In Spain, signing a deposit contract as part of any property transaction is common practice. This type of contract reflects different levels of commitment depending on the kind of obligations it contains, with three different types of deposit:
- Confirmatory deposit
- Penal deposit
- Penitential deposit
Depending on the type of deposit, its effects will be different for the parties.
However, whatever the type of deposit chosen, there are no obligations regarding its amount, so the parties are free to determine it.
Confirmatory deposits, an advance payment of the price
The purpose of the confirmatory deposit is to confirm the parties’ interest in concluding the contract of sale through the payment by the buyer of part of the agreed final price.
The amount paid in advance as a deposit is deducted from the final purchase price.
This deposit arrangement lacks provisions for contract termination by either party or penalties in case of non-performance.
Nonetheless, the confirmatory deposit amounts will be refunded if either party withdraws from the sale before the contract’s finalization. The party who experiences the contract termination (buyer or seller) may seek contract enforcement or damages compensation.
Penalty deposits, a guarantee of performance
The figure for the penalty deposit is very similar to the previous one. It is an advance payment of the agreed price through a contract that does not contemplate the possibility of cancelling the contract or any penalty for non-fulfilment.
Therefore, if the buyer withdraws from the sale, he loses the deposit he has paid.
As in the case of earnest money, the party who suffers the cancellation of the contract (the buyer or the seller) can demand the performance of the contract or compensation.
Penitential earnest money, the penalty for non-performance
Penitential deposits are expressly provided for in the Civil Code
The Civil Code explicitly includes provisions for penitential deposits, which have a distinct feature that sets them apart from confirmatory and penitential deposits. They allow the parties to withdraw from the agreement by paying a penalty. As per Article 1454 of the Civil Code:
…the contract may be rescinded by the buyer agreeing to forfeit them, or by the seller agreeing to return them doubled.
Therefore, if one of the parties decides to terminate the earnest money contract, it must hand over to the other party the amount initially agreed:
- If it is the buyer, the seller will keep the amount paid as deposit
- In the case of the seller, he must hand over to the buyer the amount of the deposit in duplicate: the first as a refund of the deposit, the second as a penalty.
When signing a sale and purchase agreement, depending on the purposes of each of the parties, one or the other form of deposit will be used. The wording of the contract will determine the consequences for each of them.
Lauriane Moreira
If you require additional information regarding the confirmatory, penal and penitential deposits in Spain,
