The Loan for Use Contract: what it is, and its specifics
What is the loan for use contract?
The loan for use contract is a legal form, long established in law, to temporarily lend an asset to someone, ensuring that it is returned in the same condition.This contract is provided for in the Civil Code from article 1129 to article 1141 where we can find all the details of its drafting. It is established between the lender (the owner of the asset to be lent) and the borrower (the recipient of the lent asset).
In what situations do we draft a loan for use contract?
This type of contract serves, for example, to transfer a property to third parties for a certain period. Imagine you have a house of your own that you will not use for the next 5 years; you could rent it out (and enter into a rental contract), or simply lend it to someone - but in this second case, safeguarding yourself legally by drafting a written contract where you will describe the exact conditions under which you lend your asset: the loan for use contract.What types of loan for use contracts exist?
Any loan of a valuable asset - which we want to temporarily transfer with guarantees of return in good condition - can be subject to the drafting of a loan for use contract. Namely:- Loan for use contract for movable assets (e.g., machines, equipment, etc.)
- Loan for use contract for real estate (e.g., apartment, etc.)
- Loan for use contract for rural properties (e.g., agricultural land, etc.)
What is the loan for use contract for rural property?
A loan for use contract for rural property consists of the temporary transfer of land, or agricultural land, to third parties at no cost. In this case, as with the loan for use contract for real estate, the conditions under which the land is lent, as well as the return deadlines (if any), will be established in advance.
What is the importance of drafting a loan for use contract?
This is a legal way to predefine the rights and duties inherent to both the lender and the borrower. It is, therefore, the simplest and safest legal way to protect the associated assets. By drafting a loan for use contract we are safeguarding against any unforeseen events or deteriorations that may occur to the lent asset. Likewise, we are preparing for possible deadlines for the enjoyment of the asset itself.
What is the duration of a loan for use contract?
The duration of the contract is defined between the lender and the borrower, as there is no predefined term in the law. However, this point of the contract should be well thought out, as article 1130 of the Civil Code tells us that "the contract cannot be concluded for a longer period, and, when it is, it will be reduced to the duration limit of that right." That is, once the previously stipulated period has expired, it will no longer be possible to change it.Still, regarding return deadlines and their exceptions, article 1052 of the Civil Code tells us that if the lender wants to alienate their right or renounce it, "the contract only expires at the normal end of the usufruct." That is, the borrower will only have to return the asset once the period previously defined in the contract has expired.
However, nothing is definitive, as the law provides in article 1140 of the Civil Code that "despite the existence of a term, the lender can terminate the contract if there is just cause."
Can I make a loan for use contract without a term?
Yes, it is possible, as the law provides for the return of the lent asset without a defined term. However, it may not be advantageous for either party. Let's see the possible situations:- The contract is drafted without a defined term but determines the use of the lent asset: the borrower must return the asset to the lender once its use is finished.
- The contract is drafted without a defined term or determination of the use of the lent asset: the borrower must return the asset as soon as it is demanded by the lender.
What are the responsibilities of the lender?
The lender is not liable for limitations of the lent asset, except if they previously take responsibility for it. They will be held responsible for the obligations they undertake when drafting the contract. On the other hand, they are obliged not to prevent or restrict the proper use of the asset by the borrower (article 1133 of the Civil Code).
What are the obligations of the borrower?
The obligations of the borrower are well defined in article 1135 of the Civil Code, and they are:- Preserve the lent asset
- Allow inspection of the asset by the lender
- Not deviate from the terms under which the asset was lent; its purpose must be maintained
- Not use it imprudently
- Accept any improvements the lender wants to make
- Not transfer the use of the asset to third parties, except if authorized to do so
- Immediately notify the lender whenever they are unaware of any threat of danger
- Return the asset at the end of the contract
What happens if the lent asset deteriorates?
The law provides that the return of the lent asset must be made in similar conditions to those in which it was transferred (at the time of drafting the contract), and holds the borrower responsible if there is loss or deterioration of the asset, if and only if, it would have been possible for them to avoid it (article 1136 of the Civil Code).It is also worth highlighting the "duty of maintenance and return of the asset" present in article 1043 of the Civil Code where "In the absence of an agreement, the tenant is obliged to maintain and return the asset in the state in which they received it, except for deteriorations inherent to prudent use, in accordance with the purposes of the contract."
Clauses of the loan for use contract
- Identification of the jurisdiction, date, place, and year of contract conclusion
- Identification of lender and borrower, and their respective signatures
- Identification and detailed description of the asset, and its condition
- Duration of the contract
- Purpose for which it is intended
- Type of liability attributed to the borrower in case of improper return of the asset
- Provision allowing for early termination of the contract
- Obligations of the borrower (e.g., inherent expenses or active guarantees)
- Permission for transfer or prohibition of sub-transfer (if applicable)
- Rights of the lender (e.g., inspection of the lent property, if applicable)
What is the difference between a loan for use contract and a rental contract?
A rental contract implies a rent to be paid to the owner and must be reported to the Tax Authority (AT), while the loan for use contract refers to the free transfer of an asset (although the payment of expenses inherent to it, such as property tax, bank loans, insurance, etc., may be provided for).
Do I have to pay tax to the Tax Authority, or report my loan for use contract to them?
No, the loan for use contract does not require the payment of stamp duty to the Tax Authority, nor its reporting.
Termination and expiration of the loan for use contract
As we have seen previously, the lender always reserves the right to terminate the contract as long as there is just cause (article 1140 of the Civil Code).
As for the expiration of the loan for use contract, it occurs upon the death of the borrower (article 1141 of the Civil Code).
In what situations can the owner return to the lent property before the end of the contract?
In case of abandonment or death of the borrower; or also, in situations of early termination of the contract by the lender due to misuse by the borrower
What to do if the borrower refuses to leave the lent property at the end of the contract?
In the absence of a legal document and in accordance with the law that protects the interests of the lender, a legal action should be filed in court.Conclusion
As we can see, there are numerous situations that can go less well when we lend an asset to someone with the best of intentions. Unforeseen events happen, as do oversights inherent to the fact that we are not taking care of our things - it is part of human nature. Therefore, protect yourself and play it safe! Draft your loan for use contract with all the clauses that will make you feel at ease regarding the asset you are transferring to someone else for a determined period.At minuta.pt you will find high-level legal support so that your loan for use contract is complete and tailored to your needs.
