A deposit contract is a private contract generally used in real estate transactions. The deposit contract allows for a reciprocal guarantee between the buying party and the selling party to ensure transaction conditions that both parties find acceptable and postpones the signing of the sale of the property.
The virtue of the deposit contract is that it operates as a double-edged sword since the buyer advances an amount to the seller, and non-compliance by any of the parties will entail – with few exceptions (mainly, an agreement between the parties or force majeure) – negative consequences for the defaulting party. Usually, if the buyer cannot comply, he loses the deposit amount for the sellers’ benefit. If the non-complying party is the seller, he must pay the buyer twice the deposit amount of the deposit.
A valid deposit contract for both parties must include all the circumstances and conditions associated with the future sale and thus compile the following information:
- A clear description of the property to be transferred: including the registry and cadastral references
- Correct identification of the parties, including name, surnames, ID document, physical address and, in the case of a legal person, references to the origin of the representative’s powers
- Conditions of the transaction:
- Sale price
- Means and conditions of payment
- Physical, registry and administrative status of the property
- Distribution of expenses and tax obligations derived from the sale
- Deposit amount to be delivered by the buying party to the seller. The parties freely agree on the amount, usually determined by a percentage between 10% and 20% of the total sale price. Given the effect of the deposit, the buying party generally prefers to negotiate a higher amount, to establish more severe conditions for the defaulting party
- Time limit to sign the transaction before a notary: the parties will want to limit the time to conclude the sale and register the new ownership in the corresponding property registry. They will do so by signing the deposit contract in a public deed, an executory deed or an authentic document issued by a judicial authority or by the government or its agents according to the regulation. The most effortless procedure is the public deed
- Failure to comply with the terms agreed by either party may constitute sufficient cause for the loss of the deposit (buyer’s breach) or the obligation to deliver double to the other party (seller’s breach). It is, therefore, convenient to establish a comfortable date that allows both parties to comfortably fulfil their obligations (obtaining financing or repairing damages)
- Conditions that will allow any party to withdraw from the transaction with or without penalty. In real estate transactions, it is common for uncertainties to arise regarding essential elements. For this reason, the parties will carry out the background checks they deem necessary during the agreed time; if said inquiries yield unfavourable results, it is common for them to decide to withdraw from the transaction without generating any adverse consequence.
A deposit contract signed by all parties that correctly includes the previously indicated points will provide legal certainty to the future real estate transaction.
Finally, it is necessary to point out that there are three types of the deposit contract.
If you require additional information regarding the deposit contract in Spain,