What is an earnest money contract?

16 May, 2024
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Real Estate
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Neus Vallara


One of the most common documents that parties usually sign before formalizing the deed of transfer of a property is the earnest money contract. It is a contract for which there are several modalities. In this article, we tell you what they are, as well as their main characteristics and differences.

What is an earnest money contract?

The earnest money contract is a preparatory contract to another one of sale, by virtue of which the parties undertake to carry out a future operation of transfer of a property. However, the effects of the contract regarding the future sale will depend on the type of contract chosen by the parties.

Although one of the agreements of the contract is that the buyer or acquirer delivers a sum of money to the seller or transferor, this amount can be delivered on account of the final price or be a guarantee or penalty in case of breach, depending on the type of earnest money contract.

What types of earnest money contracts are there?

Next, we detail the different earnest money contracts and their main characteristics:

Confirmatory earnest money contract:

The main characteristic of the confirmatory earnest money contract is that neither of the parties can withdraw from the contract, so both are obliged to formalize the future sales contract from its formalization. In this way, in case of breach, the injured party can demand compliance or opt for compensation to be determined by the courts. It is usually considered that the signing of this contract is part of the transmission itself, as it involves a payment of money on account of the price without the possibility of withdrawal, thus it is the beginning of it.

Penal earnest money contract:

In the case of the penal earnest money contract, the parties will not be able to withdraw from the future sale and the delivery of money, without prejudice that in the future sale it can be applied to the price, it is configured as a guarantee in case of breach. Thus, the party that breaches the contract loses them – if the buyer breaches – or must return them double – if the seller breaches. Although this may make us think that it is a contract of penal earnest money, the main difference is that the injured party, additionally, can demand compliance with the contract or its resolution. In addition, they can replace compensation for damages.

Penal earnest money:

The penal earnest money is probably the best known for being the most common. Its main characteristic is that the parties can withdraw from the contract. The consequence of withdrawal is different depending on each party. Thus, if the one who withdraws is the buyer, he will lose the entire amount paid as earnest money. If the one who withdraws is the seller, he must return them double.

Where and how is the earnest money contract regulated?

The regulation of the earnest money contract in the Civil Code is quite scarce, since only penal earnest money has a place, specifically in article 1,454. This means that in case the parties want to attribute a penal nature to the earnest money contract, they must expressly state it. Regarding confirmatory earnest money contracts and penal earnest money contracts, we only find references in the Commercial Code (articles 343 and 83, respectively), so they have been defined by case law.

On the other hand, the Civil Code of Catalonia is more ambitious regarding the regulation of the earnest money contract. Thus, in its article 621-8, it establishes that the delivery of a sum of money made by the buyer to the seller must be understood as being made on account of the price and that penal earnest money must be expressly agreed. In this way, unless it is expressly indicated that the earnest money has a penal nature, it will be considered confirmatory earnest money.

The effects foreseen for penal earnest money in the Civil Code of Catalonia are identical to those foreseen in the Civil Code. However, the Civil Code of Catalonia introduces as a novelty the possibility that the buyer can withdraw without penalty if the reason for the withdrawal is the denial of financing by the banking entity, provided that the parties have not agreed otherwise.

The Civil Code of Catalonia also provides that the delivery of penal earnest money can be recorded in the Property Registry so that the property is affected by its return. However, registration will only be admissible when earnest money has been agreed for a maximum period of six months and is deposited before a notary.

At MES Advocats we offer comprehensive advice and assistance in drafting earnest money contracts. If you need more information or are interested in obtaining a quote, you can contact our real estate law department at this link.

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