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The penalty clause in the provisional purchase agreement

Penalty clause sale contract Spain

Why is this clause included and what are the risks?

The penalty clause.

The penalty clause is primarily an important point because the buyer can lose the amount he pays, but the seller could also lose the same amount.

What is the amount of the fine?

Usually the amount that the party withdrawing is losing is equated with the amount of the down payment that has been made. Both the buyer and the seller accept the risk of losing this amount if they enter into a provisional purchase agreement that includes a penalty clause.

Why is this clause included?

This provision is included because the buyer wants to create certainty that the seller will not sell the property to someone else. And the seller has it recorded to be sure that the buyer is purchasing the property.

When do you lose the fine?

Under which conditions one of the two parties loses the amount is laid down in the provisions of the penalty clause of the provisional purchase agreement.

There are 3 variants.

To make it a little more complicated, there are three variants of penalty clauses. They are very similar, but all three can turn out differently if problems arise.

These are the 3 variants. The word "Arras" stands for down payment

  1. "Arras confirmatorias"
    This form of down payment does not allow either party to withdraw. This is confirmed in the text of the clause.
    If the seller does not adhere to the agreement, the buyer can demand the execution of the agreement. Or he can have the agreement dissolved. In that case, the seller must pay compensation for non-compliance with the agreement. The disadvantage is that the buyer must prove the damage suffered. With this variant, the intervention of a judge is often necessary to reach a solution.
  2. "Arras penales"
    The coercive measure in this variant is the compensation for the damage suffered.
    The damage suffered is usually equated with the down payment. But even if the damage suffered has been paid, the performance of the agreement can still be enforced. The party that is not in default can demand the dissolution of the agreement. This variant also often requires the intervention of a judge.
  3. "Arras penitenciales", can also be called "Arras de desistimiento".
    This third variant is the most advisable to include in the provisional purchase agreement that you are going to sign. This form gives both parties the right to cancel the transaction.

Below is the correct text of this third variant, which is then included in the penalty clause provision:

Las cantidades entregadas mediante el presente documento, lo son and concepto de arras penitenciales, la manera que:

Equal rights and risk.

Both the buyer and the seller have the right to cancel the transaction and know in advance what it will cost them if they do so. The advantage lies in the fact that they give each other the right to cancel the agreement in advance. This avoids going to court.

Often the text also refers to Article 1,454 of the Spanish Civil Code. That is the law article that supervises this clause.

The cause of problems.

Penalty clause problems often arise when the agreement is drawn up by people with insufficient knowledge and therefore unable to estimate the legal consequences.

Too much confidence between parties that the intended sale will take place without problems.

The scarce legal regulations regarding penalty clauses.

When in doubt.

Are you about to sign a provisional purchase agreement and are you in doubt?

Call or send me an email and ask for advice.