The earnest money contract agreement is one of the most commonly used instruments in real estate transactions in Spain. At first glance, it may seem like a simple agreement, but its legal nature and wording can have very significant legal consequences.
This type of contract is a pre-purchase agreement in which the buyer gives the seller a sum of money as a deposit. Its purpose is to formalize the commitment of both parties while the necessary procedures for signing the public deed are completed.
Our regulations only expressly regulate penitential earnest money (article 1454 of the Civil Code), however, confirmatory and penal earnest money have been configured by our jurisprudence.
There are three main types of earnest money agreements that can be included in a purchase agreement: confirmatory earnest money , penitential earnest money , and penal earnest money . Below, we explain the key differences between them.
1. Confirmatory earnest money agreement
The earnest money deposit is a clear indication that the sale has been agreed upon and that both parties are obligated to fulfill it. The money paid is a down payment on the total price .
If one of the parties fails to comply, the other cannot automatically terminate the contract, but can demand compliance with what was agreed or compensation for the damages caused.
For example, if 5,000€ have been delivered as a confirmatory deposit and if the buyer decides not to proceed, the seller cannot simply keep that amount, but must go to court or reach an agreement to claim damages suffered.
In summary, confirmatory earnest money implies a firm commitment : it does not allow for backing out without consequences.
2. penitential dowry agreement
Penitential earnest money is the most common type of earnest money in a home purchase and is the only one expressly regulated in Article 1454 of the Civil Code . This type of earnest money allows the buyer to withdraw from the contract , but with a financial penalty.
If the buyer backs out, they lose the deposit paid; if the seller is the one who breaches the contract, they must return double the amount received.
Let’s imagine an example: a buyer delivers 10,000€ the buyer pays upon signing a earnest money contract, but then decides not to purchase the property. They will lose that amount. However, if the seller changes their mind, they must return 20,000€.
Therefore, this type of earnest money grants a certain flexibility to the parties involved , in exchange for financial compensation that avoids excessive harm to the other party.
3. Penalties agreement
Penal earnest money clauses are a hybrid of a deposit and a penalty. They serve both to secure the contract and to impose a penalty if one of the parties fails to fulfill their obligations. They are related to the system of penalty clauses established in Articles 1152 et seq. of the Civil Code .
Unlike penalty clauses, earnest money with a penalty clause does not allow for free withdrawal from the contract. If the contract is breached, the aggrieved party can keep the amount paid as a penalty and, in addition, demand performance of the contract or further compensation.
For example, if 5,000€ are agreed upon in earnest money and if the buyer does not appear to sign, the seller may keep those 5,000€ and legally demand that the sale be formalized.
Therefore, choosing between one type of contract or another will depend on the needs and level of commitment of the parties:
- If the aim is a firm and definitive commitment, it is advisable to opt for confirmatory earnest money agreement.
- If the aim is to have the flexibility to withdraw by paying a penalty, then penitential dowry agreement are more suitable.
- If you want to enforce compliance with the contract and penalize non-compliance, penalty clauses are the best option.
If the parties involved do not clearly specify in the contract what type of earnest money agreement is being used, the courts understand that it is confirmatory earnest money agreement, which can generate conflicts, so it is important that it is clearly included in the contract.
