Nowadays most people that grant a purchase contract in Spain, know or have a general concept of the DOWN PAYMENT, but few people know that there are three different types of deposit which have each one different legal considerations according to whether we sign one or the other, so it’s important to know what you are signing and the consequences thereof.
The Civil Code sets out the down payment in just one article, Article 1454, which states: “If a down payment is determined in the purchase agreement, the contract may be terminated and the buyer would lose the sum or the seller would have to return twice the amount”.
Jurisprudence has distinguished three types of “Down Payment”, according to the role it has in the contract:
-Confirmatory Deposit (arras confirmatorias)
They are part of the price and its function is only to “confirm” the existence of a contract, that is, that the parties have reached an agreement of sales, agreeing upon the object and the price, which is legally binding on them from the moment such approval of both parties exists, as set out by the general rules.
This kind of deposit means the acceptance of one party and the confirmation of the other parties, and is seeking to prevent the seller to draw back in case a higher bidder turns up, as well as to guarantee the purchase at the agreed price.
The confirmatory deposit neither grants the parties to cancel the contract nor does it comply with the function of early settlement of compensation for damages. The parties may not opt out of the contract waiving the down payment or returning twice the amount. If any of the parties breach the contract, the other party may choose to claim the fulfilment of the contract or the termination thereof, with compensation for damages in both cases (Article 1124). This compensation will be determined taking into account the damage caused by the breach, according to the criteria specified in Articles 1106 et seq. That is, no compensation will be limited to the amount paid as down payment, or its duplicate refund and may be higher or lower depending on the damages caused and the good or bad faith of the defaulting party.
This is the function that should be assumed in the arras, according to the jurisprudence doctrine, in case there is no agreement to the contrary. That is, if a down payment has been made upon signing the contract and nothing has been agreed regarding its function, then the down payment will be a confirmatory deposit.
– Penalty Down Payment (arras penales)
The penalty Arras, furthermore to the generic confirmatory role of the contract, has another function, that is to say, the function of early settlement of compensation for damages in the event of default.
We are dealing with a penalty clause whose function it is to replace the compensation of damages in case of non-fulfilment of the contract.
From the perspective we are analyzing, it is so that if the buyer who has paid a down payment as a penalty deposit, breaches the purchase agreement, and for example refuses to pay the remainder of the full price without any justified reason for it and the seller wishes to fulfil the contract, the seller may either enforce the purchaser to fulfil his obligation, or request the termination of the contract.
If the seller chooses to enforce the contract, such does not exclude him to be able to claim the damages he has suffered, as set out in Article 1124 of the Civil Code. Nevertheless, such damages will have be determined by a judge.
The seller can only claim both the fulfilment of the obligation and the agreed penalty if such has been expressly agreed. These pacts are often set out as the imposition of a penalty for delays.
If the seller chooses to rescind the contract, he will hold the penalty down payment as compensation for damages.
In this case of a penalty deposit, unlike to the double-rate deposit, the decision to enforce or rescind the contract corresponds to the seller. The buyer cannot impose him to accept the deposit as compensation or, in other words, the purchaser cannot be released from his obligation by waiving the down payment.
– Double-rate deposit (arras penitenciales)
The double-rate deposit will allow the parties to freely draw back from the contract, both the seller and buyer. The seller in this case will have to return twice the amount, and the buyer will loose the sum paid.
The double-rate deposit is an optional obligation in which the parties, both the seller and buyer, may be released from their obligations, deciding to comply with another subsidiary obligation.
This is the function that is set out by the Spanish Civil Code in Article 1454 for this kind of deposit, but the jurisprudence doctrine requires the parties to expressly provide so in the contract.
When there is doubt between the penalty deposit and the double-rate deposit, the preference must be give to the penalising function.
Cecilio Sánchez lawyer in Spain.
- Lawyer in Spain, Lawyers in Marbella, Property Lawyer in Marbella, Spanish law firm,