May.05 2024

Implications when a property reservation agreement is breached

  1. Introduction to the sale-purchase process.

Before diving into this matter, we need to know (as we have already explained in previous blogs) that a sale-purchase transaction of a property can be done in several ways and in different stages.

The most common method consists of two stages: a private sale-purchase agreement with earnest money being paid, and the later notarisation of the transaction.

  1. Reservation as a legal instrument and its qualification as a private contract.

In this context, the fact of reserving a property, also known as an Agreement of Reservation, Oferta de Reserva, Letter of Intentions, amongst others, has turned into a very useful tool for real- estate agents seeking to lay the grounds for future negotiations of a sale-purchase contract with earnest money involved. As such, a reservation agreement could be considered a preliminary step in the transaction.

However, as it is only a precontract, there are many doubts related to the consequences in the case of a breach. But before diving into the matter, we need to define and clarify what is needed for this Agreement of Reservation to be considered valid and serving as a Precontract.

  1. Requirements for a document to be valid and serve as a Precontract.
  • a) Sufficient legal capacity to enter into the Agreement and to formalise it.
  • b) The property and its value must be described and stated in the document. 
  • c) Both parties must have a legitimate reason as well as clear consent about the property, the cause and the price, and it must be free of encumbrances.
  • d) There is no specific way to reach an agreement but doing so in writing is highly recommendable as this instrument could serve as future evidence.     
  • e) A precontract should contain clauses mentioning the general conditions of the contract (approximate date the property is to be transferred, who runs with the fees and taxes, the price and payment method, designation of the notary public who will formalise the transaction, and the documents that should be provided to complete the transaction).

Overall, if the document contains the afore-mentioned points, we are talking of a precontract.

  1. With all this, what consequences will there be if the precontract or Property Reservation is breached?

Obviously, we cannot talk about the consequences a breach of a sale-purchase agreement with earnest money involved (with a double-rate cancellation penalty) would entail, but a breach without a justification of the negotiations could imply a court claim for damages in pursuance to the article 1902 of the Civil Law.

To conclude, even though a reservation of a property does not have the same legal bearing as a sale-purchase contract with earnest money, failure to comply or breaking off negotiations does imply responsibilities in the way of compensation for damages, that will be borne by the party causing the breach. This is based on the fact that the party aggrieved by the breach of the negotiation obtains restitution of the situation to the same status it was in before negotiations started.

Such a claim has to follow all legal provisions a civil responsibility and extracontractual claim requires. Also, these damages have to be damages that have real and effective monetary value directly related to the cause of the breach of the precontract, and responsibility of the breaching party. 

We will get into more detail about this in a future post.