The forward purchase contract VS the forward funding contract in Spain

The sale of a building under construction can be achieved through different contracts like the forward purchase contract or the forward funding contract, both of which come from the Anglo-Saxon practice. These two contracts, very often used in large real estate operations, have sharply flourished in Spain where they serve as a basis for the development of special kinds of contracts, called « hybrids » which can overlap one part or another from each of these two contracts.

The forward purchase contract (similar to the forward sale under French law).

It is one of the most used transactions in real estate sales and it perfectly matches the characteristics of a sales contract of a future good.

In fact, the forward purchase contract is a bilateral sales contract of a future building concluded between an owner builder seller and an investor buyer through which the seller commits to carry out the construction of the building (the promoter) within a set deadline and to transfer it to the buyer. The investor-buyer commits to buying the building once the construction is concluded and to pay the price when it is delivered. The selling promoter commits to commercialise the building under determined economic conditions and within a set deadline.

The implementation of a forward purchase contract is divided into three main steps:

  • The signing of the sales contract of a future good between the parties
  • The promotion of the real estate by the selling promoter
  • The delivery of the immovable property and the payment of the sales price.

One of the main characteristics of this contract is the payment of the full price at the moment of the delivery of the immovable property, which also distinguishes this contract from others. Consequently, the selling promoter does not receive ayment until the end of the construction of the building and its delivery to the buyer. At the same time, this contract offers the selling promoter certain guarantees.

In fact, on one hand, the selling promoter is sure to have a buyer for the real estate even before the beginning of the construction. On the other, it is common for the buyer to pay a final price which is higher than the initial price had the buyer paid a part of it at the beginning of the construction of the immovable property, or if the purchase of the building under construction had to be made later on (for example through the purchase of the plot of land where the immovable property is first constructed). Finally, having a sure buyer, allows the owner seller to easily obtain the necessary funding from banks in order to complete the construction.

The forward funding contract (similar to the sale before completion under French law).

The forward funding contract is a bilateral sales contract of a future building concluded between an owner buyer seller and an investor buyer where the owner seller commits to building and selling to the buyer a building, but with the peculiarity that the burden of financing the building shall be borne exclusively by the investor buyer who hence will have to bear all the related costs of the construction. However, in principle, a limit (a maximum payment) is determined by the parties to the contract.

Again, the performance of this contract is divided into 3 steps:

  • The investor buyer starts off by buying the land from the selling promoter
  • Promotion of the immovable property by the selling promoter financed by the investor
  • Delivery of the immovable property and payment.

Generally, the selling promoter transfers ownership of the land to the investor buyer through a preliminary step corresponding to the signature of the forward funding contract, or , shortly after, at the time of completion of certain determined conditions. Accordingly, the buyer becomes landowner before or at the same time as the beginning of the construction of the immovable property. The aggregate purchase price is established by the parties to the contract before the commencement of the construction.

The selling promoter commits to promoting, to building and to commercialising the immovable property with the funding provided by the investor buyer. The selling promoter also commits to deliver the property when it is finished.

As the construction progresses, the buyer will become the owner through the process of accession of the building, in other words, as the construction progresses and, depending on the success in commercializing the building being constructed, the buyer will be remunerated and will receive an additional price.

The payment of the plot of land to the selling promoter will enable the latter to finance all, or the majority of, the necessary expenses to execute the construction of the immovable property.  All the payments made by the buyer from the acquisition of the land until the end of the construction are intended to enable the selling promoter to finance the construction. At the conclusion of the construction, the buyer pays the final price agreed to by the parties, once the construction costs carried out by the investor buyer have been deducted, along with the interests generated by these sums, depending on the profitability of the rental of the building during the construction.

Hence, this technique of the forward funding contract offers the selling promoter the advantage of directly having the necessary funding for the construction of the immovable property without having to borrow, mainly from baking institutions. There is also the guarantee of having a buyer for the immovable property. Nevertheless, the use of this technique implies a lower profit (than the profit in a forward purchase agreement).

If the selling promoter does not comply with the obligation to surrender the constructed and rented building, then the investor buyer can cancel the sale and recover the price of the land, as a form of reparation. If it is the investor buyer fails to meet its obligations, then the selling promoter also has the option to terminate the contract.

It should be noted that the transmission of the land at the beginning of the operation does not guarantee the delivery of the completed and rented building within the timeframe agreed upon by the parties.

Cécile Proust & Clément-Henri Girardot

This article is not considered as legal advice

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