The preliminary contract of sale (contrato-promessa) is, in most property transactions, the first binding commitment between buyer and seller, preceding the deed of purchase and sale. The correct drafting of the preliminary contract, including the clauses on the deposit, time limits and conditions, is often decisive in preventing future disputes, and the legal regime of the deposit (sinal), in particular, is one of the most relevant matters to understand before signing. This article forms part of the Real Estate Law area of Araújo & Associados.
What a preliminary contract is and what it is for
The preliminary contract is the agreement by which both parties, or only one of them, undertake to enter into a given contract, in this case the contract for the purchase and sale of a property. It is not legally mandatory to enter into a preliminary contract before the deed, but it is common and advisable practice whenever there is a gap in time between the initial agreement and the deed, for example, to allow the buyer to obtain bank financing, or to allow time for the resolution of pending issues relating to the property, since it binds the parties and fixes in advance the price, the deposit, the time limits and other conditions of the transaction.
Formalities of the preliminary contract for property
A preliminary contract for the purchase and sale of a building, or a separate unit of one, whether already built, under construction or to be built, is subject to specific formalities and, pursuant to Article 410(3) of the Civil Code, must be set out in a document signed by the parties.
The deposit – the regime of Article 442 of the Civil Code
The deposit (sinal) is the sum handed by one contracting party to the other at the time of signing the preliminary contract, with the function of reinforcing the commitment undertaken and, in the event of breach, acting as pre-fixed compensation, dispensing with proof of the damage actually suffered. Unless otherwise stipulated in the preliminary contract itself, all sums handed by the prospective buyer (promitente-comprador) to the prospective seller (promitente-vendedor) as an advance on the price are presumed, under the law, to be handed as a deposit.
Breach by the prospective buyer
Unless otherwise stipulated, if the prospective buyer is at fault and definitively fails to perform the preliminary contract, the prospective seller is entitled to keep the sum handed as a deposit, pursuant to Article 442(2) of the Civil Code, that is, the prospective buyer forfeits the deposit paid in favour of the prospective seller.
Specific performance as an alternative to the deposit
Instead of terminating the contract and demanding the return of the deposit, the non-defaulting party may opt, pursuant to Article 830 of the Civil Code, for specific performance of the preliminary contract, that is, ask the court for a judgment that produces the effects of the defaulting party’s declaration of intent, thereby obtaining the compulsory conclusion of the promised contract.
This route is particularly relevant where the aggrieved party’s interest is actually to buy or sell the property, and not merely to be compensated, but it is only possible where completion of the transaction is still possible, which is not the case, for example, where the property has been sold to a third party.
Delay vs. definitive breach
The sanctions provided for in Article 442 of the Civil Code – forfeiture of the deposit or return of double its amount – apply only in the event of definitive breach of the preliminary contract, and not in the face of mere delay (mora) by one of the parties. To convert delay into definitive breach, a formal notice (interpelação admonitória) is generally necessary, pursuant to Article 808 of the Civil Code, i.e., the setting of a reasonable additional period for performance, with a warning that, if that period elapses without performance, the contract will be deemed definitively breached. This distinction is often decisive in disputes concerning preliminary contracts, so the way in which the notice is given must be carefully considered.
Preliminary contract and other related matters
The preliminary contract is frequently associated with other stages of the process of acquiring a property, in particular the document checks and the deed, described in the article Buying and selling property in Portugal – process guide. Where the preliminary contract concerns a property to be built or under construction, issues relating to delays in delivery of the works, dealt with in the article Delays in the works – rights of the client, and the legal guarantees for construction defects, described in the article Construction defects – guarantees and time limits for claims, may also be relevant.
About Araújo & Associados
Established in 1980, with offices in Porto and Lisbon, Araújo & Associados provides legal advice on the negotiation, drafting and review of preliminary contracts, and on handling situations of breach, in Portuguese, English, French, German and Spanish.
Frequently asked questions about the preliminary contract
What happens if I withdraw from the deal after paying the deposit?
As a rule, if the breach is culpable and definitive, you lose the amount handed as a deposit in favour of the prospective seller, pursuant to Article 442(2) of the Civil Code.
And what if the seller withdraws from the deal after I have paid the deposit?
As a rule, you are entitled to demand double the deposit paid.
Can I force the other party to complete the deal, instead of just keeping the double deposit?
Yes, under certain conditions. The law provides for the possibility of specific performance of the preliminary contract, through which the court may issue a judgment replacing the missing declaration of intent, thereby obtaining the compulsory conclusion of the promised contract.
Must a preliminary contract always be accompanied by a deposit?
It is not mandatory, but it is the most common. In the absence of any stipulation to the contrary, any sum handed by the prospective buyer as an advance on the price is presumed to be a deposit.
Is a simple delay in the deed already considered breach for the purposes of forfeiture or return of the deposit?
Not necessarily. The deposit sanctions apply to definitive breach, and not to mere delay. To convert a delay into definitive breach, a formal notice is generally necessary, setting a reasonable period for performance on pain of the contract being deemed definitively breached.
Contact us
For more information on preliminary contracts of sale, or to book a legal consultation, you can contact us through our Porto or Lisbon offices, by telephone, email or via the form on the website. We provide legal advice in Portuguese, English, French, German and Spanish.