Promise of Purchase and Sale Agreement

Despite being a modern country, with updated legislation based on a Civil Law system, there are several topics and peculiarities within the property acquisition process in Panama that will undoubtedly differentiate it from any other process of this type in the region. Our positive law establishes guidelines flexible enough to allow common practices to self-regulate the purchase process, mainly referring to how title registration should be carried out and what elements should be included and detailed.

The full names of the parties and identifiable data, as well as all specific data related to the property, must be indicated, the agreed sale price, and the seller’s obligation to guarantee the transfer of title and the right of possession. Express will or acceptance of the deal by both parties must be included for a successful purchase process. However, all of these refer to the actual closing deed or final step of a sales agreement in Panama. Everything begins with more complex steps and stages.

Once both parties have expressed their intentions to sell and buy a property, along with their agreed sale price, it is customary to prepare an initial agreement that will regulate all foreseeable steps, obligations, and scenarios for the next weeks or even months of the transaction; this document is commonly known as the “Promise of Purchase and Sale Agreement.” In this initial contract, the parties are referred to as the “Seller Promoter and the Buyer Promoter,” where the former promises to sell, and the latter promises to buy. If one of the parties is a legal or fictitious person, the registration data, along with all the general data of their legal representative or authorized agent, must also be included.

These types of contracts usually begin with a title declaration by the Seller Promoter, describing all the legal/registry information of the property subject to the transaction, as well as its location, size, and limitations. However, these latter details already form part of the registered property data, which facilitates the simple derivation of all of them to the “registered information described in the Public Registry.”

The mention of the sale price is generally expressed in letters and numbers to avoid confusion and is often divided into two or more initial payments, starting with a lower one (usually around 10% – 20%). This common practice has more than one purpose. Firstly, it allows the Seller Promoter to take care of certain obligations, such as paying all taxes related to the property transfer (around 5% of the sale price) and updating the property with any debts, such as overdue property taxes or charges for late payments from homeowners’ associations.

But beyond handling funds to the promising seller, it also represents a show of commitment from both parties to fulfill the other’s obligations since this deposit will become the penalty to be taken into account when one of the parties breaches the agreement: on the one hand, the Buyer’s Promissory Note will lose this initial deposit if they cannot successfully finalize the deal for any reason, and on the other hand, if it is the Seller Promoter who breaches, not only will they have to reimburse this deposit, but they will also add an identical amount as a penalty. While this is not only a common legal practice but is also contemplated in our Civil Code (art. 1224), the parties can agree to something else, such as committing to losing only a percentage of this first initial payment or even none.

By: Emilio Cornejo Vernaza LL.M.
Founding Partner of PGS Attorneys and PGS Realty

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