What is the engagement contract?

When an owner of a property founds a person who is interested in buying it, both agree to carry out the purchase contract, there is a risk of breaching the contract before the sale as a consequence of one of them decides not to uphold the settlement.

In order to avoid this situation it is common that parties, previously of purchase contract, sign an engagement contract, in which they are committed to proceed the agreed purchasing though deposit made by the buyer, which consist in an economical amount as a guarantee of the future contract fulfilment.

It is necessary that the engagement contract has at least this content to make effect:

1. - The amount which is given as engagement. Even though that our legal system does not determinate a specific quantity, it must be proportional with the acquisition price agreed, between a 5% and a 15% of it.
   
   
2. - The acquisition price agreed.
   
   
3. - The maximum term in which parties will draw up the acquisition deed.
   
   

What happens in the case that once the contract has been signed, one of the parties does not comply with the agreement assumed?

The consequences of that non-compliance will depend on the type of engagement signed:

1) Confirming deposit

Though confirming deposit, the buyer gives a part of the total agreed price, obligating himself to give the rest of the price once the acquisition contract has already concluded.

By this way, the constitution of this confirming deposit is a reinforcement or confirmation of the agreed contract, being also a down payment of the price.

In case of non-compliance from one of the parties, the other damaged party may require:

- The compliance of the contract

- The termination of the contract, asking a compensation due to the damages made by the breach of the contract.

2) Cancellation penalty

The amount given as a concept of cancelation penalty, it is not understood as a down payment of the agreed price but as a penalty clause, whose amount works like a compensation of damages in case of non-compliance.

The aim of this type of engagement is to stablish a fulfilment guarantee through losing the amount already paid in the case that the breaching party would be the buyer or when the breaching party would be the seller, he/she will have to pay the double of them.

The peculiarity of this type of engagement contract is that the injured party may require both compliance and penalty.

3) Forteit deposit agreement

Though forteit deposit agreement, both parties can withdraw the agreed contract because its aim is just for stablish the intrinsic consequences for the non-compliance.

Accordingly, the agreed acquisition may be terminated by the will of the party who decides finish the contract and having to comply these next consequences:

- If the buyer is who terminates the contract, he/she will lose the amount already paid as engagement.

- If the seller is who breach the contract, he/she will pay the double of the amount received.

What kind of engagement contract is if the parties do not specify the modality of them?

It is possible that we may not know what kind of engagement contract is, if it is not indicated in the signed engagement contract.

According to the jurisprudence, in these situations it is assumed that they must been considered as confirming deposit, in other words, as amounts paid on account of the final price.

In consequence, in order to consider that we are stablishing a cancellation penalty or forteit deposit agreement, it is required that the contract point it out clearly and expressly because these last ones have an exceptional character, requiring a restrictive interpretation of the terms so that it is indisputably stated that the will of the parties is in that sense.

In case that either buyer or seller do not have their residence in Spain, we recommend you reading our post about  “The sale of a home in Spain when the buyer or seller is a non-resident person or a foreigner".

Do you have more questions? Need our lawyers to draw a contract of deposit or advise you throughout the process of buying a home? Contact us for visiting our office or use any of the online legal services we offer on our website.