The earnest money contract is a widely used legal tool in purchase and sale transactions, especially in spanish real estate purchases. This document serves to ensure that the parties fulfill the established agreement and provides a margin of security. It can either secure the sale or compensate for losses in the event of a breach.

However, there are different types of earnest money agreements, each with specific characteristics and purposes. Understanding the differences between them is essential to avoid legal conflicts and protect the interests of the parties involved. Below, we explain the three main types and when it is advisable to use each one:

What is an earnest money contract?

Before analyzing the different types of earnest money agreements, it is essential to understand their essence and function within a purchase and sale contract.

Etymological origin of the earnest money contract

The term “earnest” originates from the Latin word “arra”, meaning “signal” or “guarantee”. This term referred to a sum of money or objects given as a symbol of commitment in an agreement. Over time, this concept has evolved but has retained its essential purpose: to serve as a guarantee in commercial transactions, particularly in the real estate sector.

According to the Catalan Language Dictionary, the term “arres” derives from “arra”, reflecting its historical role as a mechanism to reinforce trust between parties in a contract.

This etymological origin highlights the significance of earnest money as a legal tool for security and commitment, firmly established in modern legal systems.

Thus, the earnest money contract is a legal agreement between a buyer and a seller, in which one party delivers a sum of money as a pledge of commitment to formalize a transaction. This sum not only symbolizes the agreement between the parties but also serves different purposes depending on the type of contract established.

Earnest money can act as:

• Garantia de pagament, assegurant que l’operació es portarà a terme en els termes pactats.
• Indemnització per rescissió, en cas que alguna de les parts incompleixi l’acord, ja sigui per desistiment o per falta de compliment.

This instrument, widely used in real estate transactions, provides security for both parties and establishes the legal framework to handle any contingencies that may arise during the purchase and sale process.

Types of earnest money contracts

1. Confirmatory earnest money contract

Confirmatory Earnest Money Agreements are the simplest form and are considered a demonstration of commitment between the parties in a purchase and sale transaction. In this case, the initial payment is merely a part of the final price, thereby confirming the mutual intent to complete the transaction.

Funció principal

A diferència d’altres tipus d’arres, les confirmatòries:

• They do not involve penalties or withdrawal clauses.
• In the event of a breach of contract, there are no automatic compensations, but the enforcement of the agreement or its termination can be demanded.
• No automatic penalties or compensations are established; any rights or indemnities must be determined through the corresponding judicial process.

In case of non-compliance

If either party fails to comply, the other may:

1. Demand the fulfillment of the contract according to Article 1124 of the Spanish Civil Code.
2. Request the judicial resolution of the contract and claim compensation for damages and losses in accordance with current regulations.

When to use confirmatory deposits?

This type of deposit is ideal when:

• There is a high level of trust between the parties regarding the viability of the transaction.
• Penalties or withdrawal clauses are not considered necessary, as they may complicate the transaction.

Confirmatory earnest money is especially useful for clear transactions, where the primary goal is to reinforce both parties’ intent to complete the sale without additional complications.

Regulation in Catalonia:

In Catalonia, confirmatory earnest money is regulated by Book Six of the Catalan Civil Code, relating to obligations and contracts. According to Article 621-8 of the Catalan Civil Code, if no other type of earnest money is expressly agreed upon, it is considered confirmatory by default.

Article 621-8

Earnest money

1. The buyer’s payment of a sum of money to the seller is understood as confirmatory earnest money, meaning it serves as a sign of agreement and is deducted from the purchase price.

Penitential earnest money must be explicitly agreed upon. If the buyer withdraws from the contract, they forfeit the deposit unless the withdrawal is justified under Article 621-49. If the seller withdraws, they must return double the amount.

