In the Spanish Purchase Agreement
Article supplied by Arcos & Lamers
Nowadays most people who grant a purchase contract in Spain know or have a general concept of the down payment. Few people, however, know that there are three different types of deposits, each with 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.
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”)
This is 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 sale, and have agreed on 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, and the aim is to prevent the seller from drawing back if a higher bidder turns up, as well as to guarantee the purchase at the agreed price.
– Penalty Down Payment (“arras penales”)
The “arras” penalty, further to the generic confirmatory role of the contract, has another function: early settlement of compensation for damages in the event of default.
We are dealing with a penalty clause whose function is to replace the compensation of damages in case of non-fulfilment of the contract.
From the perspective we are analysing, 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, 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.
– Double-Rate Deposit (“arras penitenciales”)
The double-rate deposit allows the parties to freely withdraw from the contract, both the seller and buyer. The seller in this case will have to return twice the amount, and the buyer will lose 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 for this in the contract.
When there is doubt between the penalty deposit and the double-rate deposit, preference must be give to the penalising function.
Arcos & Lamers Asociados
Avda. Ricardo Soriano, Marbella
Tel. (+34) 952 775 010
www.arcos-lamersasociados.com
