A client who had sold his property in Malaga asked us the following question: Do I have to return the deposit to a buyer who has not obtained financing in bad faith? The reason for the query was that the deposit agreement contained a termination clause, typical in such agreements, whereby if the buyer did not obtain the financing needed to complete the sale, they could terminate the agreement and obtain a refund of the deposit already paid and delivered to the seller.

In this regard, it should be noted that the deposit agreement is a crucial agreement in any property sale transaction. However, what happens if the buyer does not obtain the promised financing and there are indications that they acted in bad faith? In this article, we will analyse this case from a legal point of view, based on the real situation that came to our law firm.

The deposit agreement and the obligation to obtain financing

When a deposit agreement is signed in a sale, the buyer usually undertakes to obtain the necessary financing to complete the transaction. This agreement acts as a guarantee: if the buyer cannot obtain the mortgage loan, the possibility of recovering the deposit depends on the conditions and, above all, on the good faith of the parties involved.

In the case in question, our client, a property seller, signed a deposit agreement with buyers who undertook to obtain the required financing. However, shortly afterwards, the buyers notified them that the bank had rejected their application. Upon reviewing the process carefully, our lawyers, who are experts in sales and property law, discovered that the application to the bank had not been submitted with the expected diligence and that, in fact, it was subject to terms that seriously hindered the possibility of obtaining the loan. This situation leads to the key question: can it be argued that the buyers acted in bad faith? In this case, does the seller have to return the deposit to the buyer who has not obtained financing?

Specifically, the disputed clause that both parties, the buyers and our seller client, agreed upon in the deposit contract was as follows:

“The application of this stipulation is subject to the BUYER obtaining the corresponding mortgage loan. If, upon expiry of the maximum period established, the Deed of Sale has not been signed between the parties for this reason, this contract shall be terminated and the deposit shall be returned, without either party being entitled to claim any amount. Provided that the buyer can justify the refusal of the loan by means of a bank certificate.”

Return the deposit to a buyer who has not obtained financing in good faith. Concept of bad faith in the sale of real estate

The central point of the conflict is whether to return the deposit to a buyer who has not obtained financing, or whether, on the contrary, the seller can retain it due to bad faith. In Spanish law, bad faith is defined as the intention to act deceitfully or without the honesty expected in contractual relationships. This means that the affected party can take legal action if they can prove that there was an intention to breach or manipulate the terms of the contract.

In our case, the buyers submitted a mortgage loan application with conditions that were clearly unacceptable to the financial institution. For example, they requested 100% financing of the value of the property without providing additional guarantees or demonstrating sufficient financial solvency. This highly unfavourable request raised suspicions that the buyers never had any real intention of obtaining adequate financing. If this were the case, we would be dealing with a breach of the agreed obligations in bad faith.

It is important to mention that in a deposit agreement, if the breach of financing is due to the buyer’s negligence or bad faith, the seller has the right to retain the amount paid as a deposit. Spanish case law has dealt with several similar cases, emphasising the importance of analysing each situation specifically.

Notebook with the text ‘Earnest Money’ on a financial background and a graph of scores. Return earnest money to the buyer acting in bad faith.

The buyer must act in good faith when applying for financing after signing a deposit agreement. The wording of the deposit agreement can also be a great help when defending the situation. Seek the assistance of solicitors who are experts in property sales in Malaga and Nerja.

Evidence and legal arguments to establish the buyer’s bad faith and deny any request to return the deposit to a buyer who has not obtained financing in bad faith

To resolve a dispute over the obligation to return the deposit to a buyer who has not obtained financing, it is essential to provide compelling evidence of bad faith. In our case, the following actions were taken:

  1. Analysis of the deposit agreement: The agreement implicitly stated that the buyers must make every reasonable effort to obtain the necessary financing. That is the purpose of including a clause such as the one requiring the buyer of the property to obtain financing so that the sale can go ahead. Failure to comply with this clause could be considered an act of bad faith if it is proven that the buyers did not act with due diligence, but rather that they themselves frustrated the obtaining of financing due to the manner and conditions under which they applied for it.
  2. Examination of the financing application: It was found that the buyers made a single application with highly restrictive terms (they requested 80% of the value of the property as a mortgage loan from the bank) and with no real chance of success. They did not attempt to seek alternatives or submit additional documentation that could improve the terms of the loan, nor did they apply for the mortgage loan from the bank under parameters that could have been granted by the bank.
  3. Behaviour after the refusal: Following the bank’s refusal, the buyers showed no interest in exploring other financing options, such as adjusting the terms of the application or approaching another financial institution. This fact reinforces the theory that they were not interested in complying with the contract from the outset. Worse still, a couple of months after terminating the purchase agreement with our client, they obtained another mortgage loan from a different bank, which they used to purchase a property other than that of our client.