In the purchase of real estate, penitential earnest money agreed for a maximum period of six months and deposited with a notary can be registered in the Property Registry. In this case, the property becomes subject to the return of the earnest money. In case of withdrawal, the notary must release the deposit to the appropriate party. The obligation ceases in the following cases:

a) After sixty days from the agreed-upon period, unless the buyer files a prior claim. In such a case, the obligation is automatically canceled.

b) When the buyer withdraws, and the seller provides reliable proof of this.

c) Upon the registration of the sale.

In case of non-compliance:

• By the buyer: The seller may demand the fulfillment of the contract or its termination with compensation for damages.
• By the seller: The buyer may choose to demand the fulfillment of the contract or its termination with the corresponding compensation.

It is important to highlight that, unlike penitential deposits, confirmatory deposits do not allow for the unilateral termination of the contract without legal consequences. Therefore, they provide a different level of legal security to the parties involved in the transaction.

To ensure the correct drafting of a deposit contract, it is essential to seek the advice of an expert lawyer in real estate law, thereby guaranteeing that all parties comply with current legislation.

2. Penitential earnest money contract

Penitential Earnest Money is the most popular option, especially in real estate transactions, due to its flexibility allowing both parties to withdraw. This type of agreement enables a pre-agreed economic compensation in case of withdrawal, ensuring a clear and balanced resolution.

Main function

The primary purpose of penitential earnest money is to serve as:

An economic penalty if one of the parties decides not to proceed with the transaction.

How it works:

• If the buyer withdraws, they forfeit the amount paid as earnest money.
• If the seller withdraws, they are required to return double the amount received as compensation, in accordance with Article 1454 of the Spanish Civil Code.

In case of breach
This type of earnest money provides clarity and security regarding the consequences of withdrawing from the contract. It reduces disputes and uncertainties, as the penalties are clearly defined from the outset of the agreement.

When to use penitential deposits?

They are especially recommended in situations such as:

• Purchase of properties, where the possibility of withdrawal is a common concern.
• When the parties wish to ensure fair economic compensation in case of withdrawal from the agreement.
• In transactions where there are external uncertainties that could affect the ability to execute the contract, such as unexpected financial or legal changes.

Penitential earnest money offers flexibility with security, making it a preferred option in the real estate sector. These conditions allow both buyers and sellers to have peace of mind, knowing that in case of withdrawal, there is an agreed-upon penalty that protects their interests.

Regulation in Catalonia:

In Catalonia, penitential earnest money is regulated by the Sixth Book of the Catalan Civil Code, which governs obligations and contracts. According to Article 621-8.2 of the Catalan Civil Code, penitential earnest money must be explicitly agreed upon. Furthermore, Article 621-49 establishes that if the contract includes a financing clause and the lending institution denies the loan, the buyer may withdraw from the contract and recover the earnest money, provided they justify it with appropriate documentation.

Article 621-49

Third-Party Financing Clause

The buyer’s withdrawal obliges the seller to return any payments received, including, if applicable, the penitential earnest money, and requires the buyer to restore the seller to the position they would have been in had the contract not been concluded, without prejudice to the provisions of mortgage legislation.

If the purchase contract includes financing for all or part of the price by a credit institution, the buyer, unless otherwise agreed, may withdraw from the contract if they document, within the agreed period, the designated institution’s refusal to grant the financing or to accept the buyer’s subrogation of the mortgage encumbering the property, provided the refusal is not due to the buyer’s negligence.

Així, en cas d’incompliment:

• Withdrawal by the buyer: The buyer forfeits the earnest money paid, unless the withdrawal is justified by the denial of financing, as provided in Article 621-49 of the Catalan Civil Code.
• Withdrawal by the seller: The seller must return double the amount received as earnest money to the buyer.

It is important to highlight that penitential earnest money provides greater flexibility to the parties, allowing withdrawal from the contract without the need to claim a breach, while assuming the agreed-upon economic consequences. This option is especially useful in transactions where the possibility of withdrawal is anticipated without subsequent litigation.

The advice of a real estate law attorney is crucial for drafting a penitential earnest money contract that complies with current regulations, avoiding misunderstandings and ensuring the legal protection of all parties involved.

