Payment of the purchase price in Italy

THE PURCHASE PRICE IS NOT ALWAYS PAID AT COMPLETION

Although the final deed transfers ownership, the purchase price may be paid in several stages.

A typical transaction may include:

• an initial payment when the purchase offer is accepted;
• a deposit or advance payment under a preliminary agreement;
• additional instalments, where agreed;
• the final balance due at completion.

Each payment must be correctly identified because its legal function may differ.

The exact structure depends upon the agreement between the parties. Proper planning helps prevent misunderstandings and allows the final deed to reflect accurately the financial history of the transaction.

DEPOSIT, ADVANCE PAYMENT AND FINAL BALANCE

Italian property transactions distinguish between different types of payments made before completion.

A caparra confirmatoria is a deposit serving the contractual function attributed to it under Italian law and may produce specific consequences if one of the parties fails to perform the contract.

An acconto prezzo is an advance payment of part of the purchase price. It is deducted from the amount remaining due at completion.

The final balance is the remaining part of the agreed purchase price.

Correctly identifying each payment from the outset is important because its legal and tax treatment may depend upon its nature.

HOW IS THE PURCHASE PRICE NORMALLY PAID?

Common payment methods include bank transfers, banker's drafts or cashier's cheques and, where a mortgage is involved, funds made available by the lending bank.

The appropriate method depends upon the transaction, the arrangements agreed between the parties and the practical requirements of the banks involved.

Cash payments are subject to legal restrictions. Property transactions therefore require careful attention to traceability and documentation.

Payment arrangements should always be discussed with the notary sufficiently in advance of completion, particularly where funds are being transferred internationally.

EVERY PAYMENT MUST BE DISCLOSED AND DOCUMENTED

Financial transparency is an essential part of an Italian property transaction.

The payment history should make it possible to establish the amount of each payment, when and how it was made, who made it and who received it.

Buyers should therefore retain the documentation relating to deposits, advance payments, bank transfers, banker's drafts and other payments connected with the purchase.

This enables the notary to reconstruct the financial history of the transaction and correctly record the relevant information in the final deed.

THE DECLARATIONS CONTAINED IN THE NOTARIAL DEED

The deed does not merely state the agreed purchase price.

It also records the information required by Italian law concerning the methods by which the consideration has been paid.

Payments made before completion must therefore be disclosed to the notary together with the appropriate supporting documentation.

The same applies where money has been transferred to the notary rather than directly to the seller: the purpose of that transfer and the instructions governing its subsequent destination must be clearly established.

TRANSFERRING MONEY TO THE NOTARY BEFORE COMPLETION

International purchasers often prefer or need to transfer the funds to Italy before the signing date.

This may be appropriate where international banking times, daily transfer limits, time-zone differences or other practical considerations make payment on the day of completion inconvenient or uncertain.

Funds may therefore, where the notary accepts the relevant engagement, be transferred to the notary's statutory dedicated account before completion.

However, transferring money to the notary before completion does not by itself determine when the seller will be paid.

The written engagement governing the funds must establish their purpose and the conditions under which the notary is authorised to release them.

The purchaser may instruct the notary, where legally appropriate, to make the payment at completion. Alternatively, the funds may remain protected after completion until the deed has been recorded and the relevant Land Registry verification has been successfully completed.

International buyers who wish to benefit from this additional post-recording protection should arrange it with the notary before completion so that the appropriate written engagement and banking instructions can be prepared.

PAYMENT THROUGH THE NOTARY AND PAYMENT TO THIRD PARTIES

Funds entrusted to the notary do not necessarily have to be paid entirely to the seller.

Depending upon the transaction and the written instructions accepted by the notary, part of the funds may be used to make payments directly connected with the sale.

For example, part of the money may be intended to discharge a mortgage or another seller's liability connected with the property.

The notary may also, where appropriately instructed and where the arrangement is connected with the transaction, be entrusted with payments such as an estate agent's commission, documented condominium liabilities or professional and technical expenses relating to the property.

These may include, for example, technical reports, energy performance documentation, cadastral work or other professional services required in connection with the transaction.

