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Differences between contracts for purchae, option to buy and reservation

Definition of Purchase/Sale Contract and Option-to-Buy Contract on properties

Definition of Purchase/Sale Contract and Option-to-Buy Contract on properties

  • The Option-to-Buy contract

Option-to-Buy contract (OTB) is defined as an agreement in which one party grants to the other, for a fixed period and under certain conditions, the power to decide to complete a contract or not.

In the case of option contract, the option party would basically decide whether or not continuing with the conclusion of the sale. Thus, is awarded to one party the “choice” to decide the conclusion of any specific contract, where the concepts, requirements, and elements are fixed in an earlier moment in the celebration.

Some part of the doctrine considers this contract a normal purchase contract. But, is widely accepted in the Spanish doctrine and jurisprudence, not as a “pure” sale contract, but as a pre-contract, in which the same elements are determined and leaves one party’s decision holding such a sale or not.

The basic elements of this contract are:

-Option: The option itself, granted to a party (elector) to decide on the future conclusion of the sale.

Time to execute the option: The period within which the option must be exercised

The property: identification of the property, and the price agreed.

The first consequence of this contract is that the optioned (vendor), has the obligation to reserve and block the property in the name of the optioning (buyer) during the time agreed.

The payment for the right to option to buy will operate as a penalty in the case it is not exercised inside the period of time agreed. It means that, the optioning (buyer), will have the right to decide to continue with the sale or not. And, in the case that the optioning desists from the sale, the payment made for the option to buy will be lost. The optioned (vendor) will keep the amounts received from the buyer as compensation for damages.

  • The normal Purchase/Sale contract

The sales contract
is a bilateral contract is one in which one party (seller) to the delivery of a property to the other (buyer) to pay a certain price for it.

So, when the contract is signed, the buyer has a more advanced position of the ownership than the OTB contract.

The personal elements of this legal business component are:

  1. The buyer: This is the person or entity that agrees to pay something in exchange for a certain price
  2. The seller: Is the person or entity who undertakes to deliver the thing, as in the previous case must have legal capacity.

The material elements of the contract are;

  • The subject: The property, etc.
  • The price and way of payments
  • Time to complete the sale

The normal purchase/sale contracts, once signed by both parts is called as “private contract”. Then, once the transaction is complete, or being completed, it may pass to be a “public contract” if passed through a notary. In this case, the terms of the contrat will be passed to the notarial deeds. And will be widely known as “Public Title Deeds”.

Obligations of the seller:

• Transmit property

• Keep the property booked and reserved to the buyer.

• Deliver the property.

• Ensure the purchaser a useful possession.

• Ensure a peaceful possession to the buyer.

• Reply to eviction

• Respond hidden vices and defects that have the good (up to 3 years).

Obligations of the buyer :

• Pay the price.

• pay interest in case of delay or purchase with deferred price.

• Receive the item purchased.

• Be in good standing and not be delinquent

Differences between Option to Buy and Sale contract:

  • The main difference with this contract and a normal purchase-sale contract is the position of the buyer. In a normal purchase-sale contract, the buyer may decide not continue with the contract, and not to buy, the vendor may have the right to “force” the buyer to continue with the sale. In other terms, the buyer, if after signing the contract, decides not to buy, depending on the terms agreed in that contract, the vendor may opt to accept to cancel the contract, with compensation of damages, or, to not accept that cancelation, and then, ask to force the buyer to continue till the sale is complete.

    The reason of this eventual possibility to force the buyer to complete is because the buyer, when signing the sale contract, gets a higher and more consolidated position in the ownership of the property. We can say that, in a normal sale contract, the buyer is almost the owner. Once the sale contract is signed, legally, it can be considered that the property is “sold”, and just waiting to the date of completion to be passed to the buyer.

In a OTB contract, as difference with the normal sale contracts, if the buyer opts to not to continue with the contract, or the time to exercising the option to buy is over passed, then, the payments for the option to buy will be for the vendor, but, the contract will be cancelled, and there will not be any rights from the vendor against the buyer to complete.

So, as difference of the normal sale contract, the buyer or optioning party, does not adopt a so advanced position of the ownership of the property. The optioning only gets a “right to decide to buy”. The vendor, then, does not consider the property as “sold” , but as “booked”. Only when the optioning part confirms its decision to buy, then it will passed as “buyer”, and the OTB will turn then in a normal sale contract.

  • Another difference between these 2 contracts is the time to complete. Usually, in a normal purchase contract, the time to complete, or to fulfill the obligations from both parties, vendor and buyer, can be “flexible”. It means that there can be accepted certain delays in the fulfillment in the obligations to pay, from the part of the buyer, or to complete and handing over the property, from the vendor. These kind of delays may be sorted out establishing compensations, etc.

But, in the OTB contract, the time to execute the payment, and the right to complete is fixed. So, arrived the time agreed in the contract to confirm the option to sale, with the property ready to be handed over, if the buyer does not confirm its position, then, the contract may be automatically breached by this fault, and cancelled.

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