At Welex, leading law firm in Marbella, we are pleased to explain a topic of great relevance in the field of home buying and selling of properties: the types of contracts for the sale of a property in Spain and the differences between contracts involving the delivery of confirmatory earnest money, penal earnest money and penitential earnest money.
As experts in this area, we understand the importance of understanding the legal particularities and implications of each type of contract in the home buying and selling process. In this article, our leading law firm in Marbella will explore these differences in detail and provide key information to help you make informed decisions when purchasing a property.
Types of contracts for the sale of a property in Spain:
Earnest money contract Contract
If you wish to buy a property in Spain, it is common to be asked to sign an earnest money contract contract known as “Contrato de Arras”, which is an agreement prior to the sale in which a sum of money is given as a deposit or guarantee of the fulfilment of the contract. However, not all earnest money contracts in Spain are the same; there are different types depending on the purpose and the consequences that are to be established. In this article we will explain the difference between confirmatory earnest money, penal earnest money and penitential earnest money.
Confirmatory Deposit Contract in Spain
Confirmatory deposits in Spain are those that are given as part of the purchase price and serve to confirm the existence and effectiveness of the contract in Spain. With these deposits, the parties cannot unilaterally withdraw from the contract, but are obliged to fulfil it. If one of the parties fails to fulfil the contract, the other party may demand compulsory performance or termination of the contract with compensation for damages, which may exceed the amount of the earnest money.
Let us take an example:
Let us imagine that Joseph and Charlie agree to buy and sell a property in Spain for 100,000 euros and Joseph delivers 10,000 euros as a confirmatory deposit, both are obliged to sign the deed before a notary within the agreed period. The amount given as a deposit is a part, as an advance payment, of the total purchase price.
If Joseph does not fulfil the commitment acquired and does not decide to buy the property, Charlie can claim the 100,000 euros from him or terminate the contract, with a claim for damages that would not necessarily coincide with the 10,000 euros paid, as a confirmatory deposit in Spain.
If it is Charlie who fails to sell the property, Joseph can demand the delivery of the property or terminate the contract, claiming the return of the 10,000 euros plus damages in Spain.
Penal Deposit Contract in Spain
The penal deposits in Spain are those that are given as a guarantee of the fulfilment of the contract and which represent a penalty in the event of non-fulfilment. In this case, the earnest money cannot be considered as an advance payment of the price, although it is de facto an advance payment, nor does it give the parties the possibility of withdrawing from the contract. The earnest money, if so expressly established, will be the penalty to be borne by the party in breach of the obligation.
The penal deposits in Spain are an obligation between the parties with a penalty clause in the event of non-performance.
If one of the parties breaches the contract in Spain, the other party can demand compulsory performance or termination of the contract with compensation for the damages caused, which may exceed the amount of the penalty deposit in Spain.
The penal deposits in Spain can be used when the contract of sale is conditional on some requirement or circumstance that may frustrate the deal. For example, if Joseph and Charlie agree to buy and sell a property for 100,000 euros and Joseph hands over 10,000 euros as earnest money, they are both obliged to sign the deed before a notary within the agreed period provided that Joseph obtains the necessary bank financing, for example. If Joseph does not obtain the financing, Charlie can demand performance of the obligation or terminate the contract and keep, for example, the 10,000 euros plus compensation for damages.
If Charlie does not comply, Joseph can demand the delivery of the property or terminate the contract and recover the 10,000 euros plus compensation for damages suffered plus another 10,000 euros that Charlie must return to him as a penalty, for example.
Penitential Deposit Contract in Spain.
Penitential deposits in Spain are those that are given as a promise of sale and that allow the parties to withdraw from the contract as long as they pay the established penalty: the loss of the deposit if they gave it or the doubled return if they received it.
With these deposits, the parties are free to terminate the contract unilaterally without having to justify their decision or pay compensation for other concepts.
Penitential earnest money in Spain is usually used when the purchase contract is subject to a revisable will or conditioned by external factors. For example, if Joseph and Gerardus agree to buy and sell a property for 100,000 euros and Joseph gives 10,000 euros as a penitential deposit, both can withdraw from the contract without any consequences other than the loss or return of the deposit. If Joseph regrets, Charlie can keep the 10,000 euros and look for another buyer.
If Charlie regrets, Joseph can recover the 10,000 euros and look for another property plus another 10,000 euros that Charlie must return to him as a penalty in Spain.
As can be seen, the differences between confirmatory earnest money, penal earnest money and penitential earnest money in Spain are not always clear, they have different characteristics and consequences that should be taken into account when signing a contract for the purchase of a property in Spain.
Therefore, it is important to get good advice from the lawyers and professionals from Welex before handing over or receiving a sum of money as a deposit and to make it clear in the contract what type of deposit is agreed and what effects they have in the event of non-compliance. Do not hesitate to contact our law firm if you wish to know more information about the types of contracts for the sale of a property in Spain.