Lease with Option to Buy and Sale with Earnest Money Agreements: Features, Legal Aspects, Taxation

When engaging in a real estate transaction (purchase and/or sale), it is important to understand the difference between a lease with an option to buy agreement and a sale with earnest money agreement. Knowing their functions and characteristics is essential to ensure the process is carried out safely and securely. Pure Living Properties, in collaboration with Pérez de Vargas Abogados, has developed a detailed guide for clients and potential clients explaining the intricacies of both types of contracts.

LEASE WITH OPTION TO BUY AGREEMENT

What are the key elements that must be present in a lease with an option to buy agreement for it to be valid and effective?

Although it is an atypical contract without substantial regulation in law, the requirements for its validity and effectiveness have been outlined by case law:

– Granting the option holder the right to unilaterally decide to execute the sale.

– Determining the contractual object, fully configuring the future sale, particularly the stipulated purchase price.

– Setting a time frame for exercising the option.

Consequently, any premium established as payment from the option holder (tenant) to the owner for the purchase option is an accessory element of the business.

In the context of a lease with an option to buy, what rights and obligations does the tenant have regarding the property during the rental period?

The tenant will have the rights and obligations stipulated in the lease contract; additionally, they will have the right to unilaterally decide to execute the sale at the stipulated price within the exercise period.

What happens legally if the tenant decides not to exercise the purchase option at the end of the lease term?

If the tenant does not exercise the purchase option within the stipulated period, they will lose the right to exercise it and, if stipulated in the contract, the amount paid as a premium, which will be retained by the landlord (owner).

What are the tax obligations in a lease with an option to buy agreement?

The taxation of a lease with an option to buy is more complex than a reservation or sales contract, considering three taxable events: 1) The option, 2) the lease, and 3) the potential sale. Depending on whether it is a first transfer, the option is subject to VAT (21%) or, in the case of a second transfer, to the Transfer Tax, with the option premium being the taxable base. If the option is exercised, the sale is subject to VAT (10%) if it is a first transfer of housing or Transfer Tax for a second transfer.

For the landlord/seller, the premium for granting the purchase option is considered a capital gain, subject to taxation in personal income tax (IRPF) or corporate tax. If the purchase option is exercised and the sale is completed, the received amount will also be subject to taxation, minus the amount already taxed for the option premium.

Are there specific tax benefits associated with using a lease with an option to buy agreement?

The landlord/lessor can enjoy tax benefits related to the rental.

In what cases is a lease with an option to buy recommended?

These contracts allow the tenant to experience the property before purchasing it, defer or split the purchase price payment, with premiums and rents contributing to the final price. For the landlord/seller, it ensures rental income and a premium in case the sale does not proceed.

What are the recommendations for someone considering signing a lease with an option to buy agreement?

Seek adequate legal and tax advice. Pay special attention to the premium amount, as it will be forfeited if the purchase option is not exercised.

SALE WITH EARNEST MONEY AGREEMENT

What are the legal implications of an earnest money agreement in case of breach by either party?

Depending on the type of earnest money stipulated:

– Confirmatory earnest money: Acts as a signal of the contract’s celebration, not allowing its termination. The amount is an advance payment. In case of breach, the injured party can demand contract fulfillment or its termination with damage compensation.

– Penal earnest money: If the buyer breaches, they forfeit the earnest money. If the seller breaches, they must return double the amount. The party willing to comply can demand fulfillment or termination.

– Penitential earnest money: Allows either party to withdraw from the contract, forfeiting or returning double the earnest money.

– Penitential earnest money is commonly used in real estate sales between individuals.

How do earnest money agreements affect the parties’ tax obligations?

The amount received as earnest money is considered a simple advance payment for a future sale, not requiring immediate taxation until the sale occurs or the agreement is withdrawn and the amount retained.

What precautions should parties take before signing a sale with earnest money agreement?

Buyers should thoroughly examine the property with a technical-legal audit, as unilateral withdrawal will forfeit the earnest money. Sellers should assess the buyer’s solvency and ensure a proportional balance between the earnest money amount and the granted period for public deed execution.

From a legal perspective, what are the main differences between a lease with an option to buy and a sale with earnest money agreement?

The lease with an option to buy grants the tenant the right to unilaterally execute the sale, including both leasing and sale components. In a sale with earnest money, the earnest money serves as a deposit or compensation for unilateral withdrawal or breach, being an accessory to the main sales contract. The choice between these contracts depends on specific circumstances and the parties’ preferences and intentions.

If you are considering investing in a high-quality property on the Costa del Sol, do not hesitate to contact our sales department. An expert team will provide you with personalized attention and advice throughout the entire process.