Although the exercise of contractual freedom finds its limits in the law itself, freedom is the rule. In other words, real estate deals can be freely entered into.
Therefore, the parties that intend to enter into a real estate deal do so by mutual agreement on the terms and conditions.
However, in some situations, the seller requires a down payment when buying real estate. Therefore, the buyer is looking for a guarantee or confirmation of the legal transaction.
But what does business sign or arras mean? Must the business signal be returned or might it be lost? Is it lost if you give up?! Is it for the initial payment of the contract?!
Keep reading the article for more information.
What does business sign or arras mean?
The “deal sign”, also known as “arras” is an accessory pact used in the promises to buy and sell real estate. But, let’s explain the meaning of arras in jurisprudence and law.
In Jurisprudence (STJ Judgment)
Thus, we transcribe the words of Minister Nancy Andrighi, of the Superior Court of Justice (STJ), delivered in judgment (SPECIAL APPEAL No. 1.669.002 – RJ).
“Arras constitute the amount or movable property delivered by one of the contracting parties to the other, at the time the contract is signed, as a sign of guarantee of the business. They present a real nature and are intended to: a) sign the presumption of final agreement, making the adjustment mandatory (confirmatory character); b) serve as a payment principle (if they are of the same kind as the main obligation), and c) pre-fix the amount of losses and damages due for breach of the contract or for the exercise of the right of repentance, if expressly stipulated by the parties (indemnity character)”.
But what about the law, what does it say?
In the law text (Civil Code)
Well, in the Civil Code, between articles 417 to 420, there is the regulation of arras.
So, in article 417 of the Code, the following is provided:
Art. 417. If, upon conclusion of the contract , one party (*) gives to the other, as arras, (*) money or other movable property , the arras, in case of execution , shall be returned or computed in the payment due , if of the same kind as the principal.
Therefore, from the text of the law mentioned above, the arras (business signal) are consumed by the (*) effective delivery of some movable property or in cash. Although, it is more common, the use of cash or bonds of credit (check, promissory notes etc.).
In addition, it is noted that the most appropriate time to deliver or receive the arras is when the deal is concluded. In other words, when you want to confirm the final closing of the contract.
Furthermore, the arras can serve as part of the payment of the price of the property or be refunded upon the performance of the main obligation. For example, if the payment of the promise to buy and sell a property is made in cash and the arras as well, then they will be able to compute them in the installment due. On the other hand, if it were a promise of pure real estate exchange and the arras paid in cash; then, once the transfers are carried out, the arras will be returned to the person who gave them.
Thus, initially, the business signal (arras) in the purchase of real estate can also serve as a payment or just a guarantee of compliance.
However, let’s move on, as there are still many other features of arras to address in this article.
Must the business signal be returned or might it be lost?
What if, after having delivered or received the arras, you do not enter into the contract that is the object of the business signal? So, in this situation, is it lost or returned the arras or business signal?
Well, if the buyer’s regret or non-compliance, he will lose the arras delivered in favor of the seller.
Thus, if the purchase and sale of real estate business is terminated by the buyer’s initiative, the seller will have the right to retain the business signal.
However, if the seller is the one who gives up, then how will it be?
So…, if the legal transaction ends at the seller’s initiative, the buyer will have the following rights:
Require the return of the business signal; as well as the payment of an amount equivalent to that of the arras. Furthermore, it may require that such amounts be paid with interest and monetary correction. In addition, if applicable, you can claim compensation for attorney’s fees.
Finally, the question is: And if the business signal is insufficient to repair the damage, can it require more damages? Also, if the innocent party wishes to keep the business, can it demand performance of the obligation plus damages?
The answer to these questions, however, will depend on the type of arras agreed upon. This, therefore, is what we will see in the next topic.
The types of business signals: What are confirmatory and penitential arras?
As discussed in other articles, the real estate contract may or may not contain a repentance clause.
If it has no repentance clause, therefore, it will be irrevocable and irreversible.
But, for more information on the themes, we suggest reading the following articles:
- The right to regret in the promises to buy and sell property
- Irrevocable and irreversible contract in the purchase and sale of real estate: what is it?
For now, it only stands out that: these two hiring options directly influence the definition of the types of arras. Namely: (01) Confirmatory Arras and (02) Penitential Arras. It is noteworthy, furthermore, that doctrine and jurisprudence have given such names to arras.
So, what are these two types of arras and how do they differentiate?
What are confirmatory arras?
