What is penitential earnest money and how does it work in a home sale?

When you find the ideal home or a committed buyer, the natural next step is usually to sign an earnest money contract. However, not all earnest money contracts are the same. Of the different types that exist in Spanish legislation, penitential earnest money is the most common and offers the greatest flexibility if either party decides not to proceed with the transaction.

What does penitential earnest money consist of?

Penitential earnest money (also known as a withdrawal deposit) is a sum of money that the buyer delivers to the seller as a reservation for the property.

Its main characteristic is that it allows either party to freely withdraw from the contract, without the need to justify the decision or go to court, by paying a pre-established penalty.

It is the only type explicitly contemplated in Article 1,454 of the Civil Code, which establishes the main rules of the game in case of withdrawal.

What happens if the agreement is broken?

The economic impact of the withdrawal depends on who makes the decision not to sign the final deed of sale before a notary:

• If the buyer withdraws: They lose the entire amount delivered as a deposit or reservation.
• If the seller withdraws: They must return double the amount received to the buyer.

• Practical example:

  If €10,000 is agreed upon as penitential earnest money:

  • If the buyer decides not to buy, they will lose those €10,000.
  • If the seller decides not to sell, they will have to deliver €20,000 to the buyer (the €10,000 received + another €10,000 as a penalty).

  Keys to drafting a valid penitential earnest money contract

  For the deposit to be penitential in nature, it must be explicitly stated in the document. Case law indicates that if the contract is ambiguous or does not cite the corresponding article, the deposit will be considered confirmatory by default (which does mandate the fulfillment of the contract).

  To avoid legal misunderstandings, ensure the document includes:

  1. Express citation of the law: Explicit mention of Article 1,454 of the Civil Code.
  2. Full identification: Personal details of the buyer and the seller.
  3. Property details: Address, land registry reference, and encumbrances (if any).
  4. Terms of the sale: Final agreed price, maximum deadline for signing at the notary office, and distribution of transaction costs.
  5. Exact amount: The amount set as earnest money (usually between 5% and 10% of the total price).

  Advantages for the buyer and the seller?

  • Flexibility: It provides a way out if an unforeseen personal, family, or financial event arises before the final signing.
  • Legal certainty: The economic penalty is fixed from the outset, avoiding legal disputes to terminate the contract.

Ana Reche CEO

Ana Reche es CEO en Grupo Miraalmería.

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