Deposit (arras) in a sale contract is an amount of money that the buyer delivers to the seller as a signal, guarantee or advance on the transaction. Its purpose and consequences depend on the type of deposit agreed: signing penitential arras, which allow withdrawal by losing or returning double the amount, is not the same as confirmatory or penal arras, where performance of the contract and claims for damages may come into play. That is why, before signing, it is advisable to understand what is being agreed, how the clause should be drafted and what happens if one of the parties fails to perform.
What are arras and why are they so important in a property sale
Arras are a payment of money linked to a sale, usually of property, made before signing the public deed before a notary. In practice, they are used to "reserve" the property and record that buyer and seller have a serious intention to complete the transaction within a set period.
Although many people speak of an "arras contract" as if it were a separate document, what matters is not the name of the document but its content. It may be a private sale contract with an arras clause or a preliminary agreement regulating price, deadlines, costs, pending documentation and consequences of non-performance.
Their importance is especially high because the amount delivered is usually significant. In property transactions it is common to agree indicative amounts of between 5% and 10% of the sale price, although there is no mandatory legal percentage. For example, on a property worth €250,000, arras of 10% would amount to €25,000.
For the seller, arras reduce the risk of taking the property off the market without an economic guarantee. For the buyer, they serve to fix essential conditions of the sale and prevent the property from being sold to a third party while financing, registry documentation or notarial signing is being arranged.
The most common mistake is to sign a generic template without adapting the clause to the specific case. Ambiguous wording can lead to disputes over whether the amount delivered allows withdrawal, only proves the existence of the contract or functions as a penalty for non-performance. That difference can completely change the economic outcome of the transaction.
Types of arras: confirmatory, penitential and penal
There are three main types of arras in sale contracts: confirmatory, penitential and penal. All involve a payment of money, but each has different legal effects. Correctly identifying which type is being signed is essential to know what rights and obligations each party assumes.
Confirmatory arras act as proof that the contract exists and that the parties have assumed a commitment to sell. In this case, the amount delivered is usually considered part of the final price. If one party fails to perform, the other is not automatically limited to losing or returning the arras, but may demand performance of the contract or claim damages as appropriate.
Penitential arras are the best known in property sales. They allow either party to withdraw from the contract, but with a clear economic consequence: if the buyer withdraws, they lose the amount delivered; if the seller withdraws, they must return it doubled. This regime is provided for in Article 1454 of the Spanish Civil Code, provided that this type of arras has actually been agreed.
Penal arras function as a penalty clause. Their purpose is to fix in advance an economic consequence in the event of non-performance. Unlike penitential arras, they do not always mean that the party may freely withdraw from the contract. Depending on the wording, the performing party may claim the penalty, demand performance or request compensation if applicable.
The key is not to confuse withdrawal with non-performance. With penitential arras, a party may withdraw from the contract by accepting the agreed cost. With confirmatory and penal arras, unilateral withdrawal may be considered breach of contract and open the door to wider claims.
For example, if a buyer delivers €20,000 in penitential arras on a property worth €200,000 and finally decides not to buy, they will lose those €20,000. If the seller withdraws, they must return €40,000. However, if the arras were confirmatory, the seller could try to require that the sale be completed, in addition to claiming damages if proved.
How an arras clause should be drafted to avoid conflicts
An effective arras clause must be clear, complete and consistent with the rest of the contract. It is not enough to state that "arras are delivered" or to copy a standard formula. The document must unequivocally express what type of arras is agreed and what the consequences will be if the sale is not formalised.
The contract must correctly identify buyer and seller, describe the property, state the total sale price and specify the amount delivered as arras. It is also advisable to indicate how that amount is paid: bank transfer, cheque, payment into an account or other means that allows proof of delivery.
Another essential point is the deadline for signing the public deed. For example, it may be agreed that the sale will be executed as a deed within a maximum period of 60 or 90 days. If the buyer depends on mortgage financing, it is advisable to regulate what happens if the bank does not grant the loan and whether that circumstance allows the contract to be terminated or not.
Charges and the legal status of the property must also be detailed. Before signing, it is advisable to review the land registry note, check whether there are mortgages, attachments, usufructs, leases, tax charges or community debts. If the seller undertakes to deliver the property free of charges, that obligation must be expressly stated.
The clause should also regulate which costs each party bears, what documentation must be provided before signing and what happens if planning, registry or administrative issues arise. In inherited properties, divorces, properties with several owners or sales by companies, these checks are even more relevant.
Good drafting not only protects against obvious breaches. It also helps prevent frequent conflicts: delays in signing, discrepancies over included fixtures, failure to cancel a mortgage in the registry, problems with the certificate of occupancy or differences over the condition of delivery of the property.
What happens if an arras contract is breached
The consequences of breach depend, first of all, on the type of arras agreed and the specific wording of the contract. Therefore, to the question "what happens if arras are breached?", there is no single answer valid for all cases. The same conduct may have different effects depending on whether penitential, confirmatory or penal arras have been agreed.
