Deposits Vs down payments: A dangerous confusion

There are few legal terms as casually used as these two. Not surprisingly, they are often incorporated as "almost-standard" clauses in thousands of sales contracts, without realizing the legal and economic consequences that the inclusion of one term or the other may entail for the signatories.

I.- Difference between "Deposits" and "Down payments”

DEPOSIT (=RESERVATION): the signing of this type of agreement does not perfect the sale. Neither the property owner has sold anything nor the interested party has bought anything. Through earnest money, the latter reserves the right to formalize the sales contract during the term and under the conditions set, without interference from third parties. Therefore, the only penalty for breach is the loss of the earnest money delivered or the return of double the amount received, depending on which party fails to comply.

DOWN PAYMENT (=SALE): from the moment the agreement is subscribed, the sale is perfected, only that in this act only a part of the price is delivered. But from this very moment, the buyer (who is already one) may demand the delivery of the property in question and the seller (who is no longer the owner of the property) may demand the delivery of the total price, under the agreed conditions.

II.- What does the Law say?

The law only creates confusion on this topic because there are three very similar legal figures, and only one of them is expressly covered by the legal system.

First, we find the CONFIRMATORY DEPOSIT (equivalent to a "down payment"):

As the name suggests, they are an advance payment of the final price of the sale.

Attention. If nothing is specified in the contract, it will be presumed that the deposit is confirmatory.

In case of breach of obligations, the general regime on the fulfillment of the obligations provided in Article 1.124 of the civil code will apply (demanding forced compliance or resolving the contract, with the possibility of also claiming damages, if any).

Secondly, there are so-called PENAL DEPOSIT:

The purpose of this type of deposits is simply to ensure the fulfillment of the sales contract. Its breach normally gives rise to compensation for damages and losses in favour of the compliant party.

If no breach occurs by any party, the amount delivered as deposits is considered as a partial advance payment.

Finally, we have PENITENTIAL DEPOSITS:

This type of deposits is the only one expressly regulated in our Legal System (Art. 1545 of the civil code).

In case of breach, the law stipulates that whoever delivers them (the interested buyer) will lose them without being able to demand additional compensation for damages. And if the one who breaches is the one who receives them (the property owner) will have to return them doubled.

Only in the case that the sale is finally formalized and it has been expressly determined, the deposit may be considered delivered as part of the final price of the deal.

Attention. A deposit is only considered penitential if it is expressly indicated in the contract.

In conclusion, if the intention of the contractors is to establish penitential deposits, it must be expressly stated that the amount of money delivered is precisely for this concept. Therefore, it is essential to take into account the distinction between both figures and seek advice before signing if there is any doubt.