Spain: The “downpayment” (“arras”) in purchase contracts

published on 9 August 2024 | reading time approx. 3 minutes

Although it is common, even in the real estate sector itself, to refer to “downpayment contracts” (“contrato de arras") in transactions with advance delivery of part of the price as security, this term is technically incorrect. These contracts are generally based on a purchase within the meaning of Article 1445 et seq. of the Spanish Civil Code, and the “downpayment” operates as an essential condition or clause of the transaction. Therefore, the correct denomination would be “purchase contract with [downpayment and right of withdrawal (I.), confirmatory downpayment (II.) or penalty downpayment (III.)]”. The three types of downpayments known in the Spanish legal system are detailed below.

1. Downpayment and right of withdrawal (“Arras penitenciales”)

Let us begin with the figure that is most commonly used in practice due to its flexibility, the so-called “arras penitenciales”, regulated in a very concise manner in Article 1454 of the Spanish Civil Code:

If a deposit or down payment has been made in the contract of purchase and sale, the contract may be rescinded and the buyer may agree to forfeit the deposit or down payment, or the seller may agree to return the deposit or down payment in duplicate.

We speak of flexibility because the “arras penitenciales” allow the contracting parties to withdraw from the contract freely and lawfully, without the need to justify any cause. However, the “price” of such withdrawal is the loss of the deposit by the buyer or the duplicate payment by the seller.

2. Confirmatory downpayment (“arras confirmatorias”)

In the absence of specific regulation, the “confirmatory downpayment” operates as an advance payment of part of the price and, as their name indicates, they confirm and prove the perfection and commencement of performance of the contract.

Unlike the “arras penitenciales” (I.), confirmatory downpayments do not give the option to withdraw from the contract and its obligations. In the event that one of the parties decides to withdraw or, rather, to default, the other (performing) party may avail itself of the regime of Article 1124 of the Spanish Civil Code, and may request either performance or termination of the contract and, where appropriate, the corresponding compensation for damages. It is important to note that the advance payment of the price as a confirmatory deposit does not limit the amount of compensation.

3. Penalty downpayment (“arras penales”)

As there is no specific regulation beyond Article 83 of the Spanish Commercial Code, it is an intermediate figure between the two types of downpayment mentioned above.

Penalty downpayments can operate as a penalty clause or “contractual sanction” in the event of non-performance according to Article 1152 of the Spanish Civil Code, replacing the amount paid as a deposit with compensation for damages (substitute penalty downpayment). However, depending on the agreement between the parties, it would also be possible to request contractual performance and compensation beyond the amount fixed as a penalty deposit (cumulative penalty downpayment).

In essence, they act as a double guarantee: they ensure the fulfilment of the contract and provide for immediate financial compensation in the event of non-performance.

4. Catalonia

While this may not be news to some readers, for many others it will be:

Catalonia has its own regional Civil Code which may apply to contracts between two parties domiciled in Catalonia or, frequently, to contracts of purchase of real estate located in Catalonia, although it is also true that its application may be excluded in accordance with Article 111-6 of Law 29/2002, of 30 December, the first Law of the Civil Code of Catalonia.

Where applicable, it should be borne in mind that there is specific regulation, much more specific than that of the Spanish Civil Code, on “arras”. Article 621-8 of Law 3/2017, of 15 February, of the sixth book of the Civil Code of Catalonia, relating to obligations and contracts regulates that the advance delivery of part of the purchase price, as a general rule, will be understood as confirmatory downpayments (II.), while “arras penitenciales” (I.) must be expressly agreed. The mechanism of the “arras penitenciales” is the same, with the exception that withdrawal may be justified, without the downpayment being forfeited when the designated bank refuses the buyer financing or the buyer's subrogation in the mortgage encumbering the property, according to Article 621-49. (This refusal, in any case, must be justified by documentary evidence).

the purchaser, unless otherwise agreed, may withdraw from the contract if he provides documentary evidence, within the agreed period, of the refusal of the designated entity to grant the financing or to accept the purchaser's subrogation to the mortgage encumbering the property [...].
The withdrawal of the buyer obliges the seller to return the price paid to him and, if applicable, the downpayment [...].