In our previous post, we introduced the three types of arras contracts used in Spanish real estate transactions. In this post we’re focusing on arras penitenciales (penalty earnest money)—the most commonly used type and the one that offers both parties a defined exit route.

What Are Arras Penitenciales?

Arras penitenciales are a preliminary agreement where the buyer delivers a deposit to the seller with the mutual understanding that either party can withdraw from the transaction by accepting predetermined financial consequences. Article 1454 of the Spanish Civil Code governs this arrangement, stating that the purchase contract may be rescinded with the buyer forfeiting the deposit or the seller returning it doubled.

This mechanism doesn’t force either party to complete the sale at all costs. Instead, it establishes the economic cost of backing out.

How Do Arras Penitenciales Work?

When you sign an arras penitenciales contract, the buyer delivers a deposit (typically 5-10% of the purchase price) to the seller. Both parties commit to completing the final sale within a specified deadline. However, during this period, either party may withdraw:

If the buyer withdraws: They lose the entire deposit amount

If the seller withdraws: They must return double the deposit amount to the buyer

If the transaction proceeds successfully, the deposit is credited toward the final purchase price.

Key Differences from Other Types of Arras

Unlike arras confirmatorias, which create a binding obligation to complete the sale and allow the non-breaching party to sue for performance or damages, arras penitenciales provide a negotiated exit. The predetermined penalty (lost deposit or doubled return) represents the full extent of liability—neither party can sue for additional damages beyond this amount.

Unlike arras penales, which function as penalty clauses under Articles 1152-1153 of the Civil Code, penitenciales specifically focus on providing a withdrawal option rather than penalizing breach.

Critical Elements of an Arras Penitenciales Contract

For your contract to function properly as arras penitenciales, it must include:

  • Complete party identification: Full names, identification numbers, and addresses of buyer and seller
  • Property description: Exact location, cadastral reference, registry details
  • Total purchase price: The agreed-upon sale price
  • Deposit amount: The earnest money delivered (señal)
  • Explicit penitenciales clause: Clear statement that these are arras penitenciales, not confirmatory or penal
  • Deadline for final deed: Specific date for signing the escritura pública
  • Property encumbrances: Status of debts, mortgages, or liens on the property
  • Cost distribution: Who pays notary fees, taxes, and registration costs
  • Withdrawal consequences: Explicit statement of what happens if either party withdraws

Article 1281 of the Spanish Civil Code emphasizes that when contract terms are clear, courts must apply the literal meaning of the clauses. This makes precise drafting essential—vague language can lead to expensive disputes about whether you have a withdrawal right or a binding obligation.

The Mortgage Financing Problem

The biggest risk in arras penitenciales contracts involves mortgage financing. If you sign arras without a financing clause and the bank denies your mortgage application, the contract doesn’t automatically terminate. You could lose your deposit even though you legitimately cannot complete the purchase.

Solution: Include a suspensive condition (condición suspensiva) that makes the contract conditional on obtaining mortgage approval. Specify:

  • Minimum loan amount required
  • Deadline for obtaining bank approval
  • Required documentation proving denial
  • What happens to the deposit if financing fails

This clause protects your deposit if the bank refuses your mortgage application through no fault of your own.

Practical Example

Imagine you’re buying a property for €250,000 and deliver a deposit of €12,500 (5%) under arras penitenciales:

  • If you complete the purchase: The €12,500 is credited toward the €250,000 price; you pay €237,500 at closing
  • If you withdraw: You forfeit the €12,500 deposit
  • If the seller withdraws: The seller must pay you €25,000 (double the deposit)

This structure creates a balanced incentive for both parties to complete the transaction while providing a defined exit cost if circumstances change.

Common Mistakes to Avoid

  1. Failing to specify the type of arras: If you don’t explicitly state “penitenciales,” courts may interpret the contract as confirmatory, eliminating your withdrawal option
  2. Signing without financing protection: Never sign arras penitenciales without a mortgage contingency clause if you need bank financing
  3. Unclear deadlines: Vague completion dates create disputes; Article 1125 states that obligations with fixed dates are only enforceable when that date arrives
  4. Not verifying property encumbrances: Always check the nota simple (property registry certificate) before delivering your deposit
  5. Using generic templates without customization: Generic internet models rarely address your specific situation; contracts should be adapted to your transaction

Can You Extend the Deadline?

Yes, both parties can agree to extend the deadline for signing the final deed, but this extension must be documented in writing. Informal verbal agreements to extend don’t provide legal protection. Any extension should specify the new deadline and whether any other terms change.

Why Arras Penitenciales Are So Popular

This type of arras provides flexibility while maintaining seriousness. Buyers can reserve a property knowing they have an exit option if circumstances change (job loss, family emergency, failed mortgage application). Sellers can accept a reservation knowing they’ll receive compensation if the buyer backs out.

The key advantage is certainty: both parties know exactly what withdrawal costs before signing. There’s no uncertainty about damages, litigation, or open-ended liability.

Getting Professional Support

While arras penitenciales contracts don’t need to be lengthy, they must be precise. The difference between a well-drafted contract and a problematic one often comes down to a single clause. Consider having your contract reviewed by a real estate professional, especially when the transaction involves financing, property encumbrances, or complex circumstances.

Before signing any arras contract, also consider obtaining a property valuation to ensure the agreed price aligns with market value and mortgage lending standards. This reduces the risk of signing arras on a price the bank won’t finance.

Moving Forward with Confidence

Understanding arras penitenciales empowers you to negotiate property purchases in Spain with clarity about your rights, obligations, and exit options. Remember that the contract’s specific language controls your rights—not general assumptions about how arras “usually” work.

Need a contract template? If you’d like a model or draft (borrador) of an arras penitenciales contract, contact me by email at barbara@spainable.com and I will send it for free.

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