Penalty clause in a French sale contract: amount, courts

Penalty clause, deposit, arrhes: three different things

The dépôt de garantie is not a condition of the compromis’s validity. According to service-public.gouv.fr, it is “common” for the compromis to provide for one; it is a down payment of 10% of the price. It is refunded in full if a condition suspensive (condition precedent) is not met, and kept by the seller if the buyer withdraws from the purchase (service-public.gouv.fr). For the indemnité d’immobilisation (holding fee) of a promesse unilatérale (unilateral promise to sell), the guidance page cites as legitimate grounds for withdrawal fault by the seller who failed to provide essential documents, concealed decisive information or sold a non-compliant property.

The clause pénale works differently: article 1231-5 targets the party that fails to perform the contract, whichever it is. It can therefore apply against a seller who refuses to sign the acte authentique (notarial deed) as well as against a buyer who backs out.

Arrhes are the opposite of a firm commitment: “If the promise to sell was made with arrhes, each of the contracting parties is free to withdraw from it” (art. 1590), at the cost of the arrhes being lost or repaid twice over. The wording of the deed matters: a sum described as arrhes opens a right to withdraw, not a penalty clause.

The amount and the court’s powers

The principle. Where the contract provides that a defaulting party will pay a certain sum as damages, the other party can receive neither more nor less (art. 1231-5, para. 1).

The safeguard. “Nevertheless, the court may, even of its own motion, reduce or increase the penalty thus agreed if it is manifestly excessive or derisory” (art. 1231-5, para. 2). The court can also reduce it in proportion to the benefit provided by partial performance (para. 3). The contract cannot take these powers away from the court: any stipulation to the contrary is deemed unwritten (para. 4).

No amount is set by law for the penalty clause in a compromis: the parties negotiate it. The only legal minimum concerns a different sum, the indemnité d’immobilisation (option fee) of at least 5% of the price, compulsory in a promesse unilatérale (unilateral promise to sell) of more than 18 months (service-public.gouv.fr).

When is the penalty due?

“Except in the case of definitive non-performance, the penalty is incurred only when the debtor is given formal notice” (art. 1231-5, para. 5). The party seeking it therefore starts with a mise en demeure (formal notice) requiring the other to sign the acte authentique.

The penalty is not due where the compromis falls through for a reason provided for: failure to meet a condition precedent makes the promise caduque (lapsed), and the sum paid is refunded in full to the buyer (service-public.gouv.fr). See the guide condition suspensive de prêt (mortgage condition clause).

During the 10-day cooling-off period of a non-professional buyer, no payment may be demanded or received, except into the hands of a professional holding a financial guarantee, who must refund the sum within 21 days if the buyer withdraws; breaching these rules is punishable by a fine of €30,000 (code de la construction et de l’habitation, Construction and Housing Code, art. L271-2). See the guide délai de rétractation (buyer’s cooling-off period).

Compelling completion of the sale

The penalty clause is not a paid way out. For a compromis, “A promise to sell is equivalent to a sale where there is mutual consent of both parties on the thing and on the price” (Civil Code, art. 1589). For a promesse unilatérale, revocation by the seller during the option period “does not prevent the formation of the promised contract” (art. 1124).

In both cases, the party honouring the contract can, after formal notice, pursue specific performance, unless it is impossible or there is a manifest disproportion between its cost to a debtor in good faith and its benefit to the creditor (art. 1221). In practice, a buyer whose seller refuses to sign can ask the court to have the sale completed, rather than just claiming the penalty.

Service-public.gouv.fr points out that the seller is definitively bound from the signature of the compromis or the unilateral promise, unless a dédit (withdrawal) clause is provided for in the deed. See the guide compromis ou promesse de vente (preliminary sale contract or promise to sell).

Which professional to consult

The notaire (notary) drafts the compromis or the promise, sets the level of the penalty clause and the deposit, and holds the deposit in their escrow account until the sale. An agent immobilier (estate agent) holding a financial guarantee can also draft the compromis; their financial guarantee is the condition for them to be able to receive a sum during the cooling-off period (CCH, art. L271-2).