When the Purchase Title Deed is executed, in occasions, for diverse reasons, part of the payment of the price remains postponed to a later moment. In these cases, the normal thing is that the seller demands the buyer that he should provide somehow security  to the fulfillment of his obligation of entire payment.

 The guarantees of the payment of the price can have his origin in an agreement or in a legal rule.

Between the guarantees agreed by the parts, the most important are the pledge’s (“arras”) agreement, the Penalty Clause, the Mortgage, the Defeasance Clause, the Ownership’s Reserve Covenant and, finally, the Endorsement or banker’s reference.

The principal guarantees of the payment established by the Spanish civil law are basically two. Firstly, the seller can suspend the handing over if, after signed the purchase contract, he discovers that the purchaser is insolvent; or, secondly, if the property has been already handed over, the vendor can, previous duly attested summons, treat as discharged (or defeated) the contract when he has founded reasons for being afraid of the loss of the property and of the price, or if, in fact, the effective nonfeasance on part of the purchaser has taken place.

 The endorsement or banker’s reference.

 The endorsement is the archetype of the personal guarantees. A person (guarantor) assumes the obligation to respond with his patrimony of an obligation of payment when the debtor (in the purchase, the buyer) could not fulfill it. This form of guarantee is few use in the real estate conveyance, so that we will not enter his analysis.

Defeasance Clause (“Condición Resolutoria”)

The Defeasance Clause, or condition subsequent, is a guarantee of the fulfillment of the obligation of the buyer in purchase contracts with deferred payment. By virtue of this clause of the contract, the parts agree that the consequence of the failure of the payment of the price or of some of his periods  will be the full discharge of the purchase contract.

 This covenant is impliedly admitted by the Spanish Civil Code for the real estate purchase when establishes that, although it has been stipulated that in case of failure of the payment in the fixed term will take place the full discharge of the purchase contract, the buyer can still pay, even after expired the term, whenever he has not been demanded for payment by means of court order or duly attested summons.

As reinforcement of the guarantee, is frequent also the covenant for which, once produced the full discharge, the vendor has the right to retain the moneys already paid  in concept of breach indemnification.

It is an authentic optional defeasance clause in favor of the vendor, who can choose the contract’s discharge or to demand the fulfillment of the contract and the payment of the price.

Enforcement

The admission of defeasance clause in the purchase of real estate constitutes an exception to the general prohibition of the unilateral repudiation of the contracts in the Spanish Civil Law and, therefore, it is of restrictive application.

 On the other hand, it is admitted the entry into the Property Registry of the clause by which is granted to the vendor the right to retain, in case of contract discharge, a certain sum of money as indemnification.

Effects

 Once the Defeasance Clause has been registered in the Property Registry, it has full efficacy, even opposite to the future buyers of the property levied with it. It creates an expectant right of repurchase of the sold property (obviously, in favor of the seller).

 When the nonfeasance of the buyer has taken place, the seller has to demand for payment by means of court order or duly attested summons. Meanwhile it has not been done, the purchaser can make a valid  payment, which the vendor can’t refuse.

As soon as the contract is discharged, the buyer has to return the sold property, without charges or mortgages levied in the meantime by the buyer.

The discharge of contract as consequence of Defeasance Clause does not derive only from the rules of the Spanish Civil Code about failure of payment, but from the covenant. The discharge of the contract is an act of the party. Nevertheless, in case the buyer opposes to the discharge of the contract, the effects have to be demanded to the competent Court and it is the judge who must decide ultimately if the discharge of the contract proceeds or not.

The purchase discharge as consequence of registered defeasance clause extinguishes the contract with retroactive effects.

To promote the discharge of the contract it is necessary that the vendor has fulfilled his obligations and that on part of the buyer exists a clear attitude against the fulfillment. They are neither enough to this effect the mere suspicions or fears of nonperformance, nor the failure of incidental or complementary obligations (those which do not prevent the vendor from obtaining the economic results of the contract). The evidence of the fulfillment of the condition can be justified before the Property Registry by means of the well-known of the event, documents that proves the inaccuracy of the registrar entries or by judicial order that declares it.