In short, our argument is based on the fact that the obligated parties did not comply with the conditions agreed upon in the contract, conditions that must be interpreted in accordance with the rules of contractual good faith, as established in Article 1258 of the Civil Code. The doctrine and case law of the Supreme Court (e.g. the ruling of 22 March 1994) define good faith as the need to behave in a fair, appropriate and realistic manner in order to achieve the objective of the contract, including even those implicit obligations that are essential for its fulfilment.

The contractual good faith referred to in the provision is objective, which implies acting with honesty and fairness, as opposed to a subjective interpretation based on personal beliefs or internal intentions. This has been emphasised by the Supreme Court in judgments such as those of 22 October 1991 and 26 October 1995.

In this specific case, the buyers applied for financing with the certainty that it would not be approved, deliberately causing the transaction to fail. Such conduct is not in keeping with the spirit of the contract or the required good faith, preventing the return of the deposit. Furthermore, shortly afterwards, the buyers obtained financing to purchase a different property, which reinforces the conclusion that they could have used those resources to comply with the original contract and purchase the property that our client was selling them.

Tips for protecting yourself in deposit agreements and avoiding conflicts

Our client’s experience highlights the need to be meticulous when drafting a deposit agreement. Here are some practical tips:

  1. Draft clear clauses on financing: It is vital to specify in detail the buyer’s obligations to obtain the loan. Include terms that ensure the buyer will make reasonable efforts and multiple attempts to obtain financing.
  2. Require supporting documentation: If the loan is denied, the buyer must demonstrate that they have made every effort to obtain it. This may include rejection letters from several banks and evidence of the application conditions.
  3. Consult with a specialised solicitor: Before signing a deposit agreement, it is advisable to seek the advice of an expert in property law. This will help prevent misunderstandings and protect the rights of both parties. The Pérez Parras Economists & Lawyers law firm has solicitors who are experts in property sales with more than 15 years of experience.

In other words, the return of the deposit in a purchase agreement is a sensitive issue that depends largely on the good or bad faith of those involved. If you can prove that the buyer did not act with the necessary diligence or that they attempted to frustrate the granting of the mortgage loan by acting in bad faith, you, as the seller, are not obliged to return the deposit to said buyer acting in bad faith.

CONCLUSION: Interpreting that the obligation of property buyers in a sale transaction is satisfied simply by applying for a loan, regardless of the associated conditions, would completely undermine the contractual clause in dispute and render it ineffective. This would allow the parties bound by the clause to formally comply with the condition by making a superficial mortgage loan application, without considering its viability. This interpretation clearly does not reflect the intention of the parties when signing the deposit agreement. I understand that our client, the seller, expected the buyers to apply for the mortgage loan under reasonable market conditions.

If you want to buy a property, business premises, building or parking, or sell a property in Malaga, and you want to avoid problems following the purchase of a property in Malaga, in the Law Firm Pérez Parras Economists and Lawyers in Málaga we are expert lawyers in the purchase and sale of properties in Malaga and Nerja, with a team of lawyers and economists bilingual English / Spanish who can advise you to avoid surprises in the purchase of your property. We have offices in the centre of Malaga and Nerja. Do not hesitate to contact us and ask us for a quote to accompany you in the process of buying or selling your property. We will prepare and review your earnest money contract after ensuring that the purchase you wish to make is viable and secure, without hidden charges of any kind, and we will help you and deal with all the taxes associated with your property purchase and sale operation in Málaga, optimising for example the IRPF to pay if the property comes from an inheritance, advising you until the end of your purchase, or sale of the property, including the tax declaration, whether you are resident or taxed as a non-resident, and any other procedure with the Administration or Land Registry. You should also know that with the purchase of your property worth at least 500,000 euros in Spain we can help you to process your Golden Visa Investor Residence Permit for you and your family members. Equally, if you have any difficulties following the sale or purchase of a property, please do not hesitate to contact us so that we can advise you and defend you in or out of court if necessary. If you are a highly qualified professional in Malaga and wish to purchase your property in Malaga, we will also advise you in every step of the purchase process, ensuring that the property you wish to buy and the investment you wish to make will not cause you any problems, protecting your interests, organising your taxes and taxation as a highly qualified professional, so that you can develop your professional career and settle your life and your future in Malaga or Nerja with all the guarantees of the best legal advice.