Confirmatory arras have the nature of confirming the obligatory nature of the contraction and proving its irrevocable and irreversible nature. In other words, the deal becomes firm, right, with no right of regret and any non-compliance will be a breach of contract.
However, what does the law say about confirmatory arras?
Art. 418. (*) If the party that gave the arras does not perform the contract, the other may have it undone, (**) retaining them; (*) if the non-execution is from the person who received the arras, the person who gave them may have the contract undone, and (**) demand its return plus the equivalent, with monetary restatement according to regularly established official rates, interest and attorney’s fees.
Art. 419. (****) The innocent party may request additional indemnification, if it proves greater damage, using the (*****) arras as a minimum fee. It may also (***) the innocent party demand the execution of the contract, with the losses and damages, with the arras being the minimum of the indemnity.
From the reading of the articles, therefore, it is inferred that the confirming reasons:
- In case of breach of contract, the innocent party opens two alternatives: ( * ) to cancel the deal or ( *** ) to demand compliance ;
- In both alternatives, you can (**) retain the arras (right of those who received the arras) or (**) demand the restitution of the arras plus the equivalent (right of those who paid for the arras);
- Also , (*****) the value of the arras serves as a minimum fee to indemnify;
- Also, (****) admits the right to additional compensation, if proven;
- (***) Does not admit the right of contractual repentance ;
What are penitential arras?
Penitential arras, on the contrary, are so called when the contract provides for the right to repent. Thus, while the right to repent remains in the contract, the arras lose some of their powers.
Furthermore, as the law itself states, in this case, the arras will have the sole indemnity function.
However, what does the law say about penitential arras?
(*) If the right of repentance is stipulated in the contract for either party, (**) the arras or signal will have a compensatory function only. In this case, whoever gave them (***) will lose them for the benefit of the other party; and whoever received them (***) will return them, plus the equivalent. (****) In both cases there will be no right to supplementary indemnity.
Article 420 of the Civil Code
Thus, the following characteristics of penitentiary arras are extracted from the reading of the law text:
- That the right of repentance has been (*) stipulated in the contract for either party.
- ( *** ) It has a unique indemnity function.
- A party cannot demand the fulfillment of the obligation, if the other exercises the right of repentance, but only accepts the extinction of the business.
- In this case, therefore, he can only (***) retain the arras (right of whoever received the arras) or (***) demand the restitution of the arras plus the equivalent (right of whoever paid for the arras);
- But, (****) she does not admit additional indemnity; even if the damage exceeds the value of the arras.
Indeed, it is noted that penitentiary arras have limitations in relation to confirmatory arras, the latter being broader in terms of powers. But what is the main difference between them?
What is the main difference between the two types of arras?
Well then, the central difference between the forms of business signal, consists in the possibility or not, of additional indemnity to the fixed value by way of arras or business signal.
In addition, it can be stated that in the confirmatory arras it is possible to demand the fulfillment of the main obligation and damages. On the other hand, in penitentiary arras you can only retain the arras or demand restitution plus the equivalent, as the case may be.
Finally, the penitentiary arras allow prior delimitation of the indemnity, but in the confirmatory ones they do not. In summary, these are the main differences between the types of arras.
What is the value of the business signal?
There is no fixed proportion to match the business signal in real estate purchase. However, the buyer is interested in the lowest percentage possible.
Thus, it is common for the business signal, regardless of the modality, to be agreed between the percentages of 10% to 30% (ten to thirty percent). However, there are also cases of conviction in an amount greater than 50% of the purchase and sale price of the property.
But, it is not enough to just agree on the value of the arras.
Furthermore, it is also necessary to pay attention to the other contractual clauses. That is, especially those that deal with the possibility, or not, of the right to repent.
Although the right to repent may denote a certain security to the buyer, the fact that the arras in this modality have an indemnity nature, and can thus be lost in case of withdrawal, tends to generate a considerable burden, if not prevented.
In conclusion, even if real estate contracts can be freely entered into, it is important for buyers to know, at least minimally, the legal aspects involved. Because, the responsibility is proportional to the size of the freedom you have.
To provide such knowledge, the advice of a real estate attorney is of great importance. For example, this article has dealt with just a few aspects of arras. However, there are many other particularities about the subject, such as exceptions arising from the law.
However, we do not want to be exhaustive, but to contribute with knowledge of the subject and its practical importance.
Do you have any doubts? Need help with a real estate deal? So, contact us and schedule an appointment. Well, we will be delighted to help.
Real estate legal assistance will give you a broader view of the business’ variations. Thus, you will have greater security and effectiveness, and may also reduce your expenses or losses.