Down payment or home reservation contract

You are at that moment, when you have found “the house”, right?

Not in vain you have typed in the search engine of your internet browser “down payment (A down payment is knowed in Spain as “Arras”), security deposit or reservation, which is better?

The seller said “well, make up your mind, call me and we will sign something, to reserve it”. But, what is this something that the seller is talking about?

The decision to invest in a property, house or premises, is a very important decision because of the effort involved. Normally everyone is clear that an amount must be paid as a down payment.

However, in general it is not known which are the rights that are obtained and specially, the obligations that are assumed with that down payment.

First of all, it is clear that searching for the information on the Internet, usually leads, rather, to misinformation.

There are on-line, multitude of models of contracts related to the sale and purchase of Real Estate. But to find the one that best protects your interests, you should contact a lawyer who will find a personalized solution for your investment.

Also, if you are a buyer, you should not be satisfied with the advice provided by the Real Estate Agency. The Real Estate agency’s client is the seller, and in general terms, it is those rights that the agency tends to protect.

Home Reservation Contract

By means of the housing reservation the buyer delivers an amount on account of the price agreed for the sale. On the other hand, the seller commits to the delivery of the house. Both parties have already agreed on the sale.

Usually, these contracts are proposed by builders or Real Estate agents, who are looking for a direct sale, with no opportunity for the buyer to withdraw from the contract.

The reality is that housing reservations constitute true sales and purchases. They entail an obligation to sell to the seller and an obligation to buy from the buyer.

This obligation to buy and sell also applies to homes that have not yet been built or are under construction. The seller is obliged to complete the construction with a series of technical and habitability characteristics. The buyer is obliged to pay the agreed price, generally subject to several instalments.

Therefore, from the moment the “reservation” document is signed, the obligations of a purchase-sale are assumed. If you do not have financing, or you have doubts, do not sign a “reservation”, because it implies the purchase and there is no turning back.

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Down payment

Regarding Down payment, “Arras”, we will begin by explaining that they are not a contract, but a covenant.

It is a “bond” to deliver a thing to the other contracting party.

It seeks, therefore, to ensure the fulfillment of an obligation, between the party that delivered and the party that received.

Its legal regulation is scarce, contemplated in a single article of the Civil Code, within the chapter on sales and purchases in general.

There are three types of arras, confirmatory, penal and penitential, and opting for one or the other implies different rights and obligations:

Confirmatory “arras”:

First of all, we attend to the confirmatory arras, with identical consequences to the reservation agreement.

With a contract of confirmatory arras, the purchase (or sale as the case may be) of the property is being committed by the party. Serving the amount delivered as confirmatory arras, of advance payment of the agreed price.

According to our doctrine, if an arras contract is signed and the type of deposit is not specified, it will be considered confirmatory.

If the other party does not comply with its obligation, it will be possible to demand forced performance or termination with damages. Normally, this situation implies going to Court.

Penalty arras:

We continue with penal arras. These are actually confirmatory arras or a reservation of the property to which a “penalty” is added.

Therefore, if you are a seller and you have no doubts about the offer, it is convenient to sign a penal deposit. They ensure the sale of the house and also if the buyer defaults, a compensation.

On the other hand, if you are a buyer, this is the least convenient of all the possibilities. They force you to buy the property and the seller has the right to collect the full price and retain the amount paid.

Penitential arras:

Finally, the penitential arras, have their “raison d’être” in the lawful contractual withdrawal. They appear in article 1454 of the Civil Code. They are a “promise” of sale, which allow both the seller and the buyer to withdraw from the sale.

Of course, the withdrawal has consequences. If you are a seller and in the end you do not want to sell, you will have to return double the amount received as arras. If you are a buyer and you finally decide that you do not want to buy, you will lose the money given as arras. If they are properly drafted, in case of withdrawal, we will avoid Courts, as they are generally admitted by our jurisprudence.

Conclusions

We conclude that the most Solomonic solution, in terms of compromise, is the penitential arras.

However, if you are clear about your decision to sell or buy, then the reservation or the confirmatory arras are a good alternative.

Whatever the case may be, it is advisable to consult with your advisor, as each legal transaction is unique.

If this article has been of interest, we also suggest you to read the following article published on our website: What are the options when an obligation is breached?