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Buying property in Spain - the legal formalities

In most cases buying a property in Spain can be quite a straight forward process - if you use a good reputable lawyer - they should follow these steps to make your purchase an easy and trouble free one

Community of owners ( Comunidad de Propietarios) - the legal department resposible for the payment of community expenses such as pool, gardens, security, rubbish collection etc. These must be up to date & the seller will be asked to privide receipts to ensure all is paid up to date prior to purchase

Water supply - Again the seller must be up to date with payments as supplies can be cut off if not and you wil be obliged to pay any outstanding fees

Electricity, telephone & gas - The same as above

Real estate tax (Impuesto Municipal Sobre Bienes Inmuebles I.B.I) - Levied on the offical assesed value of the land & construction. Although you start paying from the date of the purchase, it is essential to check whether the receipts for the proceeding four years have been paid by the seller up-to-date. If not, you will be responsible for any outstanding sums.

Property Register protects the interests of the owner and third parties. The complete history of any property can be found in the Property Register and any title or right or charge which may exist against a certain property can be inspected. It is not recommend to buy from someone who is not registered as the owner at the Property Register because only the owner registered at the Property Register can prove that he is the legal owner of the property and only he can guarantee to transfer the property to you as the legal owner.

If this is not the case you can ask the Property Register for a certificate “Certificación Registral” or an extract “Nota Simple”, that shows all previous transactions and indicates who is the legal registered owner of a property and whether the property has any charges as "hipotecas" (mortgages), "censos" (ground rent or leasehold payments), "usufructos" (interests in the property), "limitaciones" (restrictions on use), "multas" (fines), "cláusulas resolutorias" (determinations, i.e. decisions about the future of the property), or "embargos" (court orders for distraint or seizure).

Catastral Certification (Certificación catastral) / Partial Plan (Plan parcial) - is very useful to know if the description of the property which is recorded in the Land Registry is exactly the same that the description recorded in the Town Hall. Checking the Partial Plan ensures that the urbanisation where the property is located is registered

Town Planning (Plan General de Ordenación Urbana) - Check withthe Town planning departament (Departamento de Urbanismo) of the Town Hall about if any major developments are planned in the property area and if them could affect the property.

Planning Permission (Permiso de obra) / Building Permit (Licencia de Obra) -If you are buying a new or recently constructed property you must make sure that the construction that has taken place has been authorised and that it was undertaken in accordance with the plans approved. If you are buying a property in the course of construction the Seller must be made to produce proof of these permits.

Certificates of the termination of the building (Certificado de fin de obra) / Licence of first occupation (Licencia de primera ocupación) - Another important check to make because if the building does not have these certifications - you may run into problems registering the property and also the council could sanction you with a fine or could order the demolition of the building.

Bank Guarantees - By Spanish law (Article 1, Ley 57/1968, de 27 de julio, Reguladora de las percepciones de cantidades anticipadas en la construcción y venta de viviendas) any property sold to you in the course of construction must be accompanied by a bank or insurance guarantee to protect you against the risk of the seller going bust or, for some other reason, not being able to complete the construction and delivery of the property.

Reservation Contract - It is a written document in which the seller offers to take a stated property off the market for a fixed period and to sell it at a stated price to a stated person at any time within a stated period. The seller will usually require that the potential buyer pay him a deposit. Once he has received this deposit the seller must reserve the property for the buyer until the end of the period specified in the contract.

If the potential buyer does not go ahead they can lose the deposit. If the seller refuses to go ahead the buyer is entitled to claim compensation.

Full Contract. “Contrato privado de compraventa” - A full, binding commitment to buy the property & an agreement that commits both parties. The seller must sell a stated property at an agreed price to a stated person as the terms set out in the contract. Remember that under Spanish law by signing and completing this contract you become, in some senses, the owner of the property, though you will need to sign a deed of sale (escritura) and register your ownership to be safe as far as third parties are concerned.

Most contracts will include that:

- The seller and buyer should both be stated fully

- The property should be described fully, both in an everyday sense and by reference to its land registry details

- A date for the signing of the deed of sale (escritura) will be fixed or the contract will permit either party to require the signing of the escritura at any point by giving notice to t the other

- A statement will be made as to when possession will take place – normally, on the date of signing the title

- The property should be sold with vacant possession

- The property should be sold free of any charges, debts or burdens and all bills should be paid up to date before signing the escritura

- Who is to pay the costs of the purchase

- It may confirm the details of any agent involved and who is to pay their commission

- What happens if one or both of the parties break the contract

- It will establish the law to cover the contract and the address of the parties for legal purposes

- It is very usual to include in the “Contrato privado de compraventa” an “arras” agreement that it is a special deposit payable by the buyer. If the buyer fails to complete he will lose the deposit (normally a 10% of the purchase price). If the seller fails to complete he will have to return double the deposit paid. If the parties fail to comply with their obligations there is the ultimate remedy of seeking a court order.

