASE AND SALE COMMITMENT WITH PENITENTIAL DEPOSIT
In ——–, on ——– of ——–, 20——–.
1 Personal details of the buyer and the seller of the land
BY AND BETWEEN:
On the one part, Mr./Ms. ——– of legal age, holder of ID No. ——–, and residing at ——–, ——– Street, No. ——–, hereinafter the SELLING party,
and on the other part, Mr. ——–, of legal age, holder of ID No. ——–, and residing at ——–, ——– Street, No. ——–, hereinafter the BUYING party.
Both parties intervene in their own name and right and, recognizing each other’s necessary legal capacity to contract and bind themselves,
2 Identification of the land for sale
DECLARE:
I.- That Mr. ——– is the owner by fair and legitimate titles of the following property located in ——–
Description: URBAN. – PLOT NUMBER ——–
Cadastral reference ——–
Registration: Registered in the Property Registry of ——–
Title: The property is owned by ——–
Encumbrances and liens: The property is free of encumbrances and liens.
II.- That Mr. ——– is interested in selling and Mr. ——– is interested in acquiring by way of purchase and sale the referenced property, all subject to the following,
3 Final price and method of payment
COVENANTS:
FIRST: The total price of the future purchase and sale is ——–
SECOND: The payment of the total price fixed for the future purchase and sale will be made in the following manner:
4 Financial amount to be paid
Regarding the sum of ——–, these are delivered as a penitential deposit, for the purposes of the provisions of Art. 1454 of the Civil Code. The amount of the previously referenced deposit is satisfied in the following manner:
-Regarding the sum of ——–, these were delivered to ——– and must from this moment be considered as a penitential deposit, the future selling party being in agreement therewith.
-Regarding the sum of ——–, these are delivered in this act to the future seller by means of ——– registered bank checks, a copy of which will be attached hereto duly signed as proof of delivery.
5 Deadline to formalize the sale
THIRD: The total price, from which the amount delivered as a penitential deposit will be deducted, shall be paid by the BUYING party in cash at the time of the execution of the public deed, which will take place no later than the ——– day of
——–, 20——– before the Notary designated by the BUYING party, this party being obliged to notify the other party reliably at least fifteen days in advance.
6 Possible property encumbrances
FOURTH: The transfer of ownership and possession will take place coinciding with the date of execution of the public deed of purchase and sale. The property will be transferred free of tenants, occupants, and squatters, as well as vacant and clear and free of encumbrances and liens, except for tax assessments and up to date with the payment of taxes and expenses of any kind.
Likewise, the selling party undertakes not to sell, mortgage, encumber, or dispose of the property subject to this contract in any way until the maximum date fixed for formalizing the public deed of purchase and sale, and also undertakes not to assign the rights arising from this contract to any natural or legal person without the prior, written, and express authorization of the future buyer.
FIFTH: The BUYING party declares to have visited the property prior to this act and that they know and accept its state of conservation, as well as its physical, registry, and urban planning characteristics.
7 Distribution of purchase and sale expenses
SIXTH: All expenses and taxes derived from the future purchase and sale shall be borne by the BUYING party, with the exception of the Tax on the Increase in Value of Urban Land (Municipal Capital Gains Tax), which shall be borne by the SELLING party.
SEVENTH: For any doubt or divergence regarding the interpretation of this contract, both parties submit to the jurisdiction and competence of the Courts of the place where the property is located, waiving their own jurisdiction if it were different.
8 Penalties in case of breach of contract
Given the nature of the penitential deposit, both the future buyer and future seller, in accordance with Article 1,454 of the Civil Code, may withdraw from the purchase and sale at any time after the signing of this contract. In the event of withdrawal by the future buyer, they will lose the amounts delivered as a deposit. If the future seller withdraws, they will be obliged to deliver double the amounts delivered as a deposit.
Regarding the sum of ——–, the BUYING party will deliver it to the SELLING party at the time of signing the public deed of purchase and sale.
9 Signature
And in witness whereof, both parties sign it in duplicate and for a single purpose, at the place and on the date indicated in the heading.
SELLING PARTY BUYING PARTY
Finally, we remind you that throughout today’s article we have seen that the implications of signing a deposit agreement depend on the agreement we negotiate with the seller of the land or their intermediary (real estate agency, property agent, etc.), so it is important to be well advised to negotiate our conditions so that they fit our needs and we can fulfill them without problem.
Normally, the first advice is carried out by an architect, who subsequently refers to a lawyer, or by an intermediary real estate agency that is impartial.
In fact, at the sustainable architecture firm, we always recommend visiting us before making any purchase decision, as this allows us to check that all urban planning and legal issues are in order as well as advise you on the purchase strategy.