On the causation of real estate sales contracts in the light of recent supreme court rulings

Recently, the Civil Division of the Supreme Court has had the opportunity to hear two cases in which, in the context of a real estate sale and purchase, it had to rule, among other questions, on the causalisation or conditioning of the contract to the approval of the General Urban Development Plan (PGOU) and the consequent modification in the classification of the land of the property being sold.

The facts prosecuted in both cases are practically identical, as are the conclusions reached. For this reason, and without prejudice to the final references, I will refer mainly to the decision in the first of the judgments, Supreme Court Judgment no. 484/2022 of 15 June 2022.

In summary, the facts of the case are as follows: buyer and seller first entered into a deposit contract and then a private purchase contract for a property. The price and payment of the transaction was structured as follows:

"The price agreed in the purchase-sale (second stipulation) was 357,192,384 euros (24 euros per m² ), of which 35,719.20 euros (10%) were paid before the signing of the contract, and another 59,578.80 euros (15%) at the time of signing. Furthermore, in the second stipulation of the contract, regarding the payment of the rest of the price, it was agreed that: (i) the amount of 89.298 euros (25%) would be paid "within 90 working days following the date of the Initial Approval of the PGOU of the municipality of Morata de Tajuña, which must contain the urban planning classification of the property to be acquired in identical classification to that which appears in the Advance of said PGOU or another that is accepted by the second party [the purchaser]"; (ii) a further 89.298 euros (25%) would be paid "within 90 working days following the date of the Provisional Approval of the PGOU of the municipality of Morata de Tajuña, which must contain the urban planning classification of the property being acquired in identical classification to that appearing in the Advance of said PGOU or another accepted by the second party"; and (iii) the remainder of the price, i.e. 89.298 euros (25%), would be paid "at the time of execution of the public deed of sale, which must take place within 90 working days following the date of Final Approval of the PGOU of the municipality of Morata de Tajuña, which must contain the urban planning classification of the property being acquired in identical classification to that appearing in the Advance of the said PGOU or another accepted by the second party and at the request of the latter".

However, the controversy arises when, finally, the competent administrative body did not approve the PGOU, and the property being bought and sold did not acquire the urban qualification referred to in the contract.

It is at that moment that the purchaser files a lawsuit requesting the declaration of termination of the purchase contract and the restitution of the part of the price paid, plus the legal interest from the frustration of the contract.

For its part, the seller not only opposed the claim, but also counterclaimed that the main claimant be ordered to pay the unpaid portion of the price, plus statutory interest.

The Court of First Instance no. 50 of Madrid upheld the claim filed by the purchaser and dismissed the counterclaim. With regard to the interpretation of the contract, it concludes that: "we are dealing with a strongly causalised contract, taking into account the criteria established by the Supreme Court, among others, in judgments of 21 March 2003 and 21 December 2009". Thus, on this basis, it understands that the frustration of the causalised contractual purpose has occurred, for reasons not attributable to the contracting parties, and, consequently, it upholds the termination action brought by the plaintiff.

 An appeal was lodged against that judgment by the defendant and by the plaintiff (the latter only in respect of the ruling relating to interest). The Madrid Provincial Court dismissed the plaintiff's appeal and upheld the defendant's appeal.

Regarding the issue dealt with in this article, the Provincial Court ruled as follows: "there was nothing to prevent the circumstance that the Plan had not been definitively approved from being included in the contract in question in order to cause the aforementioned contract and bind the sellers of the land that the plaintiff acquired for its subsequent urban development to that contingency, by expressing that cause or by including conditions that bound the parties and established the consequences of non-compliance. But none of this was stated in the contract". [...] "neither in the earnest money contract of 9 May 2005 nor in the purchase contract of 10 August 2005 is any condition established, but the final price is fixed at 24 euros per square metre [...]".

Inaddition, it considers that there is no evidence that: "the seller was aware of the possibility of resolutory action, nor that the purchase was linked to the definitive approval of the Plan, nor that this supposed causalisation was explained to him in any way".

Based on these assessments, the Provincial Court dismissed the claim brought by the purchaser and upheld the counterclaim brought by the seller.

In this publication we will focus on our High Court's assessment of the contract and its causation, as well as the consequences arising from it.

In this regard, the Supreme Court has ruled as follows:

"We see no reason to depart from the first instance court's interpretative assessment of the causation of the contract. The contract, in regulating the exchange of services in its second stipulation, clearly links the successive disbursements (after the payments made on signing the deposit - 10% - and the private contract - 15% -) to the different phases of the PGOU procedure, subordinating the payment of 75%, divided into three equal parts, to the initial, provisional and final approval of the Plan, from whose milestones the payment was to be made, to the initial, provisional and definitive approval of the Plan, after which milestones the corresponding payment was to be made within 90 working days, and under the condition that "the urban classification of the property to be acquired is identical (sic) to that appearing in the Advance of the said PGOU or another that is accepted by the second party". This being so, this classification in the Avance, as has been said, was that of "sectorised land for development.

The link between the sale and the approval of the PGOU with the aforementioned content is also consistent with two other provisions of the contractual regulations: (i) the seller retained possession of the property until the execution of the public deed; and (ii) the execution of the public deed was set at the time of the last payment, which, in turn, coincided with the final approval of the PGOU, which should include the classification of the property in the terms set out in the Avance (sectorised land for development)".

Thus, the Chamber concludes that "in view of the urban development intended for the purchased property and the subordination of the successive payments of the deferred price to the different milestones of the PGOU and its specific content in terms of land classification", the causalisation of the contract can be undoubtedly understood.

As noted above, the ruling is not only in line with the case law cited in the Judgment, but also with the subsequent ruling in Supreme Court Judgment No. 488/2022 of 21 June 2022.

The Supreme Court's decision serves as a warning on: (i) the position of our High Court in cases such as the one described above and (ii) the relevance of clearly and unequivocally establishing the grounds for this type of contract, providing the purchase and sale transaction with the necessary legal certainty and avoiding the courts having to resolve this issue.

Pedro Pérez-Cuesta Llaneras
Illeslex Abogados

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