Senior Times 09.07

The combination of factors such as climate, lifestyle, and the proximity of both countries thanks to the air transport industry coupled with Ireland's strong economy has already encouraged numerous Irish citizens to purchase their own piece of Spain. The process of acquiring property in Spain

Searching for a home in Spain is no more difficult than in Ireland although you are likely to face additional challenges such as language and legal and tax concepts, most of which are foreign to the Irish system. There are certain recommendations to ensure a sound transaction, starting with choosing the right area to acquire the property. It is always a good idea to talk to other Irish owners in that area. If your preferences are rural or remote areas, it is important to consider factors such as transport, communication and health and safety issues.

We strongly recommend that clients do not proceed with any transaction where the price declared in the Deed is inferior to the real price paid as this would constitute a Spanish tax offence. It is advisable to shop around to compare prices, visit estate agents and read the advertisements in local papers to gauge the prices in a particular area. The next thing to consider is choosing a good Spanish lawyer or Abogado, specialising in property transactions and the various tax implications for the Irish client. The Abogado must be registered with the Local Law Society (Colegio de Abogados) and must speak English and Spanish

Notwithstanding the typical pressure exercised in such transactions by the vendor or the agent, there are certain documents that should be requested by the lawyer acting on behalf of the purchaser.

The conveyancing process
We will now outline the legal consequences of the acquisition process, from choosing the property until registering the Public Deed (Escritura) in the Land's Registry (Registro de la Propiedad). Although these are the basic steps involved, there are multiple variations especially in the initial stages. There is no Law Society approved general contract for sale, and thus the parties are free to negotiate the terms and conditions of the Private Purchase Contract (Contracto Privado de Compraventa), with the limits established by certain statutory provisions. It is important to understand that the absence of certain requirements in the contract will determine the application of the default statutory provisions according to the Spanish Civil Law Code, such as the consequences for gazumping or defaulting after signing the contract, liability for costs and expenses etc...

Every transaction must be considered taking into account the particular circumstances and the will of the parties. Bilingual skills, sound legal knowledge and a good understanding of both parties' intention are crucial.

The preliminary agreements
After selecting the property, the transaction process is initiated with the preliminary agreements. The vendor and the purchaser, without committing formally, express reciprocally the intention to draft a contract. Usually, withdrawal at this stage does not create any obligation for both parties, if the nature of the agreement is clearly defined as not binding to the parties. The term "preliminary agreement" does not necessarily mean that you are not entering into a contractual relationship. It must be noted that once a payment has been made the contract is actually final and legally binding. It is also worth noting that a verbal agreement can be enforceable according to Spanish Law, although in practice there are obvious difficulties in terms of legal evidence. Traditionally, and this may be still true in many parts of rural Spain, the verbal agreement had a fundamental importance and it was commonly accepted as a binding contract by itself, after shaking hands. These days, in a less romantic scenario, it is essential to commit to writing in order for the agreement to be enforceable. This is of paramount importance for the foreign client and translation of the relevant documents should be requested where possible. Before committing in writing, the nature of the agreements should be crystal clear for both parties.

The private purchase contract
The proper contractual relationship starts when the object of the contract, the property, and the price have been the will of the parties, with the intervention of their respective lawyers. The signed private contract, which is always signed or initialled on each page, is fully executable and valid and it transfers ownership of the property. The Purchasing Contract is an agreement between the two parties, the vendor, offering the property and the purchaser, accepting it. The agreement is made on the transferring of a clearly defined property by receiving a payment as a counterpart. It may be noted that the transferring of the property and the payment need not determined and agreed by the parties. A private purchase contract (Contracto Privado de Compraventa) may be drafted at this point and the parties should fully understand and agree the nature of the obligations and rights arising from the contract, before signing. In Spain there is no requirement to witness the signature of the parties to the private contract. The private contract serves as a legal instrument to clarify happen simultaneously, and specific terms may be negotiated in that regard.

One of the more conflictive areas is the deposit requested to reserve the property. The most habitual legal form of this deposit is the payment of a signal (arras o senal), often included in the Private Purchase Contract, or as an independent contract by itself. The deposit is an amount paid as a token, usually 5 or 10% of the price to reservethe transaction. This deposit, if the agreement is properlydrafted, may be considered as orfeit on the default of the purchaser; however, double the amount of deposit is refundable in the event of the sellers' default. If the sale is agreed, the deposit will generally constitute the first instalment of the final sale price. When paying any monies on account for "off plan" or roperties under construction, proper bank guarantees of insurance policies should be arranged. There are statutory provisions (Spanish Laws L38/1999 and L57/1968) applicable to the developers and agents to guarantee the payments on account for properties in progress, until the completion stage. There are also statutory provisions to guarantee the properties themselves against any building defects up to ten years after the construction date.

