Deposit vs. Advance Payment vs. Penalty
Before signing a real estate purchase agreement in Hungary, the buyer typically pays a sum of money to the seller — but the legal label attached to that payment matters enormously. Under Hungarian law, three distinct instruments are commonly used: the foglaló (earnest money deposit), the előleg (advance payment), and the kötbér (contractual penalty). Confusing them can lead to significant financial loss. In this article, we explain what each one means, what happens when a contract falls through, and which option makes sense for buyers and sellers.
What does Hungarian law say?
Earnest money deposit — Civil Code § 6:185
Under the Hungarian Civil Code, an earnest money deposit (foglaló) is a payment made by the buyer as a guarantee of performance:
- If the buyer fails to perform, the seller keeps the deposit.
- If the seller fails to perform, the seller must repay double the deposit.
- The deposit is typically up to 10% of the purchase price.
Because the legal consequences flow directly from the Civil Code, no separate penalty clause is needed — the rules apply automatically once the payment is labelled as a deposit.
Advance payment (előleg)
An advance payment is simply part of the purchase price paid ahead of completion:
- It is deducted from the total purchase price at completion.
- It carries no automatic forfeiture if the deal falls apart.
- If the contract is cancelled, the advance must be returned — unless a damages claim arises.
Contractual penalty — Civil Code § 6:186
A contractual penalty (kötbér) is an agreed sum that the breaching party must pay:
- The amount is freely negotiated and written into the contract.
- Its purpose is to incentivise performance.
- A court may reduce it if the amount is disproportionately high.
Side-by-side comparison
| Aspect | Earnest money | Advance payment | Contractual penalty |
|---|---|---|---|
| Purpose | Performance guarantee | Prepayment of price | Compensation for breach |
| If buyer defaults | Seller keeps it | Returned (absent damages) | Seller may claim it |
| If seller defaults | Returned doubled | Returned | Buyer may claim it |
| Typical amount | Up to ~10% | Any amount | As agreed |
| Automatic consequence | Yes — Civil Code | No | Yes — if written in contract |
| Deducted from price | Yes | Yes | No |
Real-world examples
Example 1: Buyer pulls out — earnest money scenario
Facts: The buyer paid HUF 2,000,000 as an earnest money deposit on a HUF 20,000,000 flat. The buyer is unable to proceed.
Result: The seller keeps the HUF 2,000,000. The buyer faces no further liability unless the seller can prove actual damages exceeding the deposit amount.
Example 2: Seller pulls out — earnest money scenario
Facts: Same situation, but the seller decides to sell to a different buyer.
Result: The seller must repay HUF 4,000,000 — double the deposit. This is an automatic statutory consequence under Hungarian law; no proof of loss is required.
Example 3: Advance payment — deal falls through
Facts: The buyer paid HUF 5,000,000 as an advance payment, but the contract is never finalised.
Result: If neither party is at fault, the advance must be returned. If one party is responsible for the collapse of the deal, the other may claim damages — but damages must be proved.
Example 4: Contractual penalty for late handover
Facts: The contract includes a HUF 1,000,000 penalty if the seller fails to hand over the property by the agreed date.
Result: If the seller is late, the buyer can automatically claim HUF 1,000,000. No proof of actual loss is needed — this is the key advantage of a contractual penalty clause.
Which instrument should you choose?
As a buyer
- Confident the deal will proceed: use an earnest money deposit — but be aware you forfeit it if you withdraw.
- Uncertain: use an advance payment — refundable if there is no breach.
- Concerned about late handover: negotiate a contractual penalty clause for the seller's delay.
As a seller
- Earnest money deposit — the strongest protection against a buyer who walks away.
- Contractual penalty — automatic compensation if the buyer is late with payment or other obligations.
- Accept an advance payment only if you are confident in the buyer.
Frequently asked questions
Can the earnest money deposit exceed 10% of the purchase price?
Technically yes, but Hungarian courts may reduce it as disproportionate. We recommend staying within 10%.
Does the deposit arrangement need to be in writing?
Absolutely. Without a written record identifying the payment as a deposit, a court may treat it as a simple advance payment — which offers the seller far less protection.
Can earnest money and a contractual penalty be used together?
Yes, but they must be clearly distinguished in the contract — for example, a deposit at signing and a separate penalty for delayed handover.
What if the parties cannot agree?
The matter goes to court. A written contract and documentary evidence of the payment (bank transfer record, receipt) will carry the bulk of the evidentiary burden.
Under Hungarian law, earnest money, advance payments, and contractual penalties are three distinct tools that serve very different purposes — choosing the wrong one can be costly. If you are buying or selling property in Hungary, we strongly recommend having your purchase agreement reviewed by a qualified lawyer before signing. Contact our firm — we are happy to advise you on the best structure for your transaction.