Deed of Sale (Escritura de compra-venta) - This is the title document proving who is the owner of the property and containing a detailed description of the property itself. It is, under Spanish law, necessary for the Escritura to be signed before a Spanish Notary Public.

The Notary is a public official who put on the public record the fact that the title deed recording the sale/purchase has been signed in his presence and understood by the parties concerned. The function of the Notary is not to advise or to protect either your interests or the interests of the person selling the house. When the Escritura is signed in front of the Notary the purchase price must be, in his presence, handed over to the person selling the property or the seller must confirms that the money has already been handed over. Proof of such payment must be then incorporated into the title deeds of the property.

Do I have to be in Spain to complete the transaction? - The buyer and the seller of the property may attend in person in front of the Notary, but, if this is inconvenient, most lawyers can attend on their behalf if one of both provide Power of Attorney.

Where must the money be paid? - The price, together with the taxes and fees payable, is usually paid by the buyer to the seller in front of the notary. This is the best and safest way. You can, in fact, agree to pay in whatever way and wherever you please. In the case of a seller who is not tax resident in Spain the buyer is obliged to retain 5% of the price and pay it to the Spanish Tax Administration (Agencia Tributaria) on account of the seller's potential tax liabilities.

Fees and Taxes - In Spain when a property transaction takes place, as in any other country taxes and fees have to be paid at completion. Failure to do so means that registration of the Escritura at the Property Registration cannot take place.

Notary's fees - The Notary's fees for the execution of the Escritura are fixed by a sliding scale established by law. In accordance with the article 1.455 of the Spanish Civil Code

Land Registry's fees - For the registration of the Escritura at the Land Registry, again a sliding scale is applicable dependant on the purchase price. In accordance with Spanish law the Land Registry’s fees must be paid by the seller.

Commissions - The seller will have an agreement with an agent to pay them a commission upon completion of a sale to a client that agent has introduced, the commission the vendor has to pay will always be reflected in the final negotiated purchase price. The commissions on resale properties can vary.

Transfer Tax or VAT (Impuesto de Transmisiones Patrimoniales (IVA) - If the seller is a private individual and not a property developer, the sale is subject to a transfer tax (“Impuesto sobre Transmisiones Patrimoniales” – ITP) at the rate of 7% (“Comunidad Autonoma de Murcia” and “Comunidad Valenciana”) levied on the purchase price as declared in the Escritura (Article 11.1.a) LITP-AJD). If the seller is a company or developer, the sale is subject to a VAT (“Impuesto sobre Valor Añadido” - IVA) at the rate of 7% (Article 91.1.7º LIVA) will be levied on the purchase price plus a stamp tax at the rate of 0,5 or 1% (Article 31.2 LITP-AJD)

Plusvalia Tax (Impuesto sobre el Incremento del Valor de los Terrenos de Naturaleza Urbana) - This is a municipal tax on the increase in urban land value; The Plusvalia is based on the assessed increase in the official value of the property from the date of the previous sale to the date of the current sale. The amount payable varies widely since it is based upon the assessed increase in the land's value and the lapse of time since the prior transaction. The amount payable also depends on the location of the property and the applicable scale. In accordance with Spanish law the Plusvalia Tax must be paid by the seller.

Capital Gains Tax - Capital Gains Tax must not be confused with the above-mentioned Plusvalia Tax. Capital Gains Tax is not based on the official value of the property like the Plusvalia Tax, but on the real value. The Capital Gains Tax is based on the increase in the purchase price and the sales price.

In order to guarantee that non-resident sellers pay this tax, Spanish law (Article 24.2 LIRNR) now provides that in the case of a non-resident seller transferring a property located in Spain, the purchaser is obliged to withhold 5% of the purchase price on account of the sellers potential tax liability and deposit this retention in the tax office. Restitution by the tax authorities of the whole or part of the 5% will take place after the seller has declared and paid the tax. Clearly, the Capital Gains Tax falls on the seller. However, if the buyer fails to retain and deposit the 5% of the purchase price and the seller does not pay the amount due, the tax authorities can levy this sum on the property. It is essential that any buyer always deduct 5% of the purchase price when buying.

Once all the above obligations have been complied with, you will be the true owner of your Spanish property.

Registration in the Land Registry - The signing of the Escritura de Compraventa transfers the ownership of the property. However, the Escritura alone does not guarantee your title to the property. To be enforceable against all other persons the Escritura must be registered in the Land Registry. This must be done immediately after its execution.

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