Our previous March article explained the legal treatment of reservation payments and sinal deposits for Portuguese property purchases. It is common to pay them directly to the seller or estate agent. If the purchase does not proceed, recovering the money can be difficult because of the seller’s insolvency or bad faith. In Portugal, these repayment problems are not usually anticipated when signing a preliminary sale agreement. They are a significant source of property disputes and deserve the attention of advisers and document drafters. Buyers have an interest in reducing the risk of non-repayment.
For example, a seller’s culpable and definitive failure to perform requires repayment of twice the deposit as compensation under Article 442(2) of the Civil Code. Where the seller is not at fault, expiry of the preliminary agreement under a condition requiring bank finance entails repayment of the original amount. Direct payment to the seller or agent therefore carries a genuine risk that the buyer will not recover the money.
First, specific performance under Article 830 of the Civil Code and a promise with proprietary effect under Article 413 should be excluded from this discussion: they concern actually transferring ownership. The safeguards considered here concern failure of the preliminary agreement where the seller must repay money. Checking solvency before signing and paying is essential, particularly for a corporate seller, but does not protect against every risk, notably bad faith. A buyer may negotiate a bank guarantee, although its costs can be considerable where substantial sums are involved.
One solution can significantly reduce the risk: the deposit arrangement used in France. Reservation payments and deposits are not given to the seller; preliminary sale agreements usually provide for payment to the notary, specifically into a dedicated bank account under the notary’s control. The deposit contract governed by Articles 1185 onwards of the Portuguese Civil Code can be included in the preliminary sale or reservation agreement. It can regulate repayment to the buyer by the lawyer or notary drafting the deed, neutralising the effects of the seller’s bad faith or insolvency.
Legal professionals should develop this practice in Portugal so that buyers receive better legal protection. Legislation specifically governing such deposits in property purchases might provide an effective incentive. In the meantime, professionals should suggest establishing a deposit arrangement to the parties.
Dr. Pedro Emanuel de OLIVEIRA
Lawyer