Understanding the deposit contract: a preliminary agreement
Table of Contents (18)
- What are earnest money deposits?
- Are earnest monies really a contract?
- What types of earnest money deposits exist?
- Confirmatory deposits
- What are penitential deposits?
- The penalty deposits
- What do I need to consider when signing the deposit agreement?
- Where are the deposit payments held?
- Breach of commitment
- Post-contract deposit processes before a Notary
- Frequently asked questions about the deposit contract
- Is the deposit contract paid in cash?
- How much is paid in a deposit agreement?
- What type of earnest money contract is the most common?
- The earnest money contract signed by the real estate agency
- Is there any legal recommendation for drafting a deposit agreement?
- Is the deposit agreement signed before a Notary?
- JLA Notaries, deposit contract at Notary
It is one of the documents we receive the most questions about in our notary office in Barcelona and is related to the purchase of a property. But what is the deposit contract? What are penitential deposits? What elements does it contain? Are the deposits signed before a notary? What procedures must be carried out afterwards? We provide answers to all these questions below.
What are earnest money deposits?
In very general terms, we can define "arras" or "earnest money contract" as the deposit or amount paid in advance for the conclusion of a future sale, in which the bases of the future sale deed that will formalise the transaction we wish to carry out are stipulated. It is true that arras can be applied not only in the context of sales but also in relation to other contracts and obligations, but we will focus on the sale of real estate, where it has greater significance and use.
Are earnest monies really a contract?
In the title of this article, we have used the term deposit contract. Generally, this terminology is used and clients and estate agents know it as a contract, but in reality, the deposit is an accessory agreement linked to a main business or contract, such as the sale, in relation to which it will fulfil one of the three functions of the deposit that we will see later.
Through this agreement, as we have indicated, a part of the price is paid, deducted from the total amount of the final transaction, creating a binding agreement between buyer and seller.
What types of earnest money deposits exist?
According to the case law established by the Supreme Court, three different types are recognised in Spain. Each of them has different legal consequences for you as the signatory.
Confirmatory deposits
Confirmatory earnest money is intended to reinforce the existence of the contract, constituting a sign or proof of its conclusion, or representing a principle of execution, as indicated by the Supreme Court Judgment of 11 November 2010. In this case, the loss or double refund of the earnest money is not contemplated; however, in the event of non-compliance, the parties may demand its fulfilment or termination of the sale, without prejudice, where appropriate, to compensation for damages, as derived from article 621-37 of the Catalan Civil Code.
What are penitential deposits?
Penitential or Penitentiary Deposits: This type of deposit is the most common, and is covered in article 1454 of the Civil Code, which states that “if a deposit or earnest money has been paid in the purchase and sale contract, the contract may be rescinded with the buyer agreeing to forfeit it, or the seller to return double.”
In this case, these deposits can be understood as a fine or penalty in the event of not signing the future contract.
The process established by the penitential deposit contract is as follows: the prospective buyer pays the deposit amount and if subsequently the seller does not want to proceed with the sale, they must return double the amount received to the buyer. If it is the buyer who does not want to acquire the property, they will lose the money paid.
It is important to know that penitential deposits must be expressly agreed upon in the penitential deposit contract; they are not presumed, even if the agreement refers to article 1454 of the Civil Code, as established by the Supreme Court ruling of 1 December 2011.
The penalty deposits
Penalty deposits are similar to penitential deposits, as they involve the loss or double return of the deposit in case of breach. However, penalty deposits, which are lost if the penalty deposit contract is breached, do not allow withdrawal from the contract, unlike penitential deposits which are the only ones that allow the contract to be resolved or withdrawn from, through the loss or double restitution. Penalty deposits are regulated in articles 1152 and 1153 of the Civil Code.
Bear in mind that both penalty deposits and penitential deposits must be stipulated clearly and evidently, as otherwise, they will be understood to be of the nature of confirmatory deposits.
What do I need to consider when signing the deposit agreement?
When you go to sign the deposit agreement, you must take into account certain aspects that you cannot overlook, due to the great significance they may have at a later time, mainly in the purchase contract.
- What type of deposit you are signing. As we have already mentioned previously, in most cases these are penitential deposits, but this must be expressly stated.
- Amount of the deposit. The amount is important. Firstly, because in penitential deposits, they can be lost or returned doubled. Secondly, because this amount will be deducted from the price of the future purchase. It is also essential that you keep, and even attach to the deposit, the payment receipt where the respective account numbers are recorded.
- The property and its encumbrances. The property must be described and it should be stated whether it has encumbrances or not, and that it will be delivered free of any debt or charge. It may also be advisable to attach a copy of the simple note from the registry, where all this information appears.
- The expiry of the deposit. The deposit usually includes a deadline to sign the purchase deed. If the purchase is not signed within this period, the deposit will be lost, without prejudice to the possibility of extending it for a longer period afterwards.
- Agreement on the provision for financing by a third party. This point is important if the buyer intends to obtain financing, for example, through a mortgage, to acquire the property. The Civil Code of Catalonia states in its article 621-49 that «1. If the purchase contract provides for the financing of all or part of the price by a credit institution, the buyer, unless otherwise agreed, may withdraw from the contract if they documentarily justify, within the agreed period, the refusal of the designated institution to grant the financing or to accept the subrogation of the buyer in the mortgage encumbering the property, unless the refusal is due to the buyer's negligence. 2. The buyer's withdrawal obliges the seller to return the price that had been delivered to them and, if applicable, the penitential deposit, and obliges the buyer to leave the seller in the same situation as if the contract had not been concluded, without prejudice to what is established by mortgage legislation.»