The signature of the Public Deed
The private purchase contract cannot be registered in the Land's Registry without the intervention of a Public Notary (Notario). The Notary is the only person entitled to grant a Public Deed (Escritura de Compraventa) based on the terms privately negotiated by the parties in the private purchase contract. The Escritura de Compraventa is technically the public transfer deed, and it cannot be compared with the concept of the deed of title in the Irish system. There as no title deeds as such in Spain and proof of ownership is provided and guaranteed by registration of the deed of transfer at the Land's Registry (Registro de la Propiedad). The original deed of transfer is retained indefinitely by the Notary, who is able to issue certified copies as requested. The registration of the Escritura in the Land's Registry is the step needed for the purchaser to be registered as the
owner of the property. The Land's registry can issue a certified copy of the entries in the Registry (Nota o Certificado Registral); however, this will not act as deed of title.

The Land's Registry
After signature, the notarised deed needs to be submitted to the local Land's Registry in person, by mail or fax. The registration of the deed provides the highest public level of protection.

New properties - "off plan" acquisitions
When buying new property in a building development, the acquisition is "off plan" (Sobre Piano), i.e. buying before the property is built. A complete description of the property
to be built with the specifications, municipal permissions and other details should be made available to the purchaser by the developer or agent. The private contract should be signed at this stage, containing a clear description of the property to be bought, schedule for completion and stage payments as well as the other elements established by legislation and which should be included in this type of contract. To protect the purchaser when acquiring residential property there are certain statutory provisions which the developer or agent should meet:

• Secure the payments on account to the developer or agent. The former must issue a guarantee insurance policy; know as a bank guarantee, with the purchaser as the beneficiary in the period of 15 days after the payment is made. In practice, it can be a difficult and time consuming exercise obtaining bank guarantees from the developer or agent, despite that fact that their provision is obligatory.
• Maintain a separate bank guaranteed account to receive payments on account, for example an Escrow account.
• Provide a ten-year insurance policy to guarantee against loss due to building defects

Checklist before entering into a contractual agreement

Notwithstanding the typical pressure exercised in such transactions by the vendor or the agent, there are certain documents that should be requested by the lawyer acting on behalf of the purchaser, the most important being:

• To obtain all the details of the private individual selling the property and a copy of the Deed of Transfer (Escritura de Compraventa).
• If a company is selling the property, copies of the company's constitutional documentation together with the details of the registered Power of Attorney should be obtained before signing any document.
• When a company is the owner of the property and the shares of the company are going to be acquired, it is strongly recommended to use a commercial lawyer to assess the financial liabilities of the company.
• Land's registry details, including the registration complete references, as well as any charges or mortgages on the property, and undated copy of the Land's registry entry (Nota Simple). A current registry certificate will be requested again before signing the public deed of transfer. If there is a mortgage on the property, a copy of the mortgage terms should be obtained.
• If a new property is being acquired, copies of the building permits, architects completion certificate and habitation certificate should be requested, although not all of them will be available until completion.
• To check the situation of the utility contracts, local taxes and community service charges and make sure that payment of bills is up to date as well as making sure that water, electricity supply and septic tanks situation is clear.
• If the property is part of a community of owners, the articles of association (Estatutos d la Comunidad Propietarios) should be reviewed together with the last accounts and details of any extraordinary expenses made during the current accounting year or which are anticipated. It is advisable to obtain a certificate from the community chairman stating that there are no outstanding payments due in respect of that property.
• Although a formal planning search cannot be conducted in Spain according to Irish standards, it is advisable to check with the Town Council for any potential development or public works planned which may affect the property, i.e. motorway constructions etc...
• The rights to build or extend the property should also be investigated.
• It is always recommended to make a personal inspection of the property to determine the state of the building. A surveyor's report is not unusual in Spain; however, if there are serious doubts in respect of the property, this report should be requested.
• If the property is currently let, a copy of the letting agreement should be obtained and reviewed, as the purchaser will inherit the seller's legal position in respect of the tenant.
• When purchasing furnished property, an inventory stating the value and details of the furniture should be requested.
• Details of the property's location should also be checked, i.e. unemployment rates, health and educational services etc...Although such information is not readily available in many cases, it is worth gathering such information before deciding to buy. The National Statistics Institute (Instituto Nacional de Estadistica) (www.ine.es) is a useful source of information.
• If applying for a Spanish mortgage, the bank will request a valuation report. Otherwise a valuation report can be obtained from an independent surveyor.

Additional legal considerations
It is almost impossible to cover all the legal implications of purchasing property in this presentation and we always recommend that purchasers seek independent legal advice before making any decision to buy. Due to the fact that most property is that the property is located in Spain, most of the legal conflicts would be dealt with according to Spanish Law. Generally, contracts will specifically state that Spanish Law would govern the transaction and establish that any claim must be brought to the Spanish Court where the property is located.

The costs involved in the acquisition of Spanish property
There are statutory provisions which establish who is responsible to pay the different taxes and charges; however, it is recommended to agree this in the preliminary agreements.

