Buying a flat is one of the most important decisions anyone will ever make. Finding one that you like, that is located where you want and, above all, that you can afford is an uphill battle. The biggest obstacle to making a down payment is often the fear of not being granted the mortgage, so it is very important to know if the contract you are signing includes a clause about what will happen if you do not manage to get financing from the bank.
The earnest money contract is one of the procedures that experts such as Arantxa Goenaga, partner and lawyer at Círculo Legal Barcelona, recommends carrying out to protect the parties involved in the transaction.
Although it is not compulsory, the lawyer stresses that "it is a document that prevents later problems if the seller or buyer backs out". The reasons why the transaction may not materialise are varied, ranging from outstanding debts that the seller has not settled to flaws detected on closer inspection of the property, but the most common is that the buyer may not be able to obtain bank financing.
"The contract must include a termination clause that allows the buyer to recover the deposit if a mortgage is not obtained, as otherwise, they would lose the money invested," adds Goenaga, pointing out that "this is not an insignificant amount, as it is usually around 10% of the property's price".
The most common contracts
Not all earnest money contracts are the same. Goenaga insists that "it is vitally important to know the difference between confirmatory, penal and penitential deposits". In this sense, the lawyer points out that "with confirmatory deposits, the money paid confirms the commitment to carry out the sale, and in the event of failing to do so, no penalty is set". These deposits are the most convenient for the seller, "because it will be the buyer who will have to provide proof of the damage caused and settle it in legal proceedings".
In the case of penal deposits, an amount is fixed, "besides opening the door to a legal claim and compensation for damages," says Goenaga. Penitential deposits are the most common "because non-compliance penalties are very well defined: the amount given as a deposit for the buyer and double that amount in the case of the seller," reveals the Círculo Legal Barcelona spokesperson.
The penitential earnest money contract is, according to Goenaga, "the most balanced", but "it must always take into account certain conditions that allow the money to be refunded". The lawyer gives as an example "a property transaction in which a penitential deposit was made and, as it was not conditional on obtaining the mortgage and the buyer was not granted it in the end, so they lost the deposit".