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What is an earnest money contract and what types are there?

Do you want to buy a property in Spain? It’s likely that the owner will propose signing a deposit contract, so it’s necessary for you to know what it consists of and what types exist. In this post, we clarify your doubts.

What is a deposit contract? ✍️

A deposit contract can be defined as a private document in which the future buyer and the seller regulate the conditions of the future property purchase, the consequences of non-compliance, and the buyer provides a sum of money to the seller as proof of their intention to buy.

What types of deposit contracts exist? ⬇️

In Spain, we can differentiate three different types of deposit contracts, which are as follows:

1️⃣ Penitential deposit contract

The main characteristic of this contract is that both the buyer and the seller can withdraw from it, assuming the penalty stipulated in the contract. The regulation of penitential deposits is established in Article 1,451 of the Civil Code, which states the following:

“If earnest money or a deposit has been given in the contract of sale, the contract may be rescinded by the buyer losing the earnest money, or by the seller returning double the amount.”

Therefore, if the buyer breaches the contract, they lose the amount of the deposit, and if it is the seller who breaches, they must return double the amount of the deposit.

2️⃣ Confirmatory deposit contract

In this case, the deposit serves as an expression of the binding force of the purchase contract, and if the agreed terms are not met, the party that has fulfilled their obligations can demand that the purchase be formalized and claim compensation for damages. If the other party does not agree, a lawsuit for breach of contract must be filed.

3️⃣ Penal deposit contract

In this case, similar to the previous type, the contract cannot be freely withdrawn from, as is the case with penitential deposits. If the purchase is not completed as stipulated in the contract, the amount to be paid by the defaulting party is regulated. The regulation of the penalty clause is derived from Articles 1,152 and 1,153 of the Civil Code, which state the following:

Article 1152

In obligations with a penalty clause, the penalty shall replace the compensation for damages and the payment of interest in the event of non-compliance, unless otherwise agreed.

The penalty can only be enforced when it is due according to the provisions of this Code.

Article 1153

The debtor cannot be exempted from fulfilling the obligation by paying the penalty, except in cases where this right has been expressly reserved for them. Likewise, the creditor cannot demand both the fulfillment of the obligation and the satisfaction of the penalty, unless this power has been clearly granted to them.

What should the contract of reservation include? 📋

The basic content of a contract of reservation is as follows:

Buyer’s and seller’s information.

  • Description of the property and details of its registration in the Property Registry.
  • Expression of the amount and type of reservation and consequences of non-compliance.
  • Conditions of the sale: formalization date, price, notary before whom the sale will be executed, payment of taxes, payment of sale expenses.
  • Applicable jurisdiction.

What precautions should you take before signing a contract of arras? ⬇️

Signing a contract of arras involves assuming a series of obligations, both for the buyer and the seller, which will depend on the type of arras being signed. To sign and have legal certainty, it is necessary to take certain precautions, such as the following:

1️⃣ Request information about the property

You can request a property report (nota simple) from the Land Registry to verify ownership and any encumbrances on the property. It can be obtained physically at the registry office where the property is located or electronically through the online Land Registry.

2️⃣ Conduct investigations on the owner

If the owner is a business entity, you can request a company report (nota simple) and verify who the administrators are or whether the company has filed its financial statements, for example.

3️⃣ Seek the assistance of an expert lawyer in real estate law

If you want to sign a contract of arras with complete security, it is essential to seek the assistance of a lawyer specialized in Spanish real estate law who can analyze your case, verify the legal situation of the property, and advise you on the content of the arras and the obligations arising from the contract. If you need assistance with real estate investments in Spain, do not hesitate to contact us, and our team of lawyers will help you with all the procedures.

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