3. Penal Earnest Money Contract

Penal Earnest Money is a legal tool designed to ensure compliance with contractual agreements by establishing an economic penalty for the defaulting party. Unlike penitential earnest money, this type does not allow for withdrawal from the contract but aims to deter breaches and guarantee the execution of the agreement.

Main Function

Penal earnest money serves to:

• Deter contract breaches through the threat of an economic penalty.
• Ensure the execution of the agreement, as the injured party can demand both the fulfillment of the contract and the corresponding penalty.

In this type of earnest money, if one of the parties breaches the agreement:

• They must compensate the other party for the damages caused.
• The injured party can demand the execution of the existing contract, as established in Article 1152 of the Spanish Civil Code.

In case of breach

With penal earnest money, the economic penalty does not exempt the defaulting party from fulfilling the contract. This means that:

• The defaulting party is not released from their contractual obligations.
• The other party can demand both the fulfillment of the agreement and the stipulated penalty, which acts as an additional compensation for damages.

When to use penal earnest money

This type of earnest money is recommended in situations where:

• The fulfillment of the contract is essential for the parties.
• The aim is to prevent any breach by ensuring a penalty for those who fail to meet their obligations.
• The parties do not wish to consider the option of withdrawing from the contract but instead focus on strengthening the legal security of the agreement.

Penal earnest money is especially useful in complex or high-value transactions, where the breach by one of the parties could cause significant economic or legal damages.

Regulation in Catalonia:

In Catalonia, penal earnest money is not specifically regulated by the Catalan Civil Code. However, it can be expressly agreed upon by the parties, outlining the conditions and consequences in case of breach. It is crucial for these clauses to be clearly defined in the contract to avoid future disputes.

In summary, penal earnest money is an effective tool to ensure compliance with contractual obligations by establishing economic penalties in case of breach, without offering the option to withdraw from the contract without consequences.

Professional advice from a catalan or spanish real estate law attorney is essential to include penal earnest money in a contract in compliance with current regulations, avoiding ambiguous or unenforceable clauses. This ensures that penalties are legally enforceable and provide effective protection for all parties.

Summary of the differences between the three types of deposit contracts

Characteristic	Confirmatory	Penitential	Penalty
Function	Confirms the commitment of the parties	Allows withdrawal with a penalty	Penalty without the option of withdrawal
In case of breach	Requires fulfillment or resolution with damages	The withdrawing party pays the compensation (double the earnest money).	Requires fulfillment with agreed compensation
When to use them	Transactions with mutual trust	Real estate purchases or when there is a desire for the option of withdrawal.	Transactions that require maximum assurance of compliance

How to choose the most suitable type of earnest money contract

The decision on which type of earnest money contract to use should be based on the specific needs of the parties involved and the characteristics of the transaction. Each type of earnest money offers different advantages depending on the context:

Penal earnest money: Recommended for ensuring strict compliance with the contract, as it serves as a deterrent through economic penalties.

Confirmatory earnest money: Ideal for low-risk transactions where both parties are confident the agreement will be fulfilled, and no penalties or flexibility are required.

Penitential earnest money: Best for situations where flexibility is needed, as it allows withdrawal from the contract with pre-agreed economic compensation.

• Confirmatory Earnest Money: Ideal for low-risk transactions where both parties are confident of compliance, and no penalties or additional flexibility are required.
• Penitential Earnest Money: The best option when flexibility is needed, as it allows withdrawal from the contract with a pre-agreed economic compensation.
• Penal Earnest Money: Recommended for ensuring strict compliance with the contract, thanks to its deterrent function based on economic penalties.

Why rely on a lawyer specialized in real estate law and property rights?

A lawyer specialized in purchase agreements is key to ensuring that:

The type of earnest money chosen should best match the specific needs of the transaction.

