Arras Agreement in Spain

Arras Agreement in Spain

Types of deposit, contract terms and risks when buying property

An arras agreement is one of the key documents used when purchasing property in Spain. It is signed before completion before a notary and records the main terms agreed between the buyer and the seller: the property, the price, the initial payment, the completion deadline and the consequences if either party withdraws.

When the agreement is signed, the buyer usually pays the seller part of the purchase price. In practice, the arras payment is often approximately 10% of the property price, although there is no mandatory percentage established by law. The parties may agree on a different amount.

An arras agreement should not be treated as a simple reservation document or receipt. Once signed, it creates legal obligations, and unclear or unsuitable wording may result in the loss of the deposit or a legal dispute.

Before signing, the buyer should therefore verify the ownership, the property documents, mortgages, seizures, outstanding debts, unauthorised alterations and any other circumstances that may affect the safety of the transaction.

What is an arras agreement?

An arras agreement is a private contract between the buyer and the seller, normally signed before the public deed of sale — escritura pública de compraventa.

The agreement generally records:

When the transaction is completed, the arras payment is deducted from the total purchase price.

Signing an arras agreement is not legally required for every property purchase, but it is widely used in Spain to formalise the agreement between the parties before notarisation.

How arras differ from a reservation agreement

A reservation agreement is usually signed at an earlier stage, when the buyer wants the selected property to be temporarily removed from the market. The reservation payment is generally lower than the arras payment, and the reservation period is shorter.

The reservation document should specify the property price, the amount paid, the reservation period and the conditions under which the payment will be refunded. It should also state whether the purchase depends on a satisfactory legal review or the approval of a mortgage.

An arras agreement is normally signed once the principal terms have been agreed and creates more substantial obligations for both parties.

The legal consequences depend on the content of the document rather than its title. A document described as a reservation agreement may in practice create obligations equivalent to those of a preliminary sale agreement.

Main types of arras

Three principal types of arras are used in Spain:

The rights of the parties and the consequences of withdrawal depend on the type stated in the agreement.

Arras confirmatorias

Arras confirmatorias confirm that a binding sale agreement has already been reached and that the amount paid forms part of the property price.

This type of arras does not normally allow either party to withdraw freely from the transaction. If the buyer or seller breaches the agreement, the other party may request performance of the contract, termination and, where appropriate, compensation for damages.

For example, if the seller refuses to transfer the property, the buyer may seek not only the return of the money paid but also completion of the sale through the courts.

Arras penitenciales

Arras penitenciales allow either party to withdraw from the transaction subject to predetermined financial consequences.

If the buyer withdraws without a contractual reason, the buyer normally loses the amount paid. If the seller withdraws, the seller must return twice the amount received.

This is the type most frequently used for residential property purchases in Spain.

The agreement should expressly state that the parties are entering into arras penitenciales under Article 1454 of the Spanish Civil Code. Merely using the term arras may not be sufficient to establish the intended consequences clearly.

For example, if the buyer pays €40,000 and later withdraws without a protected contractual reason, the payment may be lost. If the seller withdraws, the seller must return €80,000.

Arras penales

Arras penales operate as a predetermined penalty for breach of contract.

The parties establish the amount of the penalty, the circumstances in which it applies and whether the innocent party may also demand completion of the transaction or compensation for additional losses.

Unlike arras penitenciales, payment of the penalty does not always give a party the right to withdraw freely. The precise consequences depend on the wording of the agreement.

Which type of arras should be chosen?

There is no single type suitable for every transaction.

Arras penitenciales may be appropriate when both parties wish to retain the possibility of withdrawing with clearly defined financial consequences.

Arras confirmatorias may be used when the buyer and seller are firmly committed to completing the transaction and want the right to demand contractual performance.

Arras penales may be suitable when the parties need to establish liability for specific breaches, such as a delay in vacating the property, failure to provide documents or failure to discharge an existing mortgage.

The type of arras should be selected before the agreement is signed and before money is transferred.

How much does the buyer usually pay?

In practice, the arras payment is often approximately 10% of the property price, but this is a market custom rather than a legal requirement.

The parties may agree on a fixed amount, 5%, 10% or another percentage of the purchase price.

The higher the payment, the greater the buyer’s potential loss if the buyer withdraws. At the same time, under arras penitenciales, a substantial payment increases the seller’s liability because the seller must return twice that amount if the seller withdraws.

Before transferring funds, the buyer should verify the owner of the bank account, the recipient’s authority and whether the account details correspond to those in the agreement. Transferring a substantial amount to an intermediary without written confirmation of their authority is risky.

What should the agreement contain?

The agreement should accurately specify:

Where the seller is a company or acts through a representative, the authority of the person signing must be verified in advance.

The completion deadline should be specific. Vague wording such as “after the mortgage is approved” or “when the parties are ready” should be avoided.

Any extension should be recorded in a written addendum signed by both parties.

Documents to check before signing

One of the buyer’s main mistakes is signing the arras agreement and paying a substantial amount before completing an independent legal review.

An up-to-date Nota Simple from the Spanish Land Registry should be obtained first. It allows the buyer to verify:

If the person selling the property is not the registered owner, the agreement should not be signed until the situation has been clarified.

The authority of every owner or representative must also be verified. If the property belongs to several people, all owners or their duly authorised representatives should sign.

Mortgages, debts and property condition

An existing mortgage does not necessarily prevent the sale, but the agreement must specify how it will be repaid and removed from the Land Registry. The outstanding balance, the lending bank and the method of applying part of the purchase price to the debt should be confirmed.

