Penitential deposits are a well-known and widely used mechanism in real estate transactions. This agreement, regulated by Article 1,454 of the Spanish Civil Code, imposes significant consequences on the party that fails to formalize the sale. If the seller does not appear to sign the deed, they must return double the amount received. Conversely, if the buyer fails to complete the purchase, they forfeit the amount paid as a penitential deposit. Given that the amount of these deposits is typically substantial (ranging between 10% and 15% of the purchase price), they serve as a strong incentive to finalize the transaction, making their use quite common.
Since 2017, Article 621-49 of the Catalan Civil Code has provided an exception, allowing buyers to recover the amount paid as a deposit if they are unable to secure bank financing for the purchase. Specifically, this provision states:
Article 621-49: Provision for Third-Party Financing
1. If the purchase agreement provides for all or part of the price to be financed by a credit institution, the buyer, unless otherwise agreed, may withdraw from the contract if they provide documented proof, within the agreed timeframe, that the designated financial institution has denied the financing or refused to accept the buyer’s subrogation in the mortgage encumbering the property, unless the denial is due to the buyer’s negligence.
2. The buyer’s withdrawal obliges the seller to return the amount paid, including any penitential deposits, and requires the buyer to restore the seller to the same position they would have been in had the contract not been concluded, without prejudice to provisions under mortgage legislation.
This agreement is still relatively new in practical application, and its content and scope remain somewhat unclear. So, when can you claim the refund of the deposit if you fail to secure a mortgage?
The Catalonia High Court of Justice has recently issued a decision, Judgment No. 2818/2024 (accessible here), that revises and further clarifies the interpretation of Article 621-49 of the Catalan Civil Code. This judgment emphasizes that the application of this provision requires buyers to act with due diligence in seeking financing for the purchase. If such diligence is lacking, buyers cannot invoke this exception to claim a refund of the amount paid.
The case concerns buyers (who were not classified as consumers) who needed to sell their existing home in order to purchase a new one (the subject of the penitential deposit agreement). In the agreement, the buyers stipulated that the validity of the deposit (i.e., the possibility of losing the amount) was contingent on their inability to secure bank financing. However, this financing was entirely unfeasible without first selling their initial property. Despite this, the contract did not explicitly condition the sale of their first home as a prerequisite for recovering the deposit.
The court determined that, because the sale of the initial property was not explicitly agreed upon as a condition for refunding the penitential deposit, and because the buyers sought financing they knew was unattainable (requesting 100% of the purchase price and exceeding their financial limits), they were not entitled to recover the deposit amount.
Based on this judgment, the following points should be noted:
- For penitential deposit agreements signed in Catalonia where the buyer is classified as a consumer, it is important to consider that the buyer has the right to include the clause established in Article 621-49 of the Catalan Civil Code (CCC). This clause allows the buyer to recover the deposit if they are unable to obtain financing.
- In these contracts, buyers must be able to prove that they have acted with due diligence to be entitled to the application of Article 621-49 CCC and recover the amount paid for failing to obtain the necessary financing.
- In addition to the above, when buyers need to sell a property to finance the purchase of a new home, it is necessary to explicitly state in the deposit contract that they require obtaining financing for the purchase and that they need to sell a property to complete the acquisition. If they fail to do so, they are assuming the risk of not recovering the amount paid as a penitential deposit, even in the case of including the Article 621-49 CCC clause or not waiving its application.
We remain at your disposal to clarify or expand on the content of this note and remind you that our contact details are: acc@clavellcanalsconsulting.com and sag@clavellcanalsconsulting.com.