Deposit contract: what it is, types and terms

Introduction

The deposit contract is a private document in which the parties agree to reserve the purchase of real estate. In this case, the buyer makes an advance payment known as a deposit, equivalent to a percentage of the price of the flat. Subsequently, this deposit is deducted from the agreed purchase price.When paying this amount, the party wishing to acquire the property makes clear their intention to continue with the process. If both parties fail, that is, they don't buy or sell the flat, there would be a penalty.

It is regulated in Article 1454 of the Civil Code, which states that “the contract may be terminated by the buyer by foregoing the deposit, or by the seller by returning twice the deposit". In other words, the seller pays twice the penalty if they do not comply. Article 1152 of the same code may also apply: “the penalty shall replace the compensation for damages and the payment of interest in the event of non-compliance, if nothing else has been agreed”.

Types of deposits

There are three types:

• Confirmation deposit (arras confirmatorias): consists of a partial payment of the final purchase price to guarantee compliance. If any of the parties fails to comply with its obligations, both parties may claim the reparation as compensation for damages. Although it is not explicitly regulated, article 1124 of the Civil Code states the following: “The injured party may choose between demanding compliance or terminating the obligation, with compensation for damages and the payment of interest in both cases. It may also request termination, even after opting for compliance, when the latter is impossible”
• Earnest money (arras penales): guarantees compliance with the purchase agreement signed by the buyer and seller. If the buyer does not comply, the seller can withhold the earnest money, demand compensation or request compliance. If the seller does not comply, the buyer may request double the payment or simple compliance. It is not regulated by the Civil Code and is less frequent.
• Conditional deposit (arras penitenciales): this is the only case in which a breach of contract is permitted by either party, without the need to provide a reason. It is the only one that is explicitly regulated in the Civil Code, specifically in Article 1454: “the contract may be terminated by the buyer by foregoing the deposit, or by the seller by returning twice the deposit".

In any case, deposit contracts always have certain information:

• Full names of the buyer and the seller.
• Details about the property: location, registry details, possible liens...)
• Deadline for signing the purchase contract after the deposit.
• The price of the property, as well as the payment method.
• The amount of the deposit paid after the deposit contract is signed.

In addition, the contract may specify what type of deposit contract will be signed (confirmation, earnest money or conditional), include other clauses and be signed by the buyer and seller.

Timelines for deposit contracts

There is no specific period regulated by law, although it usually takes 90 days.This type of amount is usually chosen because it gives time to complete all the steps needed during the purchase process. Other factors are usually considered when calculating this period. For example, if the property has any problems with liens, problems with ownership or there is a mortgage involved; it is quite likely that this process will be delayed for longer.

Before signing a deposit contract, both parties should make sure they understand each clause and there are no misunderstandings. To ensure this understanding, it is highly advisable to seek the advice of an expert. It is advisable to observe the contract conditions: if not, penalties may be incurred, depending on the type of deposit (earnest money, conditional and confirmation).

As a result, it is a contract of great significance because it entails a commitment between the parties, the buyer and seller, which results in relevant rights and obligations.

If both parties have any questions, there is paperwork to complete or unforeseen events, it is possible to request an extension of this contract. It usually has to be agreed by both parties, unless there is something specified in the contract previously. In any case, it is best to talk to the other party and try to reach a beneficial agreement for both parties. This will avoid unnecessary complications.

Now that you know more about deposit contracts, the types and the timelines involved; go into CaixaBank and get all the information on the economic market and our mortgages.