Earnest Money Contract in Spain: What is, types, FAQs

The earnest money contract is an essential component of the property buying or selling process; it is a legal document that establishes a commitment between the buyer and the seller, serving as a basis for the final transaction and the eventual public deed of sale.

In this article, you will find a complete guide to the earnest money contracts in Spain involved in purchasing or selling a property; we will explain the contracts’ meaning and address frequently asked questions to ensure you safeguard your interests as a buyer or seller. If you are embarking on the thrilling journey of property acquisition or disposal, do not overlook this critical information to enable you to make well-informed and confident choices.

Read on to discover all the necessary information and guarantee a successful property transaction.

What is an earnest money contract? 

The earnest money agreement is an essential private contract in the buying and selling of a real estate property, whereby the buyer and seller formalize a preliminary commitment to purchase and sell; that contract requires the buyer to pay a deposit (an amount previously agreed between the two parties); the seller agrees to deliver the property by the terms and conditions of the contract, thus establishing a firm sales commitment between the two parties. 

This document certifies the amount delivered by the buyer to the seller as a guarantee of contract fulfilment and ensures completion of the sale; it functions as a form of ownership reservation, promoting and guaranteeing the execution of agreements and obligations – this fosters security and confidence for both parties involved in the transaction.

Types of Earnest Money Contracts

There are three types of earnest money contracts in Spain, namely penitential earnest money, penal earnest money, and confirmatory earnest money. We shall explain the differences as follows.

Penitential Deposit Contract

The penitential earnest money contract also called a withdrawal earnest money contract, grants both parties the freedom to withdraw from the contract voluntarily and without obligation. In this contract type, if one of the parties chooses to terminate the agreement, they must pay the exact amount stipulated in the contract beforehand.

If the purchaser fails to abide by the formal terms and decides against purchasing the property, they will forfeit the pre-paid sum. On the opposite, if the owner violates any of the clauses in the formal contract and chooses not to sell, they will be required to return both what they received and an equal amount, hence why it is referred to as returning double the amount received.

If, as is typically the case, the contract concludes successfully, the buyer’s deposit payment will be deducted from the price on the day the public deed of sale is executed.

Confirmatory Deposit Contract

The confirmatory deposit agreement guarantees the purchase of a property by requiring advance payment of the total amount; this contract does not include explicit penalties. If either party fails to perform, the injured party has the right to request the sale or compensation for damages, necessitating a lawsuit.

If the contract does not stipulate otherwise, the earnest money agreed upon is presumed to be confirmatory.

Penal Deposit Contract

The penal deposit contract specifies the amount the purchaser will forfeit if the sale fails due to their breach of contract.

Just like the confirmatory earnest money contract, the buyer has to provide a deposit that will serve as compensation in the event of a breach of contract by the purchaser. It is worth stating that the deposit agreement precludes the seller from pulling out of the sale of their property.

FAQs about the Earnest Money Contract

During buying and selling a property, there are various questions regarding the essential steps and elements. One decisive component is the Earnest Money Contract, which establishes commitments and guarantees between buyers and sellers. This section will answer the most common questions regarding different types of Earnest Money Contracts.

Is it mandatory to sign an earnest money contract?

No, it is not mandatory to sign a deposit contract. Nonetheless, it is recommended both parties commit formally during their purchase and sale procedures to avoid any potential challenges during the process. Before the public deed, all agreements are formalized.

What information does an earnest money contract contain?

The earnest money contract must include several important aspects:

– Personal information for both the buyer and the seller;

– Property details: address, registration information and cadastral reference; if the property has any encumbrances, they must also be included;

– The sale price and payment method; costs for the buyer and seller;

– The amount of the deposit, paid as a guarantee, will be deducted from the final price of the property;

– Furthermore, the execution of the public deed of sale is subject to a maximum time limit.

After signing the earnest money contract, what is the deadline for signing the title deeds?

The time frame for signing the title deeds after signing the earnest money contract is usually three months. Although, it may differ depending on the circumstances and the consensus between the buyer and seller. In most cases, there are approximately 90 days from signing the earnest money contract to complete the transaction. However, if both parties agree, it can be extended up to six months.

For example, if the buyer requires more time to get a mortgage approval, it is usual to request an extension. In such cases, this can be specified in the original contract or in a separate document that should be drawn up by both parties, stating the change in timescale and the reasons why. This new agreed date will also be attached to the original document.

It is mandatory to meet deadlines. Failure to do so could result in a breach of contract, which may lead to the penalties mentioned above.

How much is the deposit?

The amount in an earnest money contract can vary depending on mutual agreement since it is a private document, but, usually, you have to pay a 10% deposit of the total price when buying.

What payment methods are available?

Below, we provide an overview of the most common options.

– Payment through bank transfer: This option necessitates transferring the money from one bank account to another, even if they are not from the same financial institution. The only aspect to consider is the bank commission for the transaction. The contract is considered valid upon the completion of the transfer, typically within 24 hours.

– Payment by cheque: is advised to be conform and nominative to ensure that it can be accredited. The cheque will be blocked in the account for 15 days. This option provides additional security for the transaction.

– Payment by cash: In this instance, it is essential to note that there are legal restrictions.

Is it compulsory to sign the earnest money contract in front of a notary? Can a signed contract be rescinded?

You can sign the earnest money contract without the need to go to a notary, and from a legal point of view, it will have the same value. Nonetheless, signing the document in a notary will provide extra assurance and transparency.

It is feasible to cancel a ratified earnest money contract; however, the provisions and repercussions vary according to the clauses and pertinent legislation. Cancelling an earnest money contract might lead to legal and financial consequences, so it is essential to carefully consider all the implications before committing yourself.

What is the difference between an earnest money contract, a reservation, and a purchase contract?

The primary difference between the three types of contracts is their function and nature. The earnest money, deposit, or reservation are initial agreements that precede the public deed, while the latter is the final and binding agreement that formalizes the transfer of ownership of the property, the taking of possession.

In summary, the earnest money agreement is a crucial element in the home-buying process. It establishes a foundation for the property transaction. We have examined the importance of earnest money contracts and their various types and addressed common queries. A successful transaction in the property market needs to understand the operation of the earnest money contract, its components and its implications for both the buyer and the seller.

At Fortuny Hogares Únicos, we are committed to providing all the necessary legal guarantees, assistance and support in all property transactions.

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