What is the difference between withdrawal, confirmatory and penalty deposits (“arras”)? Which suit the buyer?

Question

José Manuel Alburquerque · Accepted Answer

A confirmatory deposit (“arras confirmatorias”) is a payment on account of the price that proves the sale has been agreed, so neither party can back out without breaching the contract. A withdrawal deposit (“arras penitenciales”) allows either party to withdraw, the buyer by forfeiting what they paid and the seller by paying back double, unlike a penalty deposit (“arras penales”), which is a penalty for the party in breach and gives no right to back out. In Catalonia, unless the contract expressly states that the deposit is a withdrawal deposit, the law treats it as confirmatory. A buyer who wants to secure the flat is usually better off with a confirmatory deposit, whereas one who needs a way out is better off with a withdrawal deposit. If the buyer is relying on a mortgage, what protects them, whichever type is used, is a financing clause in the contract. What each type does A confirmatory deposit is part of the price paid in advance and confirms that the sale has been agreed. If one party fails to perform, the other can demand that they complete the sale or terminate the contract, that is, cancel it, with compensation for any losses proved. The amount paid is neither a cap nor automatic compensation. A withdrawal deposit gives both parties the right to withdraw at a price fixed in advance. For example, with a price of 300.000 euros and a deposit of 30.000 euros, a buyer who withdraws loses those 30.000 euros. A seller who withdraws must pay back 60.000, the 30.000 received plus another 30.000. A penalty deposit is a penalty for breach, not a price for withdrawing. The party in breach forfeits it or pays its amount, as agreed. In general, the penalty replaces compensation for the losses. The party who receives it can only demand performance of the contract as well if the contract clearly allows it. What the law says in Catalonia The “Código Civil de Cataluña”, the Catalan Civil Code, treats the money the buyer hands over to the seller as a confirmatory deposit, unless it is expressly agreed that it is a withdrawal deposit. That is why someone who signs a deposit agreement (“contrato de arras”) without stating what type of deposit it is cannot back out by forfeiting the down payment. The seller can demand that they buy or claim damages from them. Nor can the seller escape by paying back double. The name given to the deposit is not decisive, because the courts look at what the contract says. Many of the standard forms used by estate agents cite Article 1454 of the Spanish Civil Code (“Código civil”), which governs withdrawal deposits in the rest of Spain. If the flat is in Catalonia, that reference does not change the applicable law, but it can serve as an express agreement if the wording makes it clear that either party can withdraw by forfeiting the deposit or paying back double. In the rest of Spain there is no equivalent written rule, but the “Tribunal Supremo”, Spain's Supreme Court, interprets withdrawal deposits restrictively and, in case of doubt, treats them as confirmatory. Which type suits you The law does not say. It depends on your situation: If you want to secure the flat and have your financing in place, a confirmatory deposit protects you more, because the seller cannot walk away by paying back double if a better offer comes along. In return, it also obliges you to buy. If you need a way out, for example because you depend on selling your own flat first, a withdrawal deposit suits you, although backing out will cost you what you paid. Bear in mind that the seller will also be able to withdraw by paying double, a real risk when prices are rising. If you are offered a penalty deposit, read it carefully, because depending on how it is worded it may allow the other party, as well as collecting the penalty, to demand that you buy. Whatever the type, it is advisable to add to the contract conditions that protect you. If you are relying on a mortgage, what protects you is a financing clause, which works with both types of deposit.