reservation contract & arras contract, What differences are there?

It’s very common, when buying a house, to initially sign what’s called a reservation contract whose purpose is to get the property out of the market to avoid a new buyer appearing, in exchange of a small sum of money. After this, another contract is usually signed, which is named “arras” contract, and together with it, another sum is paid that usually amounts to 10% of the final price. Although named differently, and serving, at least from the parties’ point of view, different purposes, is there a real difference between them?

We have to start by taking into account that, as soon as there is an agreement on the price and the object of the contract -for our purposes, the property-, the Spanish Civil Code considers that the purchase and sale has been perfected. This means that, having agreed both on the price and the object, each of the parties can compel the other to fulfil his obligation -to pay or to transmit the property- without having to sign any other contracts. In conclusion, there’s nothing really being reserved, but rather the property is actually being bought, with the possibility for each party to request the other to fulfil their obligation of giving either the object or the rest of the price. In order to speak about a true reservation contract, it would have to be that, without having agreed a price for the house, the owner agreed not to sell it to anybody else -to reserve it for the potential buyer- in exchange of receiving a certain amount of money.

The same goes for the “arras”, the fact is that such a contract cannot exist and the contract is of purchase and sale or promise to sell. The word “arras” means earnest payment, so it refers to a type of partial payment, and it can be just that, in which case it’s referred to as confirmatory arras, or be of two other types, penitential or penalty arras. The Civil Code only regulates penitential arras, whose main characteristic is that, when this kind of payment is made, the contract may be rescinded by the purchaser by agreeing to forfeit the earnest money, or the seller to return it in duplicate. It’s precisely this type of earnest payment that is agreed in purchase and sale contracts.

In summary, there’s an agreement on both the price and the object, and thus, the parties can compel each other to fulfil their obligations. In addition, all that is agreed in the contract regarding the arras is that they are of the penitential type, which permits the contract to be rescinded. But the contract to be rescinded is the purchase and sale contract, as there is no arras contract, only a clause within the purchase and sale contract in which the earnest money is mentioned. Imagine, for a moment, that it’s agreed that the price will be paid in one single payment, nobody would refer to a “single payment contract”, as this is just the form of payment, and the contract is of purchase and sale. The earnest money is simply a type of payment, not a contract in itself. If this wasn’t enough, it’s common to use this second contract to indicate that the money paid as reservation also works as an earnest payment, making it even clearer that both contracts are, in reality, the same purchase and sale contract, but referring to two different amounts being paid.

Lastly, it’s important to take into account that the principle of contract conservation is fully applicable in the Spanish legal system. This means that, when in doubt, the court will try to preserve the contract so that it produces its effects rather than rescinding it. This has led to our courts interpreting penitential arras in a restrictive way -as they are the ones that permit rescission-, so, unless the parties’ will is expressed clearly, the court will interpret them as being confirmatory. This restrictive interpretation has reached such a point where the Supreme Court understood that, although the parties had mentioned the Civil Code’s article that regulates penitential arras, there was not sufficient evidence to consider them to be of this type.

Given these circumstances, it’s fundamental to get help from a professional who is able to draft the contract in such a way that there’s no doubt about the intention of the parties. Otherwise, it could happen that, before the request from one of the parties to rescind the contract, the other negates this arguing that, in reality, only confirmatory arras were agreed and thus, rescission is not allowed.