Earnest money and confirmatory deposits: differences that must be made clear
When a purchase and sale contract mentions earnest money, it is not advisable to assume that these are forfeitable deposits. If this is not expressly agreed, a reference to Article 1454 of the Civil Code is not enough on its own to automatically give it that effect. In this guide we explain which practical difference must be set out in writing and which mistakes to avoid before signing.
Before signing: do not assume that “earnest money” means the same in every case
In a property sale and purchase, the word earnest money is often used as if it always had the same legal effect. However, for there to be a right to withdraw with loss of the amount paid or repayment in double, the agreement must be expressly framed that way. Article 1454 of the Civil Code establishes that, if earnest money or a deposit has been involved in the purchase and sale contract, the contract may be rescinded if the buyer agrees to forfeit it, or the seller to return it double. That is the typical effect of forfeitable deposits, but it should not be automatically applied to any document that uses the word “earnest money”. Article 1454 of the Civil Code
The practical key is simple: if you want the contract to allow withdrawal on those terms, you must set that out clearly in writing. If not, you may be dealing with a different agreement, or with a simple deposit without that withdrawal regime.
Forfeitable deposits: when does the option to lose the sum or have it returned in double apply
Forfeitable deposits are those that allow one of the parties to step away from the contract before the final sale and purchase, taking on the agreed financial consequences. In practice, this usually translates into two scenarios:
1. If the buyer withdraws, they lose the amount paid.
2. If the seller withdraws, they return twice what they received.
But it is not enough for the contract to say “earnest money” in a general way. What matters is that the document expressly identifies that withdrawal regime and its consequences. If you are selling your property, this precision avoids later disputes over whether the amount paid was a reservation, a deposit, part of the price or security with different effects.
Practical advice:
- state that these are forfeitable deposits if that is the real intention of both parties;
- describe very clearly what happens if one party does not attend the final signing;
- set out whether the amount paid will be credited against the price or whether it acts only as security for withdrawal.
Common mistake:
- using a downloaded template and leaving “earnest money” as it is, assuming the effect of Article 1454 will apply automatically.
Confirmatory deposits: the contract is not put on hold, it creates an obligation
Confirmatory deposits do not work as an optional exit from the transaction. Their purpose is different: they reinforce that the sale and purchase is already committed and that both parties must comply with what has been agreed. They are not intended for the buyer or seller to decide freely to break the agreement with a simple agreed penalty, as with forfeitable deposits.
The practical difference is important for the documentation. If the contract is meant to be confirmatory, it should say so expressly and describe the duty to perform, the possible consequences of breach and, where relevant, the way to claim damages or specific performance as appropriate in the particular case.
Do not confuse this point with the final sale and purchase: in a practical guide to home sales and purchases, the Community of Madrid notes that before completion various contracts may be used, including earnest money or a deposit, an option to purchase or a private sale and purchase contract, and it distinguishes precisely between forms with different effects on the obligation to proceed with the transaction Compraventa de viviendas.
What the contract must make clear to avoid misunderstandings
If you are reviewing or drafting a sale and purchase contract with an advance payment, it is worth checking these points before signing:
1. **Exact name of the arrangement**. Do not assume that “earnest money” always means forfeitable deposits.
2. **Legal nature stated in writing**. It must say whether the arrangement is forfeitable or confirmatory.
3. **Consequence of withdrawal**. It must be clear whether the transaction can be abandoned, on what conditions and with what financial effect.
4. **Destination of the amount paid**. Clarify whether it is deducted from the final price or serves another purpose.
5. **Timing of the final signing**. It should be indicated when the deed will be executed or when the sale and purchase will be made final.
6. **What happens if one party breaches the agreement**. Do not mix up a penalty for withdrawal with a claim for contractual breach, because they are not the same.
A well-defined contract greatly reduces the scope for later argument. If the wording does not clearly distinguish between withdrawal and breach, disputes are usually resolved not by the label used, but by what was actually agreed.
Common mistakes when selling a property with earnest money
These are some errors worth avoiding:
- **Calling any payment of money earnest money** without defining its regime.
- **Copying a standard clause** without adapting it to whether it is forfeitable or confirmatory.
- **Thinking that Article 1454 applies by default** even if the document does not explain it expressly.
- **Failing to provide for what happens if documents, financing or the signing date are missing**.
- **Mixing reservation, earnest money and a private sale and purchase contract** as if they were equivalent.
If you need to fit this step into an orderly sale, you can then review the general documentation for the transaction or request a general property valuation at /valoracion-vivienda-madrid. The online estimate is indicative, provides a range and PDF report and, if you wish, you can request an optional visit.
How to review the wording before signing
Use this practical sequence:
1. Read the full clause and see whether it refers to withdrawal or performance.
2. Check whether the amount is paid as a deposit to be credited against the price or as security for withdrawal.
3. Verify whether the contract expressly identifies the earnest money as forfeitable or confirmatory.
4. Make sure the date of the final signing and the handover of keys are coordinated.
5. If anything is ambiguous, ask for it to be corrected before signing; an imprecise phrase can completely change the effect of the agreement.
General guidance: this guide helps you spot common differences, but it does not replace an individual review of the contract when the transaction has particular features. If you would like to discuss your case or need support preparing a sale in Madrid, you can do so at /contacto. You can also be assisted at the UBICASA office, Calle Montesa 29, Madrid, Monday to Friday from 10:00 to 15:00 and from 16:00 to 19:00.
In short, the difference that must be made clear is not just the name, but the actual effect of the arrangement. If you intend forfeitable deposits, say so expressly. If they are confirmatory, do not draft the document as if there were an automatic unilateral exit. And above all, do not assume that the mere mention of earnest money on its own activates the regime of Article 1454 of the Civil Code.