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Property deposit returned on basis mortgage not approved

The Supreme Court has ruled that ‘an obscure’ clause in a pre-purchase contract for the purchase of property from a construction company was sufficient to render the entire contract invalid and force the return of the deposit monies previously handed over by the prospective purchasers.

The Court was at pains to distinguish the clause that appeared in the purchase contract in the case before them, with those that often appeared in similar contracts, and which the Court had previously ruled were merely incidental terms of the contract and were not capable of invalidating the contract.

Subrogation Clauses

The clause under scrutiny stated that the buyer could, if they so wished, ‘subrogate’ the existing mortgage of the seller of the property. In Spain ‘subrogating a mortgage’ is quite a common practice for purchasers whereby, instead of arranging their own new mortgage, the buyers essentially take the place of the then current owner of the property and retain the existing mortgage.

However, in this particular case, by virtue of the inclusion of the clause in the contract, the construction company had in fact made a very attractive offer  whereby , ‘ …in any case, if [the party reserving the property] so wishes, the existing mortgage will be subrogated…’.

On the basis of this interpretation of the clause, it was not a secondary or incidental term of the contract, but the purchaser was in reality being guaranteed finance for the purchase, the absence of which in the end frustrated the objective of the contract.


Return of the Deposit Monies

The Court, later in it’s judgment, remarked that the seller of the property always had the option to make an agreement with it’s bank limiting the latter’s future liability to the market value of the property and thereby avoid complications arising from the banks refusal to accept the addition of the purchaser to the existing mortgage as a result of their poor financial rating.

In this case it was therefore correct to rule that the contract was invalidated with the result that any monies that had been deposited to reserve the property should be returned.

So, if you find yourself facing the loss of a substantial deposit for failure to obtain a mortgage, it is certainly worth checking the ‘Contrato de Arras’ or pre-purchase contract to see if any such clause is present.

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