Can a promise of sale be unilaterally resolved if the buyer does not pay on time?

By means of the contract of promise of sale, the parties undertake to enter into a contract in the future. Generally, we find them when the property of the future sale is under construction or pending some procedure. In any case, our Civil Code requires the identification of the thing and the fixing of a certain price. Its regulation is found in article 1451 CC which provides:

“The promise to sell or buy, having conformity in the thing and in the price, will give the contracting parties the right to claim reciprocally the fulfillment of the contract.

Whenever the promise to buy and sell cannot be fulfilled, the provisions of this book on obligations and contracts shall apply to the seller and the buyer, as the case may be.”

But what happens in cases where the buyer does not pay the price on time? Does the same apply as in the case of a contract for the sale of real estate? Must the buyer be requested by a notary or a court in order for the seller’s decision to be valid?

It might seem that Article 1.504 of the Civil Code extends to the figure of the promise of sale.  In the mentioned article, proper of the real estate sales, it is provided that:

“In the sale of real estate, even if it had been stipulated that due to lack of payment of the price in the agreed time, the termination of the contract will take place as of right, the buyer may pay, even after the expiration of the term, in the meantime not being required to do so by the court or by a notary act. Once the request has been made, the judge cannot grant a new term.”

Therefore, the termination of a promise of sale, by analogy with the contract of sale, could be governed by the same article.

However, nothing could be further from the truth. In a recent Supreme Court ruling, it has been ruled that its application is not possible. Let us see below what its reasoning is.

Supreme Court Ruling No. 649/2018 of 20 November 2018

As we said, this ruling analyses whether Article 1.504 of the Civil Code applies to promises of sale.

In this particular case, a claim for damages is brought against two sellers. It is understood that the plaintiff has not fulfilled its obligation to sell the property in the agreed manner. And that they have also unilaterally terminated the sales contract signed, without prior notice of payment.

The defendants requested the rejection of the lawsuit in its entirety, which was accepted by the Court of First Instance. As a result, and after the appeal was lodged, the Provincial Court revoked the Ruling and upheld the lawsuit.

The appeal invoked by the defendants is based, first of all, on the incorrect interpretation of Article 1451 of the Civil Code. And understanding that the appealed Ruling contradicts the jurisprudence of the Supreme Court regarding promises of sale. The rules laid down for obligations and contracts in general by the CC apply to them and not those specific to the contract of sale.

The second plea invokes the infringement of Article 1.504 CC, again, because it does not apply to promises of sale. And therefore, because there is no obligation of the seller to require payment from the buyer to terminate the contract.

Once the two reasons for the appeal have been presented, the Supreme Court first analyses the contract concluded between the parties. And the facts that occurred after the signing of the contract, which we set out below:

“On October 27, 2014, Don Maximiliano, on the one hand, and Doña Adela and Marcelino, on the other, signed a contract which they called “a penitential deposit”. The object was a house owned by Dona Adela and Don Marcelino, to be sold to Don Maximiliano for the total price of 112,000 euros. Don Maximiliano gave a deposit of 4,000 euros (in three parts), and began to look for financing for the acquisition of the house, without success. On the 16th of January 2015 Mrs. Adela and Mr. Marcelino sent a burofax to Mr. Maximiliano cancelling the contract”.

Similarly, it was established as a clause in the contract:

“If on December 31, for reasons not attributable to the buyer, the latter does not have sufficient financing, this contract will be postponed until January 15, 2015, at which time, if the buyer has not paid the price to the seller, it will terminate this contract, taking over the amounts of the deposit received and being free to sell to whomever it wishes.

Once the facts and the contract have been analysed, the Supreme Court will assess whether or not there has been a breach of the articles invoked by the buyer. And, therefore, if the arguments in the Appeal Judgment are acceptable. In the sense of ruling whether the contract of promise of sale is supported by article 1451 CC. And consequently, if the rules provided for the contract of sale were applicable to it, among them art. 1504 CC.

The Supreme Court, proceeds to judge the two grounds together, and with reference to more distant jurisprudence. It resolves as follows:

“Thus, the sentence of the Supreme Court dated October 29, 1931 declared: “…that article 1504 of the Civil Code does not apply, in the sense that it is intended because here it is not a question of a perfect sale, which is what the article refers to, but only of a promise of sale…” and the sentence of December 30, 1955, which states that “article 1504 of the Civil Code expresses a particularity especially established for the contract of sale of real estate and, therefore, only applicable to it and not to the modalities of option or promise of sale…”. The judgments of October 7, 1896, January 26, 1942, November 11, 1943, March 6, 1954, March 10, 1966, March 13, 1997, and March 14, 1998, are identical.

With respect to the breach of contracts of promise of sale, in accordance with the second paragraph of article 1451, it is necessary to follow the general principles for obligations contained in the Civil Code and fundamentally in article 1124 CC. (…)”

“Ruling 607/2009 of 22 September, after stating the existence between the parties of a contract with an option to buy, which in case law is assimilated to a unilateral promise to sell, and that both unilateral and bilateral promises are included in art. 1451 CC, declares that art. 1504 CC. “In this case, therefore, there is no sale or obligation to pay the agreed price until the contract has been perfected and, in short, the exceptional provision of this regulation does not apply in the sense of allowing the buyer to pay the price – in the case of the sale of real estate, even after the term set for this purpose has expired, as long as the seller has not been required to give a ruling. (…)”

Therefore, it concludes that art. 1504 CC is only applicable to contracts for the sale of real estate. And not to any other, even if certain analogies exist with those.

Notwithstanding the above, the termination clause for non-payment provided for in the contract is a lex comisoria agreement. Therefore, it would not even be subject to the 1,124 CC relating to the tacit and implicit resolution conferred on the creditor:

“(…) when there is a lex comissoria agreement in the contract, that is, when there is a clause established by the parties that regulates and conditions the exercise of the right to terminate (5 4-5-72 ); and if it is established that the non-performance of the service functions as a condition for termination, then termination occurs automatically and not through the “power” to terminate granted by the said article 1124 (S.S. 1-5-46, 18-12-56, 23-11-64, 8-5-65, 24-2-66 and 30-5-76 ).

Hence, the agreed resolution is correct. (…)”

The above leads to the appeal being dismissed and the Ruling of the Court of First Instance being upheld.

Conclusions

• “Promise to sell“contracts have always generated doubts about their regulation with respect to real estate purchase contracts.
• As they are similar figures, it is common practice that buyers who do not pay on time, oppose the unilateral resolution by the seller. This is because no prior notarial or judicial request for payment has been made. (Article 1.504 CC)
• However, the Supreme Court has recently ruled that the purchase and sale regulations do not apply to promissory sale contracts.
• And that, in addition, they are governed in accordance with the provisions of the CC for obligations and contracts in general. It does not matter that it is an analogous figure to the contract of sale of real estate.
• We must add that if a lex comisaria agreement is added to the promise of sale, which conditions the resolution, this will be automatic. And it will be, by the mere fact that one of the parties fails to comply.
• So if you have signed a contract of promise of sale and you do not pay on time, you can be terminated without any requirement.