Formal Requirements of Promise-to-Sell Agreements for Real Estate and Its Registration Thereof
Florencio A. Gramajo and Jorge Ordóñez, attorneys in Guatemala experts in Real Estate Law, share this analysis on the formal requirements of promise-to-sell agreements for real estate, and their implications for registration in the Property Registry.
In general, contracts do not require any formalities for their validity, except in cases where the law expressly mandates them. In this context, the Civil Code of Guatemala, Decree Law Number 106, defines a sales contract as an agreement in which one party (the seller) transfers ownership of an asset and commits to delivering it to the other party (the buyer), who in turn agrees to pay the price in money. This contract may involve any property subject to ownership, including real estate. Likewise, Guatemalan law allows parties to contractually assume the obligation to enter into a future agreement; that is, a promise of contract.
Real estate promise-to-sell agreements are common in Guatemala, as they may be used to secure a sales transaction that, due to specific circumstances, cannot be executed immediately. Therefore, it is essential to understand the legal obligations regarding the form these contracts must take, including registration requirements.
As previously mentioned, the general rule is that contracts do not require a specific form to be valid between the parties. However, there are some that, due to the legal requirement of registration in the Property Registry, must be executed in a public deed. The relevant articles to consider are:
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Article 1125: "The following shall be registered: (...) 2º (...) real estate promise-to-sell agreements, (...).”
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Article 1576: "Contracts that must be registered or recorded in public registries, regardless of their value, must be executed in a public deed. (...)."
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Article 1674: "(...) A promise of contract must be executed in the form required by law for the contract that is promised.”
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Article 1680: "When the promise concerns the transfer of real estate or real rights over it, the contract must be registered in the Property Registry."
Based on the foregoing, it can be concluded that promise-to-sell agreements for real estate must be executed in a public deed to be eligible for registration in the Property Registry. While failing to register a promise-to-sell agreement does not affect its validity, registration serves to provide public notice of the contract, thereby strengthening its legal security against third parties. In this regard, if promise-to-sell agreements for real estate are not registered, despite a legal obligation to do so, the following risks may arise:
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Loss of registration priority: Any subsequent registrations or annotations of other transactions will take precedence over the unregistered real estate promise-to-sell agreements. This means that priority will be given to the party who first registers their right or even to the party who submits their registration request earlier, even if the unregistered contract was executed beforehand. As an example, one can think of the scenario in which A (promising seller) and B (first promising buyer) enter into a promise-to-sell agreement for real estate, but it is not registered. In any case, if A acts in bad faith, he could enter into another promise-to-sell agreement for the same real estate with C (second promising buyer), without the latter or B being aware of it, creating a situation of legal uncertainty and, most likely, giving rise to legal proceedings. The above can be avoided if the promise-to-sell agreement for real estate between A and B is registered in the Property Registry, since in this way it becomes public, and any third party (C) can find out about its existence.
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Exclusion from legal proceedings: If a legal process takes place in relation to rights over the real estate promised for sale, the promising buyer, whose contract is not registered, may not be summoned to the respective trial as a third party and this could affect his interests. In this regard, the procedural rules provide that contracts or acts that should be registered, and are not, will not be admitted in court. Therefore, if the promising buyer becomes aware of the legal process, he could be in a difficult position to assert his right, since, without a registered contract, the respective court may not recognize his capacity to appear in the legal process.
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Rejection by public entities: Finally, and among others, if, for some reason, a public office requires it, there is a risk that, upon presentation, the promise-to-sell agreement for real estate will not be admitted (including judicial authorities).
These risks directly affect the promising buyer, who lacks control over actions taken by the property owner, his creditors, or third parties with an interest in the real estate, such as the example explained above.
Guatemalan courts have issued rulings that highlight the importance of registering these contracts, evidencing their significance in protecting the rights of the promising buyer. For investors and buyers, complying with this legal obligation can help guarantee the stability of their real estate operations, protect their assets and develop their businesses with legal certainty.
The Arias team is composed of professionals with extensive experience in real estate law, who will be pleased to advise you on this and other related matters. If you have any questions or require further information, please do not hesitate to contact us.
The information provided by ARIAS® is presented for informational purposes only. This information is not legal advice and is not intended to create, and does not constitute, an attorney-client relationship. Readers should not act upon this information without seeking advice from professional advisers.