Deposit Agreement: What It Is and What Risks It Involves

The earnest money contract is a preliminary agreement to the sale —common in real estate transactions— by which the buyer and seller commit to completing the sale within a specified period, with a sum being paid as a deposit. This amount can serve as a simple advance, as a penalty guarantee, or as a withdrawal mechanism, depending on how it is expressly agreed upon.

In Spain, the regime of earnest money has its legal reference in the *Código Civil* (Civil Code) (art. 1454) for the so-called “penitential earnest money.” The specific legal qualification (confirmatory, penal, or penitential) depends on what has been written in the document. Therefore, the wording is key: a misplaced word can imply losing the deposit or having to return double.

Types of earnest money and effects if someone breaches

Confirmatory earnest money

They serve as proof of the contract and an advance on the price. If one party breaches, the other can demand performance or resolution with compensation for proven damages, but there is not automatically a loss or return of double the deposit unless agreed upon.

Penal earnest money

The amount paid serves as a penalty clause. In the event of a breach, the performing party can choose to demand the agreed penalty (usually, losing the deposit or returning double) or performance with additional compensation if so provided. They require clear wording to avoid confusion with confirmatory or penitential earnest money.

Penitential earnest money (withdrawal)

They allow either party to withdraw from the sale: if the buyer withdraws, they lose the earnest money; if the seller withdraws, they return double. For them to operate this way, their “penitential” or “withdrawal” nature must be expressly and unequivocally agreed upon. In the absence of clarity, practice and jurisprudence tend to consider them confirmatory.

Common risks of the earnest money contract

• Ambiguity in drafting: if the type of deposit is not precisely specified, they may be considered confirmatory rather than penal.
• Unrealistic deadlines: periods that are too short to obtain a mortgage, gather documentation, or rectify encumbrances lead to avoidable breaches.
• Lack of suspensive condition for financing: signing without “subject to obtaining a mortgage” leaves the buyer exposed to losing the deposit if the bank does not grant the loan.
• Unawareness of encumbrances and occupants: mortgages, liens, leases, or undeclared occupants can prevent timely signing.
• Delivery of deposits to third parties without guarantees: depositing them in non-segregated accounts or without clear return rules creates conflicts.
• Confusion between “reservation” and “deposit”: many agency documents are simple reservations without withdrawal effects, despite being called deposits.
• Inherited properties or in joint ownership: if not all heirs or co-owners sign, the contract may be ineffective.
• Ignored taxation: the loss or receipt of deposits may have effects on the IRPF (Personal Income Tax); it is advisable to analyse their taxation.
• Cash payments: breaching legal limits on cash payments or anti-money laundering regulations can lead to penalties.

Keys to signing secure deposits

• Complete identification of the parties and the property (land registry, encumbrances, occupancy situation, energy certification).
• Explicitly define the type of deposit and its effects in case of breach or withdrawal.
• Total price, amount of deposit, and method of payment, specifying that they will be credited to the price on the day of signing at the notary.
• Realistic deadline for granting the deed (usually 30 to 90 days) and possibility of a justified extension.
• Suspensive condition for financing: subject the transaction to the granting of a mortgage within a timeframe; detail the entity, amount, and diligence of the buyer.
• Delivery free of encumbrances and up to date with expenses: community fees, IBI (Property Tax), utilities; attach certificates or foresee their provision before signing.
• Distribution of expenses and taxes according to current regulations, avoiding abusive or null clauses.
• Secure deposit: consign the deposit in a trusted third-party account with clear instructions for delivery and return.
• Useful annexes: recent simple note, ITE (Technical Inspection of Buildings)/IBI, zero debt certificate from the community, plans, and list of included furniture or improvements.

Recommended clauses

• Suspensive condition for financing and for the cancellation of the seller's encumbrances in the deed.
• Penalty for attributable delay and brief automatic extension if there is a notarial appointment or pending administrative procedures.
• Possibility of mortgage subrogation or cancellation prior to signing at the seller's expense.
• Condition of preservation and right of prior visit before signing to verify occupancy and supplies.
• Possession and keys agreement: at the signing, and never before without guarantees.

Deposit when the property comes from an inheritance

In transactions involving inherited assets, risks multiply if titles are not ordered in advance. Before signing:

• Ensure that the inheritance is accepted and, if applicable, allocated or at least document the chain of ownership so that the seller can transfer.
• Check that all heirs or the attorney with sufficient powers sign; in joint ownerships, all co-owners.
• Verify possible legitimate shares, collation, rights of use, or uncancelled encumbrances.
• Align the deposit calendar with the notarial and registration deadlines specific to the inheritance.

If you are processing an inheritance and plan to sell a property, coordinating deposits, allocation, and cancellations avoids losses of deposits or double refunds. Having inheritance lawyers in Murcia is crucial for aligning timelines and legal security.

Frequently Asked Questions

What is the usual amount of the deposit?

In real estate practice, amounts ranging from 5% to 10% of the price are seen, but there is no legal figure. It should be adjusted to the risk and the agreed timeframe.

Can I recover the deposit if I do not obtain a mortgage?

Only if a suspensive condition for financing is expressly agreed upon and you prove your diligence in the application. Without that clause, you may lose the deposit.

What happens if the seller backs out?

In penitential deposits, they must return double what was received. In confirmatory or penal deposits, what has been agreed will apply, and in its absence, compliance or resolution with damages may be demanded.

Are deposits taxable?

They may have effects on the IRPF (Personal Income Tax) when lost or refunded double due to withdrawal. Always analyze the tax implications in advance and according to your specific case.

Is a “reservation” the same as a deposit?

No. Many agency reservations do not confer the right to withdraw nor regulate losses or refunds. Read the document and, in case of doubt, demand a clear deposit contract.

Quick tips for buyers and sellers

• Buyers: do not sign without an updated simple note, financing condition, and realistic timeline; avoid delivering cash deposits.
• Sellers: prepare community certificates, IBI, cancellation of charges, and clarity on deadlines; do not accept abusive withdrawal clauses.

GVC Lawyers: drafting and reviewing deposit contracts in Murcia

At GVC Lawyers (García Valcárcel & Cáceres), located at Plaza Fuensanta, 3 – 6ºB, 30008 Murcia, we combine legal tradition and a practical approach to safeguard your transaction. We review or draft your deposit contract with precision, avoiding costly ambiguities and aligning the transaction with financing, taxation, and notarial and registration deadlines.

• Urgent review of drafts from real estate agents and individuals.
• Negotiation of withdrawal clauses, deadlines, extensions, and penalties.
• Coordination with notary, bank, and registry to reach signing without surprises.
• Tax advice and prevention of civil liability risks.
• Transactions involving inherited properties, co-ownerships, and divorces: we integrate our team of inheritance lawyers and family law lawyers for a comprehensive solution.

Our office in Murcia stands out for its close attention, prudence in viability analysis, and service-oriented approach. If you are looking for lawyers in Murcia to secure your deposit contract or your purchase and sale, we can assist you.

Conclusion

The deposit contract is a useful tool, but also a critical point of risk if drafted ambiguously. Clearly defining the type of deposit, conditioning the transaction on financing when appropriate, and documenting charges and deadlines avoids loss of deposits and litigation. Before signing, consult with specialised professionals. At GVC Lawyers, we put our experience at your service to ensure your transaction in Murcia reaches a successful conclusion safely and without surprises.