Contrary to what many people believe, "signing a deposit" or "signing a down payment" is a very important commitment in the sale of a property. It is not a mere formality to continue with the operation that gives us a period of time "to arrange the papers" to be able to go to the notary's office to sign the deed of sale. The "arras" is the real contract of sale, so it is essential that it regulates in detail all the conditions under which the sale will be made.

In this article, we would like to collect the 6 key questions that our clients most frequently ask us when they are faced with the signing of a deposit contract prior to the purchase of their home.

Before signing a purchase contract, make sure you know the answers to these six key questions to avoid any unpleasant surprises at the last minute.

1.  What are arras?

First of all, it is necessary to know that there is no such thing as "arras". There are even authors who place them on the same level as the "wild freshness of Caribbean lemons". What in common parlance is traditionally called "arras" or "arras contract" is a real contract of sale of the property, to which an earnest money agreement is added. It can have different configurations that give rise to totally different legal consequences.

The earnest money contract does not legally exist, it is a contract for the sale of real estate to which a deposit agreement, usually penitential, is included.

Therefore, when you are told that you have to sign a "deposit", be aware that you are signing a real contract of sale and its content is decisive for the success of the transaction. Despite the incorrectness of the term, we will continue to speak of "arras", although technically it should read "private contract of sale with earnest money agreement".

It should also be said that, erroneously, contracts that are not "earnest money" are often called "earnest money". It is important to analyse well the regulation of the documents in order to know what is being signed.

2. Do I always have to sign a private agreement?

Far from it. It is possible to carry out a sale and purchase by formalising the transaction by executing the deed of sale directly. However, the formalisation of a private agreement allows us to perfect the agreement in advance, on occasions, due to the need to carry out certain formalities or because we wish to subject it to certain suspensive conditions (financing, legalisation, registration, etc.), as we explained in this entry.

It is not always compulsory to sign a "arras", but once signed, it is compulsory.

Moreover, in many cases the signing of a contract of sale with earnest money may not be the most advisable way of arranging a sale, but this will depend on the specific circumstances of the transaction.

3. What do the "arras" oblige to ?

The next issue, and perhaps the most important, is that the "arras" is a fully valid contract of sale. As a consequence, from the moment it is signed, rights and obligations arise for each of the parties, the main one being that the seller is obliged to deliver the thing and the buyer is obliged to pay for it.

The contract of sale with earnest money agreement obliges the seller to sell and the buyer to buy, although the parties may withdraw by forfeiting money if they are penitential earnest money.

The most common configuration is that the contract of sale with earnest money agreement is configured with a "penitential earnest money agreement", explained extensively in this entry.

In spite of this possibility of withdrawal, from the moment of signing, the house is sold and bought, unless, for whatever reason, the delivery is delayed (which, normally, is the execution of the deed before a notary). This temporal separation, in legal terms, is what differentiates the perfection of the purchase contract (i.e., from when there are obligations) from its consummation (i.e., the moment when all the obligations are fulfilled and the contract is extinguished).

From the signing of the "arras" the house is "sold" and "bought", so it is essential to have carried out the physical and legal checks on the property before signing, as well as to ensure that the mortgage loan has been granted.

As the signing of the "arras" perfects the purchase contract, from that moment onwards the parties have rights and obligations between them and with respect to the property, assuming important risks. For example, did you know that if, between the signing of the "arras" and the granting of the title deed, the house collapses, the buyer is still obliged to pay the price?

4. Who should sign the arras?

Since the "arras" is a real contract of sale, it must be signed by persons with legal capacity to dispose of the property. Therefore, it is necessary to verify before signing the earnest money contract that the person who is going to sign it can really sell us the property.

In legal terms, signing a "down payment" contract with a real estate agency has no binding force for the seller until it is ratified. Therefore, it is better not to advance money to someone who cannot guarantee the sale.

As a general rule, the purchase contract must be signed by all the owners of the property. In addition, if there are joint owners and usufructuaries, both must also sign, since, otherwise, we would only be buying the right of the person who is transferring it to us (i.e., either the bare ownership or the usufruct). As a particular case, if the property is the marital home of a married couple, both spouses must sign the purchase contract, even if one of them is not the owner.

Thus, sale and purchase contracts should not be signed with non-owners (family members, estate agents, etc.) unless they have an express power of attorney from the seller authorising them to sell under these conditions. If, for whatever reason, a third party has to sign as a verbal representative, it is advisable not to pay any amount until the owner ratifies the sale.

5. What do the arras have to regulate?

As we have seen, the "arras" are a real contract of sale, so they have to regulate completely how the transaction is to be carried out.

The contract can be made in just two lines, but poor regulation always leads to problems.

In order to be able to draw up a purchase contract, and although it may sound a truism, the first thing to do is to carry out a legal review of the property to be purchased.

As far as the contract is concerned, the minimum content has to include:

i.         Identification of the parties (with name, ID number and address for notification purposes)

ii.       Identification of the object (what is being sold and bought)

iii.     Purchase price and method of payment (if there are advance payments, etc.)

iv.      Time limit for delivery (execution of the deed of sale)

The content of an "earnest money contract" depends on three factors: the parties, the object being purchased and the legal review.

The above would be the skeleton of an "arras", but there are many other issues that can be specifically regulated in favour of one or the other party to give greater legal certainty. Some of these are already relatively "standard" in market practice (body certain, free of encumbrances, etc.), but others derive from the always necessary legal review of the property. Examples of additional conditions include:

i.         Agreements on the legal status of the property at the time of handover (encumbrances, tenants, payment of taxes, community, supply contracts, etc.).

ii.       Covenants on the physical condition of the property at the time of handover (unfurnished, furnished, with appliances, freshly painted, etc.).

iii.     Suspensive conditions (need for financing, need for building permits, etc.)

iv.      Obligations between the signing of the private contract and the execution of the deed (maintenance, obtaining licences, legalisations, payment of taxes, etc.).

v.        Shifting of risk from the buyer to the seller.

vi.      Other seller's warranties.

6. Why should standard contracts not be used?

When you search for model contracts on the internet, you can find things like this (here, here, here): these are examples that appear on the first page of Google as of the date of this article. Also, sometimes you run the risk of taking models that do not even belong to your jurisdiction, and that put the price in foreign currency or subject to other legislation.

The models in the attached links are all correct, but they are far from being complete contracts, as they are generic and regulate a legal transaction without knowing either the parties or the object to which they relate, and will therefore be of no use when problems arise.

A model contract downloaded from the Internet would be comparable in medical terms to performing an operation by watching a YouTube video. The expertise and knowledge of the practitioner are key in both matters.

Contracts are essential parts of the legal transaction, since they are the element that has to regulate it, that has to indicate to the parties how they should act. They are as important as the property or the money that is exchanged, with the aggravating factor that they only come into play when problems arise.

To conclude, before signing an "earnest money contract", whether you are the seller or the buyer, it is advisable to seek legal advice from lawyers specialised in Real Estate Law to review the situation of the property, advise you on all aspects of the sale (how to arrange it, financing, taxes, etc.) and guide you through the entire purchase process.