The buyer should also check:

The physical layout should correspond to the Land Registry, cadastral and municipal records. Particular attention should be paid to enclosed terraces, extensions, swimming pools, joined rooms and other alterations.

A technical inspection is advisable when buying a house, villa, older apartment or renovated property. Where the purchase depends on the result, this should be included as a condition of the agreement.

Mortgage financing clause

A major risk arises when the buyer needs mortgage financing but the agreement does not regulate what happens if the bank refuses the loan.

A preliminary approval does not guarantee that the mortgage will ultimately be granted. The bank may refuse financing because of insufficient income, a low valuation, excessive debt, problems with the property documentation or an inability to verify the source of funds.

Where arras penitenciales are signed without a mortgage clause, the buyer may lose the deposit even if the bank refuses the loan.

The agreement should therefore establish:

A general phrase such as “the purchase is subject to mortgage approval” may not provide sufficient protection.

Considerations for foreign buyers

A foreign buyer should plan in advance for obtaining an NIE number, opening a bank account, preparing proof of income and documenting the source of funds.

The bank, notary or lawyer may request tax returns, bank statements, employment or income certificates and documents explaining the origin of the capital.

Failure to obtain the NIE, complete bank compliance checks or transfer the purchase funds on time does not necessarily release the buyer from liability under the agreement.

The completion deadline should therefore take account of the realistic time needed for documentation and international transfers.

What happens if the buyer withdraws?

Under arras penitenciales, a buyer who withdraws without a reason protected by the contract normally loses the amount paid.

The payment may, however, be refundable if the seller breaches the agreement, is not the legal owner, fails to disclose an encumbrance or cannot transfer the property legally.

A refund may also be available if a specific condition included in the agreement occurs, such as a documented mortgage refusal.

Each case must be assessed according to the precise wording of the agreement and the circumstances of the transaction.

What happens if the seller withdraws?

Under correctly drafted arras penitenciales, a seller who withdraws must return twice the amount received.

Disputes may nevertheless arise over which party breached the agreement or which type of arras was actually intended.

If the seller does not return the money voluntarily, court proceedings may be necessary. The right to receive twice the deposit does not replace a proper review of the ownership and a carefully drafted agreement.

With arras confirmatorias, the buyer may in certain circumstances demand completion of the sale rather than merely the return of the money.

Taxes and additional costs

The arras payment forms part of the property price and is deducted from the balance due on completion.

When buying a resale property, the buyer normally pays Property Transfer Tax — ITP. The rate depends on the autonomous community, the price and any available relief.

For the first transfer of a new residential property by a developer, the buyer normally pays 10% VAT — IVA — and regional Stamp Duty — AJD.

The budget should also include notary fees, Land Registry fees, legal services, bank valuation, technical inspection, translations and powers of attorney.

The full cost of the purchase should be calculated before the arras agreement is signed.

Main risks and buyer mistakes

The most common risks and mistakes include:

Once signed, the conditions normally cannot be changed without the other party’s consent. Advertising materials and verbal promises from an agent do not replace the written agreement.

How to sign an arras agreement safely

Before signing, the buyer should:

  1. Obtain the owner’s and property documents.
  2. Request an up-to-date Nota Simple.
  3. Check mortgages, seizures and outstanding debts.
  4. Compare the Land Registry, cadastral records and physical condition.
  5. Arrange a technical inspection where necessary.
  6. Assess the prospects of obtaining mortgage financing.
  7. Agree on a detailed financing clause.
  8. Establish a realistic completion deadline.
  9. Prepare a contract tailored to the transaction.
  10. Verify the recipient’s bank account before transferring funds.

An independent lawyer acting for the buyer should complete the review before the agreement is signed, since the agent or sales office usually represents the seller’s interests.

Conclusion

An arras agreement in Spain is a legally significant contract that establishes the principal terms of the future sale and the consequences if either party withdraws.

Before signing, the buyer should select the appropriate type of arras, verify the owner and the property, establish a precise completion deadline, agree on a mortgage clause and define when the payment must be refunded.

Under arras penitenciales, the buyer normally loses the deposit if withdrawing without a protected reason, while the seller must return twice the amount received. These consequences must be stated clearly in the agreement.

The main rule for a safe purchase is not to transfer a substantial sum before an independent legal review and the inclusion of conditions protecting the buyer.

GG Real Estate Barcelona represents buyers and provides comprehensive support for property purchases in Barcelona, Catalonia, the Costa Brava, the Costa Blanca, the Costa del Sol, Madrid, the Balearic Islands and other regions of Spain.

We verify the property and the seller, prepare the arras agreement, negotiate mortgage and protective clauses, supervise payments and support the transaction through to registration of ownership.

Frequently asked questions

Is an arras agreement mandatory in Spain?

No. It is not legally mandatory, but it is widely used to record the price, completion date and obligations of the parties.

How much does the buyer usually pay as arras?

The payment is often approximately 10% of the property price, although the parties may agree on another amount.

What happens if the buyer withdraws?

Under arras penitenciales, the buyer normally loses the amount paid unless the agreement provides a protected reason for a refund.

What happens if the seller withdraws?

Under correctly drafted arras penitenciales, the seller must return twice the amount received.

Are the arras refunded if the mortgage is refused?

Only if the agreement contains a properly drafted mortgage clause or the parties have agreed on another refund mechanism.

Can arras be signed before the property is checked?

Doing so is risky. The owner, encumbrances, debts and legal status of the property should be checked first.

Can the completion deadline be extended?

Yes, with the consent of both parties. The extension should be documented in a written addendum.

Does the arras agreement need to be notarised?

It is normally signed as a private written agreement. This does not reduce its legal force.

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