This type of earnest money contract is the only one typified in the Civil Code and allows the parties to back out of the transaction.
Penitential or cancellation deposits
Penitential deposits, also known as withdrawal deposits, are a form of guarantee used in sales contracts that allows the parties to freely withdraw from the performance of the contract. They are the only deposits included in the Civil Code and provide the option to formalise the purchase contract.
Are penitential deposits obligatory?
The penitential deposit is a guarantee mechanism that helps to ensure the fulfilment of the purchase contract, but it is not obligatory. In other words, the presence or absence of a penitential deposit in a contract does not affect the validity of the contract. However, their use is common and they can be included in the sales contract if both parties so agree.
In addition, it is important to mention that such deposits must be clearly stated in the sales contract and the conditions under which they are to be retained or returned must be specified.
How long does a penitential deposit contract last?
The maximum duration of a deposit contract is six months from the time it is signed. However, it is sometimes requested that the period be extended, for example, if the buyer is unable to obtain financing to buy the house. In order for this extension to be valid, an addendum must be created in the previous contract with the new deadline for formalising the transaction.
Withdrawal in the penitential deposit contract
But what happens if the earnest money contract is waived or breached?
Withdrawal by the buyer
With the penitential earnest money contract, if the buyer backs out, he will lose the amount paid as earnest money. If the buyer breaches the contract and withdraws from the sale, the seller can retain the earnest money as compensation for damages.
Withdrawal by the seller
On the other hand, if the seller is the one who decides not to sell, he will have to return double the amount paid by the buyer. The buyer has the right to recover the double deposit.splash
Penitential Deposit Form 2023
Here is an example of a model of a penitential deposit:
All the amounts delivered to date for the purpose of formalising the purchase-sale, have the condition of penitential deposit, by virtue of which, if the buyer does not fulfil any of the payment obligations assumed or desists from formalising the purchase-sale, and does not pay the price within the stipulated periods, the contract will be understood to be terminated, the stipulations of article 1454 of the Civil Code will apply, forfeiting the amounts delivered.
In the event that the seller does not comply with the agreed terms or desists from formalising the sale, he/she will have to pay double the amounts received to date.
How much is the earnest money paid?
Normally, the amount of the deposit is 10% of the total value of the property. This amount is paid by the buyer to secure the transaction and to attest to his interest in acquiring the house.