Down-Payments, Deposits, Guarantees & Sureties

New residents in any country without a credit history or good financial track record often find themselves being asked to provide down-payments, deposits, guarantees, or sureties for financial commitments in their new home.  Most often this can be to enable them to buy or rent a property for their new home or business, buy a car, or borrow money.

A Down-Payment (often referred to as an “Entrega” or “Reserva”) but commonly as a Deposit (“Deposito”) is part payment of the total price or rental obligation of the purchaser or tenant.  A Deposit  is a sum of money given as security for the performance of financial obligation such as the payment of rent.  

 

When making a Down-Payment it is very important that the total price, or rental obligation is made clear and that the seller or Landlord will give credit for the Down-Payment towards the total price; when any balance is payable; and in what circumstances the Seller or Landlord is entitled to keep the Down-Payment if the buyer or Landlord does not complete the purchase or rental.

When it comes to rental property, a Deposit is normally paid by the Tenant as security for payment of the rent and keeping the property in good condition until the end of the rental contract.  Landlords often look upon the payment of a deposit as a bonus payment in addition to payment of rent, however this is incorrect.  Under Articles 1766 and 1767 of the Spanish Civil Code a Deposit must be retained intact until there has been a breach of the agreement which entitles the Landlord to forfeit it, such as non-payment of rent or the Tenant causing damage to the property.  A Landlord cannot use the deposit himself until the situation has arisen which gives him the right to do so and this must be precisely defined in the rental agreement. 

Confusingly, Article 36 of the Law of Urban Rentals of 1994 refers to a rental deposit as a “Fianza” or Guarantee.  This stipulates that the amount of rental deposit can be equal to one month’s rent for residential property and two month’s rent for commercial property, or such other amount as the Landlord and Tenant may agree.   The amount of the rental deposit should be returned to the Tenant within one month of the Tenant leaving the property, unless the Landlord has good reason not to return it such the need to repair damage caused by the Tenant or cover arrears of rent.

A Guarantee (“Fianza”) is security provided by an additional person or external object or money which guarantees the performance of the principal obligation, such as a third person or bank guaranteeing the payment of a loan or rent.  Again the terms on which the guarantee can be called on must be precisely defined.

A  Surety (“Aval”), is the written confirmation by a third party that they will perform an obligation if the person with the primary duty to carry it out fails to do so.   A common form of this type of arrangement in business is the bank guarantee (“Aval Bancario”) in which a bank guarantees to make a payment if the debtor fails to do so.  Of course, banks are well known for protecting their own interests above all others and if they are to provide this type of guarantee they invariably require property or money to be deposited as security for any risk that the bank may be taking on.   Sometimes, private individuals are asked to become a surety (“Avalista”)  for loans or other obligations and if you are asked to do so this is not a commitment which you should enter into lightly.   If you become a surety for a mortgage, or loan made by a bank, or say, for a finance agreement to buy a car you should assume that you may be called upon to stand by your surety.  You may also find that your own credit rating is affected by taking on such a such a commitment.

Down-payments, deposits, guarantees, and sureties are an inescapable part of modern commercial life but whether you are paying or receiving any of these it is vital that their terms and conditions are precisely defined before you commit yourself.