Deposit Contract: Types, Risks and How to Protect Yourself When Buying a Property

The signing of a deposit contract is usually one of the most important —and also most delicate— moments in any real estate transaction. Although many people see it as a simple preliminary step before the purchase, it can actually have very significant economic and legal consequences.

Poor drafting, unclear deadlines, or inadequate regulation of withdrawal rights can end up causing disputes, loss of the amounts paid, or even legal proceedings.

For this reason, before signing any document, it is advisable to clearly understand what deposit agreements are, the different types that exist, and the legal differences applicable in markets such as Madrid and Barcelona.

What is a deposit contract?

A deposit contract is an agreement commonly included in real estate purchase transactions whereby one of the parties pays a sum of money as a deposit or guarantee for the transaction.

In practice, it serves to:

• Reserve the property.
• Formalise the purchase commitment.
• Regulate the consequences if either party breaches the agreement or decides to withdraw.

Although it is normally signed before the public deed, its legal effects may be fully binding.

In addition, deposit amounts are usually significant —typically between 5% and 10% of the property price— meaning that any mistake may have a substantial financial impact.

 

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Types of deposits

One of the most common mistakes in property transactions is assuming that all deposits work in the same way. They do not.

There are three main types of deposits, and each has different consequences.

Confirmatory deposits

These are the most common when the contract does not specify otherwise. Their purpose is to confirm that the purchase agreement exists and that the amount paid acts as an advance payment on the purchase price.

What happens if one party breaches the agreement?

The other party may:

• Demand compulsory performance of the sale.
• Terminate the contract and claim damages.

In other words, they do not allow the parties to freely withdraw from the transaction.

Penitential deposits

These are the best known in real estate practice because they allow either party to withdraw from the contract.

They are regulated under Article 1454 of the Spanish Civil Code and must be expressly agreed.

Consequences:

• If the buyer withdraws, they lose the deposit paid.
• If the seller withdraws, they must return double the amount received.

Precisely because of these economic effects, it is essential that the contract clearly states that the parties intended to agree on penitential deposits.

Penalty deposits

These function as a penalty clause. They do not grant a right of withdrawal but instead establish a financial penalty in the event of breach.

In certain cases, in addition to the penalty, the compliant party may also legally demand completion of the sale.

Main risks when signing a deposit contract

Many real estate disputes do not arise at the time of signing the public deed, but rather weeks earlier, during the deposit stage.

These are some of the most common issues.

Failing to clearly define the type of deposit

This is the most frequent risk.

If the contract uses ambiguous expressions such as “deposit” or “arras” without specifying their legal nature, different interpretations may arise regarding whether there is a right to withdraw.

And this often ends in conflict.

Mortgage financing problems

One of the most delicate scenarios occurs when the buyer pays the deposit and the bank subsequently refuses the mortgage.

If the contract does not include a suspensive condition linked to financing approval, the buyer could lose the amounts paid.

That is why it is essential to regulate this point correctly before signing.

Unclear deadlines

A lack of precision regarding essential aspects of the transaction may lead to breaches that are difficult to interpret, especially concerning:

• The deadline for signing the deed.
• Obtaining documentation.
• Cancellation of charges or encumbrances.
• Transfer of possession.

Charges or registry issues

Before signing a deposit contract, it is advisable to verify:

• Actual ownership of the property.
• Outstanding mortgages.
• Attachments or embargoes.
• Urban planning restrictions.
• Community debts.
• Registry limitations.

Many issues appear too late, when money has already been paid and commitments assumed.

Differences between deposit contracts in Madrid and Barcelona

This is where legal advice becomes particularly important, because the regulations are not exactly the same.

• In Barcelona (and throughout Catalonia): The Catalan Civil Code applies. Article 621-8 clearly establishes that, if nothing is specified, deposits are considered confirmatory. For them to be penitential, this must be expressly agreed. This provides greater certainty that the transaction will proceed successfully.
• In Madrid (Common Law territory): The Spanish Civil Code applies. Although case law generally interprets deposits as confirmatory in case of doubt, simply referring to Article 1454 of the Civil Code without clear drafting may generate interpretative disputes. Therefore, in Madrid it is even more crucial that the contract is drafted by a professional in a way that leaves no room for doubt.

How to protect yourself before signing a deposit agreement?

The best protection does not come after a dispute arises, but before signing. Some essential recommendations:

• Review the property’s registry status.
• Expressly define the type of deposit.
• Properly regulate mortgage financing conditions.
• Set clear deadlines.
• Verify the parties’ legal capacity and authority.
• Analyse charges, taxes, and associated costs.
• Adapt the contract to the regulations applicable in Madrid or Catalonia.

In many transactions, preventive legal review avoids much more costly problems later on.

Do you need legal advice for a property purchase in Madrid or Barcelona?

At Adlanter, we support individuals, investors, and companies in real estate purchase transactions, providing preventive legal advice throughout the entire process.

We offer advisory services for the purchase and sale of homes and real estate in Madrid and Sierra Norte and in Barcelona and its metropolitan area. If you have any questions, contact our commercial law advisory experts for more information.