The Confirmatory Deposit in the Sale and Purchase of Real Estate

1.What is the confirmatory deposit?

The confirmatory monetary deposit, according to the provision of Article 1385 of the Civil Code, is a legal instrument that is widely applied in real estate purchases and sales and the same deposit is generally paid by the buyer to the seller at the time of signing the preliminary purchase and sale agreement.

The rationale of the institution is to ensure compliance with contractual commitments, providing protection for both the seller and the buyer. Its operation, application profiles and practical implications are analyzed below.

The confirmatory monetary deposit fulfills two main functions:

1. Guarantee function that serves to strengthen the contractual bond by providing an incentive for both parties to fulfill their obligations.

2. Compensatory function in case one of the parties fails to fulfill its obligations. In such a case, the deposit can be retained or returned with a doubled value, thus saving the affected party from having to prove the extent of the damage suffered, provided that the fulfilling party is always entitled to claim more suffered damages, if he/she manages to prove them.

Indeed, it represents, on the one hand, an advance on the total price and, on the other hand, a guarantee of the buyer’s commitment to complete the purchase (and the commitment of the seller, to sell) .

The effects of the confirmatory deposit are effective when the buyer makes the agreed amount available to the seller for this purpose.

Therefore, a check received and not yet cashed by the seller, or an amount paid as security to a third party, with the explicit function of a confirmatory deposit, will also follow the rules under consideration.

2.The effects of the confirmatory deposit.

The effects of this institution vary depending on whether the contract is fulfilled or not.

In case of fulfillment, the amount paid is usually charged against the final price of the property.

In case of default, however, the effects change depending on whether it was the buyer or the seller who defaulted:

(i) If he defaults, the seller is entitled to retain the deposit as compensation;

(ii) If the seller is in default, the buyer may demand the return of the doubled deposit.

3.Distinction between confirmatory deposit and other related institutions.

The application of the institution of the confirmatory deposit in correlation with a sum paid as an advance on the total price will be possible only where the same is expressly referred to in the contract.

Otherwise we may be faced with other seemingly similar legal institutions, such as the contractual penalty or the down payment. These institutions, although apparently similar in wording, have the different legal effects.

The penalty clause, provides for damages determined in advance in the event of default by one of the parties and, in this way, limits the amount of damages that can be compensated to what the parties stipulate in the contract. It is also possible to provide for the automatic transition of the security deposit into a penalty clause, thus limiting the uncertainty of the quantum of damages that may be due, if any, in the event of default.

The down payment also differs from the deposit, which is only an advance payment of the price due and cannot be retained if the contract is terminated for non-performance. The right to retain the down payment, charging it to compensation for any damages suffered, is possible. In order to distinguish the two figures, which is not always easy in practice, in the silence of the contract on the point a sum given will be considered a down payment.

3.Safeguards in the conclusion of the contract.

In order to avoid possible disputes related to the application of the confirmatory deposit, it is essential that the preliminary contract be carefully drafted by the professional and contain, among others, the following indications:

(a) clear indication of the amount paid as a deposit;

(b) detailed description of the terms of the contract and the obligations of both parties;

(c) it is also useful to provide for the consequences in the event of non-performance by one or both parties with reference to the handling of the sums paid as a deposit and how the contract can be terminated.

6.Conclusion.

The confirmatory deposit, governed by Article 1385 of the Civil Code, is an essential tool in real estate purchases and sales to protect both parties and to incentivize compliance with contractual obligations. However, in order to take full advantage of its benefits, it is crucial to clearly define its effects even with respect to the preliminary contract and, where necessary, to take the advice of a legal professional.

Finally, the fate of the confirmatory deposit paid in the preliminary contract follows that of the final contract also in terms of taxation. In fact, according to a recent ruling of the Supreme Court of Cassation, “the registration tax paid in a proportional amount on the confirmatory deposit must be refunded, if the related preliminary contract of registered real estate sale is terminated by mutual consent by the parties, who will therefore not give rise to any final contract” (See Cass. civ., Sec. V, Ordinance, 18/10/2024, No. 27093).