• The contract should be drafted in compliance with current legal regulations, avoiding unclear clauses or future legal disputes.
• The rights and interests of all parties involved should be protected, ensuring a secure and transparent transaction.

Seleccionar el tipus de contracte d’arres adequat pot marcar la diferència en l’èxit d’una compravenda. Comptar amb l’assessorament d’un professional no només ajuda a prendre la millor decisió, sinó que també proporciona la tranquil·litat jurídica necessària per a una operació tan rellevant.

Most common issues with earnest money contracts in Spain

Earnest money contracts are a highly useful tool for ensuring commitment in purchase and sale transactions. However, various issues can arise if they are not drafted correctly or if the terms are not clearly understood. Below are the most common problems associated with earnest money contracts:

1. Confusion between the different types of deposits

One of the most common mistakes is not specifying the type of earnest money (confirmatory, penitential, or penal) in the contract:

• Legal misunderstandings: In the absence of a clear clause, earnest money is considered confirmatory by default according to the law. This can lead to disputes if the parties were expecting conditions associated with penitential or penal earnest money.
• Lack of understanding: Parties often lack knowledge of the legal and economic differences between the types of earnest money, which can result in disagreements in cases of withdrawal or breach of contract.

2. Ambiguous or incomplete drafting

A poorly drafted contract can lead to issues such as:

• Unclear clauses: Conditions for withdrawal or penalties may not be well-defined, leaving room for subjective interpretations.
• Lack of specific penalties: If a specific amount for compensation in case of breach is not established, legal disputes may arise over what each party is entitled to.
• Undefined aspects: For example, in the case of co-owners, if one fails to meet their obligations or does not consent to the formalization of the contract, all sellers may be held responsible, even if the breach is attributable to only one of them. This means that, unless the contract specifies the limits of liability for each party, they may all be required to return double the earnest money. The same applies in cases involving multiple buyers.

3. Non-compliance with the agreed obligations

The most common issues related to non-compliance are:

• Lack of resources to fulfill the agreement: For example, the buyer cannot secure the necessary financing or the seller is unable to formalize the transfer.
• Withdrawal without meeting the agreed conditions: One party attempts to withdraw from the contract without paying the corresponding penalties.

4. Problems with financing

It is common for the buyer to sign an earnest money contract without securing the financing for the purchase, which can lead to:

• Denial of mortgage loan: If the bank denies the financing, the buyer may lose the earnest money paid, depending on the earnest money contract and the applicable legislation.

5. Misinterpretation of the clauses

Conflicts may arise when:

One party interprets that earnest money allows withdrawal, when in fact it was not a penitential earnest money contract.Disagreements arise over which damages and losses are claimable in case of a breach of contract.

6. Clauses contrary to current regulations

Some contracts include abusive clauses or provisions contrary to consumer rights, which may invalidate parts of the contract or lead to legal sanctions.

7. Lack of professional advice

The lack of intervention by a real estate lawyer often leads to:

• Technical errors in the contract, which can be difficult to correct later on.
• Excessive trust between the parties, without anticipating situations of breach or disputes.

How to avoid these issues?

1. Clearly specify the type of earnest money: Explicitly state whether it is confirmatory, penitential, or penal, and include the specific conditions.
2. Clear and detailed drafting: Ensure that all clauses are easy to understand and cover all potential scenarios.
3. Include financing clauses: Add a provision allowing the buyer to recover the earnest money if they fail to secure the necessary financing.
4. Seek legal advice: A real estate contract attorney can ensure that the document complies with regulations and protects the rights of all parties involved.
5. Read and understand the contract: Before signing, it is essential that both parties fully understand their rights and obligations.

With a careful approach and the guidance of a professional, it is possible to avoid these issues and ensure that the earnest money contract is an effective tool for a secure and satisfactory real estate transaction..

Can the failure to return earnest money be a crime?

The failure to return earnest money does not, in itself, always constitute a criminal offense. However, it may acquire criminal relevance if there is evidence of fraudulent behavior, such as premeditated deception or bad faith, that significantly harms the other party. This will depend on the circumstances of the case and the applicable regulations.

