BREACH OF CONTRACT WHEN THE BUYER DOES NOT OBTAIN FINANCING
Dear clients and readers,
We do hope you have enjoyed a peaceful summer vacation.
Over the past few months, we have witnessed an increasing number of breaches of purchase contracts due to mortgage declined.
Subsequently, due to the importance of this matter, we would like; if we may, to clarify if and when a sale can be terminated for this sole reason.
A typical case is when the buyer wishes to apply for a brand-new mortgage or alternatively to subrogate or take over the existing mortgage loan that the property already has. However, after signing the private contract and before granting the deeds, the Bank rejects the loan; and as a result, the buyer cannot raise the required money to pay the selling price.
GENERAL RULE AND EXCEPTIONS
As a general rule, the impossibility of obtaining financing to fulfil a purchase contract is a risk that must be borne exclusively by the debtor (the BUYER).
Therefore, in the event of a breach of contract due to lack of financing, the SELLER by virtue of the provisions of article 1.124 of the Civil Code, may demand compliance with the contract or, alternatively, the rescission, and in both cases compensation for any possible damages caused.
As an exception, the debtor (BUYER) may excuse himself from complying with the contract and therefore may terminate it, only if any of the following two conditions are met:
First, the rescission of purchase will proceed when the buyer does not obtain financing if this cause was stated in the contract as a valid cause for rescinding the contract.
Second, in those cases where it is the SELLER has expressly assumed the financing risk, for example by assuming the commitment to obtain a mortgage for the buyer.
INTERESTING COURT JUDGMENTS
1. High Court Seville (Section 6), a judgment of 05.28.2015:
“Considering such evidence, the Chamber considers that D. Francisco (BUYER) had a real intention to buy the properties and that he did what was required of him to obtain a loan in order to pay the price. In accordance with the provisions of art. 1.123 of the Civil Code, given that it was expressly agreed that if financing could not be obtained; the contract would be terminated, the defendant is obliged to return the deposit received to the buyer”.
2. High Court of Guadalajara (Section 1), judgment 12.12.2017:
“From a thorough interpretation of the clauses of the contract, it cannot be concluded that the sellers had an obligation to obtain financing for the buyer; nor did they ensure that the bank would accept the subrogation of the buyer in their contractual position; so the risk of lack of financing did not correspond to the sellers but to the buyer.
Therefore, the supervening impossibility by the buyer to complete the purchase does not imply a default of the sellers; nor is there a reason not to apply the consequences in the event of non-compliance with the payment of the price. ”
CONCLUSION AND SOUND RECOMMENDATIONS
To sum up, remember if the buyer does not find financing by a bank is not a cause in itself that might justify the non-compliance by the buyer, nor can it be considered as a supervening impossibility that justifies considers the contract to be terminated.
Therefore, our sound advice before you sign a private purchase agreement and pay a deposit would be to secure the finance in the first place.
Alternatively, you should include in the contract a safeguard clause stating the refund of the deposit in the event of failing to obtain finance, or if this grievous condition might not be accepted by the seller; then preferably ask in that case, for an extended completion’s date (i.e. 6 months), in order to allow you sufficient time to search for alternative finance.
HOW TO CONTACT US FOR FURTHER SPECIFIC ADVICE OR INFORMATION?
Remember this is not intended to be specific legal advice. Subsequently, if you are in the process of buying a property in Spain, and you might wish to discuss about your specific situation; we are a law firm specializing in complex conveyancing cases.
Therefore, as a preliminary step, do not hesitate to get in touch with us, either by:
1. Calling us or sending us a WhatsApp now to (0034) 687 88 88 73.
2. You can also use our e-mail form at the top of the sidebar of your screen, or alternatively, you can send us an e-mail to email@example.com or through our contact section.
We have online legal consulting services, and our commitment, we’ll respond to your e-mail inquiry in less than 24 hours.
Finally, thank you very much for your attention, and in case you might have any questions or doubts about mortgage declined and contract termination, please do not hesitate to contact us and we will be glad to clarify immediately.
We look forward to helping you and the benefit of our “know-how”.
Mr Oscar Ricor
“NON-PRACTISING ENGLISH SOLICITOR IN ENGLAND AND WALES”, under the “Solicitors Regulation Authority” (SRA) SRA number 519196 and practising Spanish Solicitor.