The earnest money contract: is it necessary? 

Nov 30, 2021 | Lagares News

The earnest money contract, also known as deposit or reservation contract, lies its importance in the need to establish the conditions of purchase of a property, easening the whole process while declaring the guarantees against a possible breach by any of the parties.


But, what exactly is an earnest money contract?

It is a private contract for the reservation or pre-contract of the property itself, in which the parties sign and agree to the advance reservation of it. In order to do this, an amount of money is delivered form the buyer to the seller as a ‘deposit’.

Within the earnest money contracts, we are able to find three different types: confirmatory  penalty and double-rate or withdrawal deposits.


Types of earnest money contracts

Confirmatory deposits : they represent an advance of the total price agreed in the purchase. At this point, it is important to note that the amount delivered as confirmatory deposit is charged to the final price.

Penalty deposits: they are equal to the obligations with a criminal clause.

Double-rate or withdrawals deposits: indicate the price to be paid by either party in the event of withdrawal from the purchase.

The choice of one type of deposit contract over another will be determined by the purpose of the contract, since each one has different legal consequences.

Therefore, it should be noted that the contract must include the type of earnest money contract in which said amount is given, although if not clearly specified,it is understood to be a confirmatory earnest money contract.


Why do I need to sign an earnest money contract?

Do you want to have this property taken off the market? Well, with the signing of it you guarantee that, safely, the property is no longer available on the market. This will allow you to obtain the finance necessary to purchase the property or even manage the mortgage with your bank, so that you can later sign the purchase document.

Likewise, the signing of the earnest money contract guarantees that the seller keeps their word to what is established in the contract itself, since a breach of it obliges the seller to pay a penalty for it corresponding to the amount received as a deposit plus a penalty that will depend on the type of earnest money contract signed.

In the same way, if the buyer breaches the contract, he or she may partially or totally lose the deposit provided as an advance.

It is this bilateral protection, both for the buyer and the seller, which gives importance to this contract, since its final goal is to ensure and preserve the action of the purchase so that both parties feel safe throughout the whole process.


Which information should an earnest money contract include?

There is a series of minimum data to include, necessary to proceed with the signing of it, that is:

  • Personal data, both of the buyer and the seller.
  • Final price for which the property will be acquired.
  • Means of payment.
  • Identification and description of the property.
  • Deposit thatwill be paid by the buyer to the seller. This amount will be deducted from the final price of the property at the time of signing the deed of sale (except for new homes, which will be taxed with IVA or IGIC)
  • Period of time to formalize the sale.
  • Notification form.
  • Possible property charges.
  • Distribution of expenses of the sale.
  • Contract date.


Now, if you are thinking of buying a property, Lagares Abogados offers the support you need throughout the purchase process, from the selection of the property to its registration after its acquisition. If you need more information , please leave us your query here. 

Seneida García
International Liaison


C/ Canalejas, 29
35003 Las Palmas de Gran Canaria

+34 928 382 148