Base legal en el dret espanyol

Civil or Criminal Breach?

The failure to return earnest money is generally considered a civil matter, regulated by the Spanish Civil Code:

• Article 1454: In penitential earnest money contracts, if the seller breaches the agreement, they must return double the amount received. If the buyer withdraws, they forfeit the earnest money paid.
• Such breaches are typically resolved through civil lawsuits, demanding either the fulfillment of the contract or its termination with compensation.

When it may constitute a criminal offense

1. Fraud (Article 248): If the seller or buyer acts deceitfully to unlawfully retain the earnest money, it could be considered fraud. For example, if the seller accepts the earnest money without the intention of fulfilling the contract and uses the amount for their own benefit.
2. Misappropriation (Article 253): If a party unlawfully retains the earnest money when it no longer belongs to them, this could lead to charges of misappropriation, particularly if the money should have been returned as per agreement or court ruling.

In such cases, the circumstances and evidence will determine whether the breach has civil or criminal implications.

Practical examples

Civil case:
The seller breaches the contract and refuses to return double the earnest money, citing financial problems. This would be a case of civil liability, not criminal.

Criminal case:
The seller accepts the earnest money knowing they do not own the property or will not be able to fulfill the contract, acting with fraudulent intent to take advantage of the buyer’s money. This act could be considered fraud.

Despite this, it is often observed that the criminal route is improperly used to address issues that should remain within the civil domain, especially in cases of breaches related to purchase agreements with earnest money clauses. This highlights the need to clearly distinguish between criminal law and civil contractual claims to avoid disproportionate use of criminal proceedings.

Judgment No. 417/2015, dated June 30, from the Second Chamber, reinforces this distinction. It establishes that the appropriation of earnest money or deposits as part of the purchase price does not constitute the crime of misappropriation. This is because the amount delivered is not intended for automatic return but rather for return only in the event that the agreement fails. Consequently, the elements required to classify this action as a criminal offense are not present.

Legal procedure to claim the deposit

Civil route:

• File a lawsuit to demand either the fulfillment of the contract or its resolution with the appropriate compensation (Article 1124 of the Spanish Civil Code).

Criminal route:

• File a criminal complaint if there is evidence of fraud or unlawful appropriation. This requires proving the malicious intent of the other party.
• Generally, these cases are treated as contractual breaches under civil law, but the specifics of each case will determine if criminal action is warranted.

The failure to return earnest money is generally a civil matter, but it may acquire criminal relevance in cases of fraud or bad faith. To protect the rights of the injured party, it is crucial to seek the advice of a lawyer specialized in real estate and criminal law, who can evaluate whether the issue involves a contractual breach or a criminal offense.

How to claim earnest money in case of breach or withdrawal

The claim for earnest money depends on the type of earnest money agreed upon (confirmatory, penitential, or penal) and the circumstances of the breach. Below is the process for claiming them, as well as the key steps to ensure an effective claim:

1. Review of the deposit contract

• Identify the type of earnest money: Review the contract to determine whether it is confirmatory, penitential, or penal. This is crucial to understand the rights and obligations of each party in the event of a breach.
• Agreed conditions: Ensure that the contract specifies the clauses related to the return or forfeiture of the earnest money. If there are no clear specifications, the applicable regulations will be considered.

2. Communication with the other party

Before initiating legal action, it is advisable to seek an amicable solution:

• Formal notification: Send a notarial requirement or burofax to the other party, requesting the return or fulfillment of the contract.
• Response time: Provide a legal or reasonable timeframe to receive a response and resolve the conflict.

3. Civil claim

If the amicable solution fails, legal action can be initiated:

A. Judicial procedure

Breach of contract: You can request the forced performance of the contract or its termination with the return of the earnest money and compensation for damages, as per Article 1124 of the Spanish Civil Code.