It is therefore necessary:- The provision of such financing in the deposit by the buyer. It is enough to mention the intention to obtain financing.
- That the refusal of the institution to grant financing is accredited. It would be advisable for the parties to agree in the contract on how to prove this. A single certificate from the corresponding institution refusing to grant financing would suffice, but it may be agreed that two or three certificates from different institutions are necessary.
- That the refusal to provide financing is not due to the negligence of the buying party, for example, because the interested party has not submitted the documentation in time and form.
- Is an agreement necessary? If the deposits are subject to Catalan law, it would be enough to mention the provision to obtain financing. In this case, article 621-49 applies, unless it is expressly agreed that it will not apply. In the case of common law, it will be necessary for this clause to be expressly agreed.
In the event of not obtaining financing, the buyer will not lose the deposit for being unable to complete the purchase, and it must be returned to them, but the buyer will be obliged to leave the seller in the same situation as before signing.
Where are the deposit payments held?
The buyer has to pay a sum of money as a deposit, but who is the deposit paid to? This is a question you don’t usually ask at the office. There are several possibilities:
- It is given to the seller. This is the first option. Handing over the deposit directly to the seller, who will deduct it from the price of the future sale. Also, in case of breach by the buyer, they will lose the amount of the deposit in favour of the seller. This may cause some distrust on the part of the buyer, but there are other options.
- It is given to the estate agent. When an estate agent is involved, it is usual for the agency itself to hold the deposit and, after the sale, hand it over to the seller. Also, in many cases, it will be used to cover their own fees.
- It is deposited with a notary. As a last resort, there is always the option of making a deposit with a notary, which offers more confidence to the parties. In this case, the notary will transfer the deposit to the seller when the deed of sale is signed.
Breach of commitment
With the agreement signed in any of its variants, the situation may arise that one of the parties breaches it. In both penitentiary and penal agreements, the amounts stipulated therein must be paid.
In the case of confirmatory agreements, it is different; the complying party may demand performance or request compensation for damages and losses.
But how to prove the breach? A very simple option is to draw up a notarial record of said breach. For example, if the parties have arranged to meet at the notary's office to sign the sale and purchase agreement and one of the parties does not attend, a record of non-appearance of the other party can be drawn up at that time, provided the interested party so requests.
Post-contract deposit processes before a Notary
Once the deposit agreement has been signed, which is almost always done privately to avoid increased costs, the next step must be formalised: this is the deed of sale which must be carried out at a notary’s office. Our Notaries can assist you and manage it if you need to process one. If you need to know the documents required for the deed of sale, you will find them here:
This is the moment when the change of ownership takes place, the keys are handed over and the remaining part of the amount is paid. That is, it is the official and specific moment when the transaction is carried out and formalised.
If you want to learn more about the process of buying a home, we also recommend the following reading:
Frequently asked questions about the deposit contract
Furthermore, there are a series of questions that our clients usually ask regarding this topic, which we would like to address.
Is the deposit contract paid in cash?
The deposit is paid at the signing of the deposit contract and the method of payment will be agreed upon beforehand, and can be made in cash, cheque (nominative and certified cheques are recommended) or bank transfer, the latter being the most common. The cash limit in a deposit contract between private individuals is €2,500; however, if it involves a businessman or professional, the payment is limited to €1,000.
A bank transfer is recommended to avoid problems and fraud.
How much is paid in a deposit agreement?
The amount to be paid in a deposit agreement is freely agreed between the buyer and seller. However, the most common is that it is 10% of the sale value of the property. This amount will be deducted from the final price of the house.
What type of earnest money contract is the most common?
The penitential deposit contract is the most common, as it allows either party to withdraw if necessary, although the agreed compensation must be paid.
The earnest money contract signed by the real estate agency
The deposit contract, an advance on the purchase of a property through an estate agent, can be signed entirely at the agency. However, it is advisable to sign before a Notary, especially in situations where the time or amounts paid are significant. Likewise, when you want to have the greatest possible guarantees in any payment or you distrust third parties and seek a neutral figure, the Notary is the most suitable option.
Is there any legal recommendation for drafting a deposit agreement?
At JLA Notarios we recommend that the deposit is always expressly agreed upon with a penitential character and that the contract precisely sets a deadline for the fulfilment of the deposit and the signing of the deed of sale at the notary’s office.
We also recommend that it is stated that the property being sold is up to date with the payment of all expenses and taxes that correspond to it and that the property complies with all the requirements demanded by all applicable legislation of any kind.
Is the deposit agreement signed before a Notary?
Knowing what a deposit agreement is is essential to understand what is being endorsed. Although it can be done privately, going to a Notary provides extra security when signing. For this reason, when asked whether the deposit agreement should be signed before a Notary, the answer is that it is the most advisable option. Understanding this document is the most recommended for you, and the Notary is a legal figure who will inform you in detail so that you make the best decisions according to your circumstances, not only regarding the previous process but also the consequences of non-compliance, the income to be declared in the IRPF, or the loss affecting this tax. Furthermore, their signature guarantees that the property is free of encumbrances and provides legal security to the deposit agreement. Therefore, we await you at our Notary office to offer you security in this procedure and advise you at every moment. However, we also want to note that the most common practice, to reduce costs, is to sign the deposit agreement privately and then sign the purchase deed at the notary’s office.
JLA Notaries, deposit contract at Notary
If you need to sign a deposit contract before a Notary or a deed of sale, contact us at the email bcn@jlanotarios.com, by entering the contact form on our website or by calling 93 159 17 62.
We can process your deed of sale or your deposit deed if you come to sign at our notary office on Avenida Diagonal in Barcelona. We will be happy to assist you.