Such arrangements should always be agreed in advance. The amount or method of determining it, the recipient, the purpose of the payment and the conditions under which the notary may release the funds must be clearly documented.

USING THE NOTARY'S STATUTORY ESCROW ACCOUNT FOR POST-RECORDING PROTECTION

Where the purchaser chooses the statutory deposit-of-price protection available under Italian law, the relevant purchase money is not released to the seller at completion.

Under the statutory deposit-of-price mechanism, once the deed has been registered for tax purposes and the required Land Registry publicity has been completed, the Notary verifies that no encumbrances or prejudicial entries have arisen in addition to those existing on the date of the deed or resulting from the deed itself. The deposited sums are then released without delay to the persons entitled to receive them, subject to any further release condition validly provided for in the deed.

This protects the purchaser during the interval between signing and the completion and verification of the relevant recording formalities.

The statutory deposit-of-price mechanism is explained in greater detail in our separate guide The Notary's Statutory Escrow Account in Italy.

DOES THE "PRICE-VALUE" SYSTEM AFFECT PAYMENT?

No.

The Italian price-value system concerns the method used to calculate certain transfer taxes when the statutory conditions for its application are satisfied.

It does not alter the actual purchase price agreed by the parties and does not eliminate the obligation to disclose and document the real consideration and the relevant payments.

Even where the price-value system applies, the financial arrangements must therefore remain fully transparent.

PURCHASING WITH A MORTGAGE

Where a bank loan finances all or part of the purchase, the release of the mortgage funds must be carefully coordinated with completion.

Banks may use different procedures. Funds may be made available by banker's draft or electronic transfer, and some lenders may require additional internal procedures before the loan proceeds become available.

The notary, the lending bank and the parties should therefore coordinate the payment arrangements before the signing date.

PAYMENTS MADE BY FAMILY MEMBERS OR OTHER THIRD PARTIES

The person providing the purchase money is not always the purchaser.

Parents, relatives or other third parties may contribute to the price.

Whenever funds are provided by someone other than the purchaser, the notary should be informed before completion. The legal significance of the payment depends upon the individual circumstances and must be assessed accordingly.

Early disclosure enables the notary to understand the financial structure of the transaction and ensures that the deed reflects the relevant arrangements correctly.

THE ORIGIN OF THE FUNDS

Italian anti-money laundering legislation requires the Notary to apply customer due diligence and to assess the transaction on a risk-sensitive basis. Depending on the circumstances and the level of risk, this may include obtaining additional information concerning the client's economic and financial situation and the origin of the funds used in the transaction.

Where required by the risk assessment, buyers may therefore be asked to provide information or supporting documentation concerning the source of the purchase money, which may derive, for example, from personal savings, the sale of another property, a mortgage, an inheritance, a gift or family financial assistance.

The scope of these enquiries depends on the statutory customer-due-diligence obligations and on the risk assessment applicable to the individual transaction.

COMMON PAYMENT MISTAKES

Many practical difficulties at completion arise because payment arrangements have been organised too late.

Typical problems include arranging an international transfer without allowing sufficient banking time, relying on an instant transfer without checking the bank's operational limits, arriving at completion with a payment method that has not previously been agreed, or failing to provide documentation relating to payments already made.

International purchasers should therefore discuss payment arrangements with the notary well before the signing date.

CAREFUL PLANNING MAKES COMPLETION EASIER

The purchase price is not merely an economic aspect of the transaction. Its payment and documentation form an integral part of the conveyancing process.

For international buyers, advance planning is particularly important because cross-border transfers, different banking systems and local legal requirements may affect the practical organisation of completion.

Where appropriate, funds may be entrusted to the notary in advance and managed according to a written engagement specifying their purpose, recipients and conditions of release.

Where the purchaser wishes the purchase money to remain protected until the deed has been recorded and the relevant Land Registry verification has been successfully completed, the notary's statutory escrow mechanism provides an additional level of protection.

The appropriate payment structure should therefore be agreed with the notary before completion and adapted to the legal and practical circumstances of the individual transaction.