Municipal capital gains tax on the value of urban land:

(replaced the Plusvalia tax):
This is a direct tax payable by the vendor, taxing the capital gains released by the increase in value of the land (not the buildings) and it is only payable in respect of urban land (not rural). Please note that it is accepted practice for the purchaser to pay this tax, if it has been included in the contract. This tax replaces the old Plusvalia tax, and if the vendor fails to pay, the tax does not become a charge against the property as was the case with the
Plusvalia. The local tax office is responsible for the calculation of this tax.

VAT (IVA):
IVA is charged on new properties. The rate is levied at 7% of the purchase price and is payable by the purchaser. If the property is located in the Canary Islands, a regional tax is applicable instead of IVA.

Transfer Tax (Impuesto Sobre Transmisiones Patrimoniales - ITP) and Stamp Duty (Actos Juridicos Documentados - AJD):.

The property transfer tax, ITP is charged at 7% generally on the value of the property on second and subsequent transfers of the same property. This tax is discharged by the purchaser.

The Stamp Duty, AJD is generally charged at 1 % on the value of the property when issuing the public documents. The purchaser or person applying for these documents will be responsible for paying the AJD tax.

Notary Fees:
The costs of granting the public deed are established according to a schedule of fees determined officially and they are based on the value of the transaction. The costs of granting the first copy of the deed is payable by the vendor and the second copy by the purchaser. If a charge or mortgage is established on the property, it is paid by the purchaser, if a cancellation of a previous charge is requested, it is payable by the vendor, although the parties can negotiate a different arrangement. Notary fees typically fall within the range of 0.5%-l% of the value of the transaction.Land's registry fees are paid by the purchaser upon registration of the deeds. Again these fees typically fall within the range of 0.5%-1% of the value of the transaction.

Bank Charges:
Generally, the purchaser pays the charges involved in the transaction, until the monies reach the vendors account. It is important to ensure that all payments are made via bank transfer and the name of the purchaser is indicated on the bank documents.

• The purchaser will be responsible for the expenses related to changing the names on the utility contracts.
• The Real Estate agents (if any) will usually charge a commission to the vendor, to the purchaser or to both. The commission should be specified in the agency contract.
• If a surveyors report is required, the purchaser will be responsible for this cost, typically between €250-€500.
• Legal fees are typically in the region of 1%-1.5% of the purchase price, although this depends on the situation of the property and the complications (if any) arising in the course of the transaction.
• It is recommended that the purchaser appoints a fiscal representative in Spain to liaise with the Spanish Tax Agency, assess ongoing tax liabilities and ensure that returns are correctly filed on time.
• Contents and building insurance should be taken out when acquiring the property.
• Irish citizens acquiring property in Spain must register with the Spanish Tax Agency and obtain a Foreigner Identification Number (Niimero de Identification de Extrajaneros or NIE). This is required by non residents to enable them pay the taxes associated with their property purchase, get utilities connected, set up bank orders, etc... The NIE number is also required by the Notary at the signing of the Deed. Until recently, this could be obtained by the lawyer or an agent with a power of attorney on behalf of the client, but now the purchasers must attend personally either at the local police station in Spain or at the Spanish Embassy in Dublin. However, it can take up at to 3 months to be issued through the Embassy.
• Most purchasers are also required to have a bank account in Spain and this is necessary for setting up standing orders to pay utilities and annual fees and taxes. Also, it is required to obtain house insurance on the property at the time of closing the purchase. The only requirement is to provide your passport and NIE number

Spanish Will
In general, Spanish Law can recognise an Irish will over the Spanish property provided it has been officially translated into Spanish, notarised by a Notary Public and legalised with the Apostille Stamp of the Hague Convention which. is issued by the Department of Foreign Affairs.

However, as Irish and Spanish succession laws differ greatly, there is a risk that the Irish Will maybe considered invalid in Spain. (For example: an Irish resident who, in his Irish Will, names his wife heir of all his assets. This will is invalid in Spain, as Spanish succession law protects the children over the spouse, thus the Irish man should have left 1/2 of his Spanish assets to his children). In this example, Spanish law will consider there is no Will applied to the Spanish property, and therefore will start a long and very expensive process, as the Inheritance tax keeps increasing, to identify the heirs.
If the Irish owner dies intestate i.e. without a Will, it is even more complicated. It is for this reason that we always recommend to clients to make a Spanish Will for the Spanish assets to avoid any problems.

In relation to inheritance taxes, an Irish person will be taxed in Ireland for his worldwide assets and his heirs will be also taxed in Spain in respect of the Spanish property and assets. There are no provisions regarding this tax in the "double treaty between Ireland and Spain", but there is tax relief in both countries, which depends on the value of the benefit being inherited and also the relationship between the disposer and the beneficiary. Obviously when considering buying a property abroad for the purposes of retiring, it is essential that you should have visited the area a number of times, and indeed out of high season. What are the local amenities facilities like, what is the public transport system that is available? Is there a hospital nearby, and are medical services available? All of these issues are highly important and need to be studied before making a decision to pay over a deposit on a particular property.