01 Apr What is the earnest money contract and what types exist?

The earnest money contract (contrato de arras) is a private agreement in which the parties establish a reserve for the purchase and sale of personal property. In this context, the buyer makes an advance payment, generally referred to as a “deposit,” which corresponds to a percentage of the property price and typically ranges between 5% and 15% of the property’s value. This amount is subsequently deducted from the total agreed price.

With this payment, the buyer demonstrates a kind of commitment to move forward with the transaction. If either party breaches the agreement, whether the buyer or the seller, a penalty will apply.

This type of contract is regulated by Article 1454 of the Civil Code, which provides that “the contract may be terminated by the buyer agreeing to forfeit the deposit, or the seller agreeing to return it in duplicate.” Likewise, Article 1152 of the aforementioned legal text establishes that “the penalty shall replace compensation for damages and interest payments in the event of non-compliance, unless otherwise agreed.”

What types of deposits are there?There are three main types:

1. Arras confirmatorias: These consist of an advance payment that forms part of the final purchase price, thereby demonstrating interest and willingness to acquire the property. If either party fails to comply with the agreement, the other may demand compensation for damages. The sale is therefore closed.

Although not specifically regulated, Article 1124 of the Civil Code establishes that the affected party may choose to demand compliance with the contract or its termination, with the corresponding compensation.

2. Arras penales: These guarantee compliance with the sales contract. If the buyer breaches the contract, the seller may retain the amount paid as compensation for damages. Article 1152 establishes that “the penalty shall replace compensation for damages and interest in the event of non-performance, unless otherwise agreed.”

3. Arras penitenciales: These are the only types of deposits that allow either party to freely withdraw from the contract, that is, without needing to justify their decision. These are the ones we have outlined in Article 1454, which stipulates that the buyer will lose the amount paid if they decide not to continue, while the seller must return double the amount if they breach the agreement.

Given the binding nature of the earnest money contract and the financial consequences it can have for both parties, especially the completion of the purchase transaction, we at Navarro Llima Abogados recommend that you carefully review these types of contracts before signing them.

If you have any questions about this, please don’t hesitate to contact us; we’ll be happy to help.