Buying a Plot with an Option and Conditional Payments

An option on a plot gives the right to buy it at a price agreed in advance within a term, and conditional payments tie the money to events: a licence, approval of a plan. Together they shift part of the risk to the seller: the buyer risks the premium, and the main sum is paid once the conditions are met. The price of this: the premium is, as a rule, not returned if the option is not exercised, and it counts toward the plot price only if the contract says so directly.

What an option is under Catalan law

An option, opció, is a right that allows its holder to acquire property on terms set by the contract (art. 568-1 Código civil de Cataluña, book five, the Civil Code of Catalonia). If the option operates as a right in rem over real estate, it is executed in a notarial deed and registered in the Registro de la Propiedad (art. 568-2.1). On exercise the buyer then receives the plot in the legal position it was in when the option was created (art. 568-2.2). This protects against encumbrances that appeared later.

Term: if the contract does not state one, it is taken as four years (art. 568-6.a). The maximum for an option in rem is ten years, and extensions are possible by agreement, each no longer than ten years (art. 568-8). If an option is written as a condition inside another contract, it cannot last longer than that contract.

What the contract must contain

Under art. 568-6 the contract needs at least five elements:

1. The term of the option and the term for exercising it.
2. The acquisition price or the criteria by which it will be determined, and the right to exercise the option unilaterally, if agreed.
3. The premium for creating the option and the way it is paid.
4. The seller's address for notices.
5. The way to confirm payment of the price, if the option is exercised unilaterally.

A separate trap: the premium counts toward the plot price only if the contract says so directly (art. 568-5.2). Without that sentence you have paid for a right, not for part of the price.

What conditions are set when buying land

A conditional payment depends on a future event: the issuing of a licence, approval of a plan, no suspension of licences. Under the general law, the rights and obligations of a conditional transaction arise or are lost together with the event (art. 1114 Código Civil). But a condition cannot depend solely on the will of the debtor, otherwise the obligation is void (art. 1115). If the debtor himself prevents the condition from occurring, it is treated as fulfilled (art. 1119). A licence is issued by the administration, that is, a third party, and such a condition is permissible. How Catalan law relates to these rules is checked by an abogado (lawyer).

The content of the condition matters as much as the fact that there is one. The contract states which licence exactly (llicència urbanística, the urban planning licence) and with what parameters, within what period, whether the licence counts as obtained immediately or once the decision takes effect, who files the application and who pays for the project. The procedure is described in the article on getting a licence.

Three structures in one example

Worked example, not a forecast: a plot for 1 M€, an option premium of 3%, a payment of 15% on obtaining the licence, the premium counted toward the price under the contract. If the licence is refused, the plot is worth 600,000 € on the market (an assumption from the article on plots with and without a licence).

On cost, the option pays off only in the no-licence scenario. If the licence is obtained and the premium is not counted toward the price, 30,000 € is added to the plot price: that is the fee for deferring the decision. It is worth comparing with the cushion in the scenarios of plan change risk.

An option can also be set up on part of a plot or on its buildability, in which case the price is calculated by area or another parameter (art. 568-3.4). This is convenient if the project goes in phases.

What protects the buyer and what does not

The law says the seller must look after the plot and answers for damage caused by fault or intent (art. 568-10). The plot can be sold without the option holder's consent, but the new owner takes on its obligations (art. 568-9.1). The option itself can be transferred to another person unless it was set up for the holder personally (art. 568-9.2).

What the law does not do: it does not protect against losing the premium if you did not exercise the option, and it does not remove the plan risk after the purchase. The tax treatment of the premium and of the later transaction (IVA or ITP, Spanish VAT or transfer tax) is determined by an asesor fiscal (tax adviser), and the general rules on plot taxes are described in the article on land plot investment. The difference between an option and a deposit is explained in the article on option and arras.

Who this structure does not suit

It does not suit a seller who wants the whole sum quickly, nor a buyer without money for the premium and project costs. It does not suit someone who needs a simple deal either: an option contract with conditions is longer than an ordinary sale, and every formulation has to be checked. The assumptions behind the calculations are described in the methodology.