Due diligence checks
Things to look out for when buying property in Ibiza
When buying a property in Spain, we strongly advise commissioning an independent lawyer to conduct all necessary checks and help ensure the legal pitfalls associated with buying a property in Spain are avoided. If you do not have your own lawyer, we can recommend or help you find a suitable professional.
Choose a lawyer who can speak both Spanish and English fluently and has well-established relationships with entities on the ground, such as the land registries, town halls, local notaries, banks and other specialists involved in the process of purchasing a property.
Following is a list of key checks to conduct as part of the due diligence process. This list is by no means exhaustive and should serve as a brief guide – your lawyer will be able to advise on additional requisite checks.
Check the vendor’s title
Confirm the vendor owns the full title to the property and can legally sell it.
Check the property is free of debts, charges, liens and embargoes
Debts in Spain are held against the property itself, not the owner, which means any encumbrances or liens against the property instantly become the responsibility of the new owner.
If buying a rural property, make sure you make checks on the various easements that exist with such types of property such as right of way, (servidumbres de paso), right-of-view, hunting rights or the right to extract water from your private well or stream running through your property.
Check payments of local taxes (IBI) are up to date
You need to see the latest receipts for payment of local rates (IBI), and in some cases check with the town hall (Ayuntamiento) to ensure there are no problems with unpaid rates from previous years.
Check the deeds
Before you proceed to purchase, you will need to obtain a copy of the deeds from the vendor and have your lawyer confirm the property is correctly described in the deeds. The deeds contain descriptions of the amount of land (if any), boundaries, built areas, internal divisions, exterior recreational areas and other salient features of the property.
There are many cases of irregular documentation with properties in Ibiza and it is always advisable to seek a legal representative who can help you understand the overall legal situation of a house before you decide to continue with the purchase. It is usually the responsibility of the seller to actualise the information described in the property documentation, at their cost. This can be a key point for negotiation on price and it is advisable to always seek your lawyer’s advice.
Some illegal property features may become legal by virtue of the amount of time they have existed – generally after approximately eight years without any complaints from neighbours, orders from the town hall to remove them (Expediente de Infraction Urbanistica) or any considerable changes or extensions to the property during this time. In this case you must always have a registered architect certify the feature is more than eight years old (Certificado de Antigüedad de un arquitecto certificado) and get the all clear from the town hall. This responsibility usually lies with the seller.
It is important to note unregistered extensions can have legal repercussions on seeking finance. If, for example, the property is to be used as collateral to secure a mortgage, lenders will not consider the extensions to exist. So whatever is not legally registered at the Land Registry does not technically exist in the eyes of the lender.
Check the retention tax
When checking the property deeds your lawyer must also pay attention to how many times the property has changed hands in the last four years, and who the previous vendors were. If the property has changed hands at all in the last four years, and if any of the previous vendors in this period were non-residents, then your lawyer needs to check that the 5% retention was paid to the tax authorities by whoever bought the property. If the property has not changed hands in the last four years (and one month, to be precise) then there is nothing to check.
If the property was built within the last five to six years the buyer must make sure that both a Certificate of the Termination of the Building (Certificado de fin de obra) and the Licence of First Occupation (Licencia de primer ocupacion) were obtained.
Check the cadastral record
Whilst the principle function of the property register is to record title, the cadastre (catastro) also records the location, physical dimensions and classification of all properties in Spain. It includes plans, maps, and aerial photographs and is a useful source of information when buying rural property as it helps to identify discrepancies between the deeds and what you have been shown. In the case of buying rural property, be warned that the information held by the Land Registry and Cadastral Registry is often inaccurate regarding the existing real life structure and plot of land. You are strongly advised to commission a chartered surveyor to carry out a full report on findings. A thorough report will enable your conveyance lawyer to better find the weaknesses of the property and negotiate more favourable terms for you.
Check with the urban planning department (Urbanismo)
The planning department has plans for all land within the municipality, along with the regulations that govern what can and can’t be built on it. In some cases it may be more appropriate for an architect to carry out this check and report back to your lawyer, as not all lawyers understand the intricacies of planning regulations.
Check for the correct licences and planning permissions
When buying a recently built property, and especially when buying newly built property from an investor, you may need to check that planning permission (licencia de construcción) was granted, that a certificate of completion (Certificado de Final de Obra) was signed by an architect, and that an occupancy licence (Cédula de Habitabilidad or licencia de primera ocupación) was issued by the town hall. Generally speaking, if a property has mains connections to water and electricity then it has necessary licences, as utility companies only supply properties with an existing occupancy licence.
If you are looking at property in an urbanised area you may also wish to learn what is going to be built around the property in the future. The urban plan (plan parcial) in the town hall reveals exactly what can and can’t be built on the land around the property you are considering.
Lastly you need to check with the town hall regarding the overall development plans for the region. This information is contained in the general plan and includes plans for major projects such as motorways, airports and railway lines. Outside of consolidated areas, however, there is a very small chance that plans to build a motorway, or reclassify rural land as development land, could affect the property you are considering.
A word on declaring the value of your property…
Some sellers of resale property in Spain will encourage you to under-declare the value of the property to the authorities, and pay a proportion of the price in cash in order to secure a slightly cheaper price. This is illegal, and is done purely so the seller can avoid paying part of the capital gains tax they will owe on the property. Not only is it possible to be prosecuted in the new climate of clamping down on illegal real estate practices, you will also be liable to pay the capital gains tax on the full amount of the difference between the declared value at the time of purchase and when you sell the property.
Forward planning for inheritance purposes
Property can be registered in a single name; names of a couple or joint buyers’ names; the names of children, giving the parents sole use during their lifetime; or in the name of a Spanish or foreign company. Before registering the deed of a home, it is important to carefully consider the tax and inheritance consequences for those in whose name the deed will be registered.
Buying property through a company
It is possible to avoid Spanish capital gains, inheritance tax and transfer tax on a sale by registering a property through a limited company, which in turn could be owned by an offshore company. Buying property through a company can be beneficial in certain circumstances but you may be required to pay an annual tax of 3% of the rated value (valor catastral). It is possible to obtain an exemption from this tax if the property is owned by a company in a country with a double taxation treaty with Spain.
Before buying a property through a company, it’s essential to obtain expert legal advice and carefully consider the advantages and disadvantages.
If you are buying a property from an offshore company, confirm the vendor has paid the 3% tax levied on this type of ownership.
• If the property is within 500 metres of the coast then your lawyer may need to confirm that the property does not fall foul of the coastal planning law (ley de costas).
• If the property is being sold with furniture of any value ensure you are provided with a signed inventory.
• Check all utility bills are up to date (water, gas, electricity and telephone) by obtaining copies of the latest receipts from the vendor.