With penitential arras, the system is simpler: the buyer who decides not to proceed loses the amount delivered, and the seller who withdraws must return it doubled. This solution avoids, in many cases, lengthy disputes over damages, provided the clause is well drafted and there is no dispute over who has withdrawn.
With confirmatory arras, the performing party may choose to demand performance of the sale or claim termination of the contract with compensation for damages, if the legal requirements are met. This may happen, for example, if one party refuses to sign the public deed despite all agreed conditions having been fulfilled.
With penal arras, the agreed amount acts as a penalty for non-performance. However, it is important to review whether the contract also allows demanding performance or additional compensation. Not all penalty clauses have the same scope, and imprecise wording can end in a judicial dispute over its interpretation.
A practical example helps to see this. Suppose €15,000 in arras are agreed on a property worth €180,000 and signing before a notary is fixed at 75 days. If the seller finds another buyer offering more money and refuses to sell, the consequences will not be the same if the arras are penitential, confirmatory or penal. In the first case, they will presumably have to return €30,000; in the others, they could face a claim for performance or damages.
It is also necessary to analyse whether the alleged breach is justified. It is not the same not to sign through a simple change of mind as to do so because the property has undeclared charges, because not all owners hold title or because an essential condition included in the contract has not been fulfilled.
Tax impact of arras and economic aspects to consider
The tax impact of arras often goes unnoticed, but it can be relevant. If the sale is finally formalised, the amount delivered is normally applied to the total price of the transaction. In other words, if a sale of €220,000 is agreed and €22,000 in arras are delivered, the deed will show the remainder of the price as pending payment, unless another structure has been agreed.
In sales of second-hand homes, the main tax for the buyer is usually linked to Transfer Tax, in accordance with the rules applicable in each autonomous community. For new-build property, VAT and Stamp Duty may apply. Delivery of amounts before the deed must be analysed with particular care when dealing with new-build or property development.
If the transaction is not completed and one party loses the arras or must return them doubled, consequences may arise in personal income tax. For example, the amount retained by the seller could have tax treatment as a capital gain, depending on the circumstances. Similarly, whoever bears an economic loss must assess how it is correctly reflected.
In addition to taxes, indirect costs should be anticipated. If the buyer applies for a mortgage, there may be valuation costs, bank fees or costs associated with preparing the transaction. If the sale falls through, some of these amounts may not be recoverable, even if they do not strictly form part of the arras.
It is also important not to agree a disproportionate amount without measuring the risk. Arras of €3,000 may be insufficient to commit the parties in a high-value transaction; arras of €50,000 may create excessive exposure for a buyer awaiting financing. The figure should reflect the price, the deadline, the risk and the real situation of the transaction.
As a precaution, before signing it is advisable to review not only the contract but also the buyer's financial capacity, the registry status of the property and the tax timetable of the transaction. A secure sale depends not only on finding a good price but on closing all legal, economic and tax elements consistently.
Recommendations before signing and frequently asked questions on arras
Before signing an arras contract, the first recommendation is not to rush. Pressure "not to lose the property" can lead to accepting unclear clauses or unbalanced conditions. A signed private contract without review can create important obligations, even if a notary has not yet been involved.
A frequent question is whether arras are mandatory. They are not. The parties may agree them or not, and may also structure the transaction differently. However, in property practice they are very common because they provide security and organise the process prior to the deed.
Another common doubt is whether arras are always returned doubled when the seller breaches. The answer is not always. That consequence belongs to penitential arras when they have been correctly agreed. If the contract does not specify the type of arras or uses unclear wording, it may be necessary to interpret the parties' intention.
It is also frequently asked whether the buyer loses the arras when the bank does not grant the mortgage. It depends on what has been agreed. If the contract does not make the sale conditional on obtaining financing, lack of a mortgage may not automatically release the buyer. Therefore, if the transaction depends on the loan, a specific clause should be included.
As to how arras are reflected in a contract, they must be in writing with the type of arras, amount, method of payment, deadline for execution as a public deed, consequences of withdrawal or breach, allocation of costs, status of charges, pending documentation and obligations of each party until signing.
At Martínez Sanz Abogados we recommend reviewing each transaction individually, especially when there are large amounts, tight deadlines, buyers awaiting financing, inherited properties, properties with charges or sellers with several titleholders. Prior review can avoid litigation, economic losses and unnecessary delays.
If you are buying or selling a home and need to draft, review or negotiate an arras contract, specialist legal advice will allow you to sign with greater security. Before delivering money or assuming commitments, make sure the document protects your interests and reflects exactly what you have agreed.
Useful legal references
To explore the applicable legal framework further, the Spanish Civil Code published in the Official State Gazette may be consulted, in particular Article 1454 on penitential arras and the general rules on obligations and contracts. To explore the applicable legal framework further, the Spanish Civil Code published in the Official State Gazette may be consulted, in particular Article 1454 on penitential arras and the general rules on obligations and contracts.To explore the applicable legal framework further, the Spanish Civil Code published in the Official State Gazette may be consulted, in particular Article 1454 on penitential arras and the general rules on obligations and contracts.
The interpretation of each contract depends on its specific wording and the circumstances of the transaction. These references should therefore be understood as general guidance and do not replace personalised legal advice.