Withdrawal: If it involves penitential earnest money, you can claim the corresponding amount based on the agreed penalties.

B. Jurisdiction and competence

• Spain: In the case of penitential earnest money, Article 1454 of the Spanish Civil Code regulates the double return of the earnest money or its forfeiture.
• Catalonia: Book Six of the Catalan Civil Code specifically regulates the rights of buyers when the contract cannot be fulfilled, including the scenario of loan denial (Article 621-49).

4. Necessary documents for the claim

• Key Elements for Earnest Money Contracts
• Earnest Money Contract: Must be clear and signed by all parties involved.
• Proof of Payment: Receipts, bank transfers, or other payment confirmations.
• Preliminary Notices: Notifications sent to the other party as a formal requirement.
• Additional Evidence: Any document that demonstrates the inability to fulfill the contract (e.g., loan denial).

5. Statute of limitations

• Spain: The general time limit to claim a contractual breach is 5 years, according to Article 1964 of the Spanish Civil Code.
• Catalonia: The prescription period is 3 years, according to Article 121-20 of the Catalan Civil Code.

Practical advice

• Assessorament legal: Compta amb un advocat especialitzat en dret immobiliari per assegurar que la reclamació es faci correctament.

The claim for earnest money is a process that can vary depending on the type of earnest money agreed upon and the applicable regulations. It is essential to have a clear contract, adequate evidence, and specialized legal advice to protect your rights and ensure an efficient process.

Conclusion

Earnest money is a key element in any purchase agreement, as it establishes an initial commitment that binds the buyer and seller. However, precisely because of its importance, it is essential that the agreement is drafted with maximum care and clarity. This is especially critical when the earnest money represents significant amounts, often 10% of the property’s value, which can have a major economic impact in cases of breach or errors in the contract.

Poorly drafted or misinterpreted earnest money agreements can lead to problems such as misunderstandings over refunds, disputes over unclear responsibilities, and even lengthy and costly litigation. Moreover, the criminal route may be improperly invoked to address issues that belong exclusively to the civil domain, further increasing costs and resolution times.

For this reason, it is crucial to ensure that the earnest money agreement is well-structured and compliant with current regulations, avoiding ambiguities or clauses that might lead to confusing interpretations. This is where the expert advice of real estate lawyers becomes indispensable, ensuring that the document protects the interests of all parties involved and anticipates potential conflict scenarios.

A well-drafted deposit agreement avoids serious problems

Don’t cut corners on this critical aspect of the purchase agreement. An initial investment in professional legal advice can prevent significant financial issues as well as unnecessary litigation that could complicate the transaction. With a solid and clear agreement, risks are minimized, paving the way for a successful and smooth transaction for all parties involved.

The secret to a successful real estate transaction lies in planning and expert advice: protect your future with real estate law professionals.

Sources

Spanish Civil Code (CivEsp):
Earnest money is regulated in Article 1454, which establishes:

• If earnest money is given in a purchase and sale agreement, it is understood to be penitential unless another type is expressly agreed upon.
• In the case of withdrawal, the buyer forfeits the earnest money, and the seller, if they are the one who withdraws, must return double the amount received.
• For further details, consult the Spanish Civil Code.

Mortgage Law:
In real estate transactions, earnest money may be linked to the formalization and registration processes of the sale.

Normativa catalana (Catalunya)

• Catalan Civil Code (CCC):
• Book Six, relating to obligations and contracts, regulates earnest money in the following articles:
• Article 621-8: Defines earnest money as a sum of money paid by the buyer to the seller as a signal of the conclusion of the sale and as an advance on the price. If no other type of earnest money is agreed upon, it is understood to be confirmatory.
• Article 621-49: In real estate transactions, it is specified that if the financial institution denies the loan to the buyer, the buyer may recover the earnest money paid, provided they can document it.
• For further details, consult the Catalan Civil Code.

El pacto de arras y la apropiación indebida

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