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Escaping the Spanish property development thats gone bad

Recently I was asked why the Spanish system is not offering solid and efficient guarantees for purchasers of property in Spain, why Lawyers can’t make legal proposals to put in place a system where developers can and have to offer effective guarantees to purchasers, why in Spain any person can become a developer (ie. no qualifications) and why the system itself does not recognize the purchase of property as a key part of Spain’s economy.

Whilst in agreement with the fact that all can be improved, I explained how the Spanish system actually offers a very high level of protection to purchasers. The problem tends to lie in the fact that not all conveyance Lawyers are specialized enough to offer solutions specialized enough leaving purchasers unable to fight for their rights or do what may be required according to Spanish Law.

Here is an introduction to the basic guarantees provided by the Spanish system

As probably many people know, purchasers of Spanish property must be given guarantees against any and all payments done on account of the purchase price of new dwellings. These guarantees can be given by banks or insurance companies.

Generally, the problems start because guarantees depend to a larger degree on the developer’s good will. This is despite what might have been agreed in the purchase contract where usually there are clauses offering such guarantees. Guarantees can only be produced once payment is completed.

If the guarantee is provided by a bank, once the bank has received the funds, a letter will be sent confirming the bank guarantee (which by Law must be registered in a special list of guarantees at the Bank of Spain).

If the guarantee is offered by an insurance company, once the payment is completed, the developer will confirm, or should confirm, to his insurance company who will then release a certificate of inclusion for the purchaser in a collective insurance policy (previously subscribed by the developer for the whole development).

But what happens if the developer doesn’t activate the bank guarantee or doesn’t confirm to his insurance company that a specific purchase has been made for the purchase of a unit in his development?

Developers (again, despite what may have been promised at the private purchase contract) may not have prepared and finalized correctly the activation of the guarantees, so the purchaser is not legally protected (or not protected enough!).

The real problem lies in the fact that breach of contract is not deemed severe enough to cancel a contract and get the money back. If the Law could impose such a penalty, all developers would immediately have to provide the guarantees.

Having said this, it is important to mention that the guarantee can only be activated or enforced when there is a serious problem at the development, not for any old reason or simply ‘a change of one’s mind’.

Guarantees can be enforced when it is clear that the development will not be concluded on time since this is its real purpose: if the developer can’t perform and complete the development, customers have the right to have their money back.  It should also be noted that the process of enforcement of guarantees is a long way off being an automatic process, but having them in place at least means that the refund will happen eventually.

It may also be convenient to outline that the completion date, unfortunately, is not a real dead line for the developer. The completion date can be altered for several legitimate reasons like rain, strikes or other legal excuses. Late completion can only be claimed in Court (as a reason to cancel) when the delay is around a year.

The bottom reason for this is that in the case of non-residents these properties are second homes and Tribunals, unfortunately, don’t consider that the damage caused to the purchaser of a holiday home is insufficient to cause cancelation of a contract – essentially equivalent to a few months delay.

Also bear in mind that the developer may have already invested large sums of money to build a property that he / she may or may not be able to resell.

So now we know how  the system works…

  • What happens if a developer is late and there are no guarantees?
  • What happens if there are problems with the building license or the final occupation license?
  • What happens if the developer just doesn’t have enough money to refund the payments plus the legal interest when required?
  • What happens if the developer has spent all his money in building the development and now he can’t sell further units that may give him further cash to attend the claim refunds?
  • How will it be possible to get a refund from a person or a company that just don’t have the cash?

These are the most common cases where property purchasers get stuck. There is a solution and the solution is offered by the system itself.

The same Law that puts in place the obligation to provide guarantees to purchasers puts in place a second indirect guarantee for purchasers. It is stated by the law that banks who take money from purchasers are obliged to request the developer to show the guarantees offered to customers. Should a bank fail to request those guarantees at the time of depositing the purchaser’s money into the developer’s account it will be found guilty of not performing in accordance with Spanish Law and be subject to paying compensation for damages incurred. The only person who can incur damages as a result of failing to request the guarantees is the purchaser (whose money has been happily received by the bank). The amount of damages which the purchaser can claim are precisely the same as those not guaranteed by the bank and those that can’t be claimed from a developer with no cash or financial troubles.

We have succeeded all over Spain in over a hundred cases rescuing our clients from developments with problems. We are experts in this field. In almost all cases (note that not all purchasers have proper purchase contracts or have performed as required by the Law) we can obtain a refund for our clients plus interests, even if the developer has no cash to refund using the strategy above summarized.

This strategy is technically complex since the case must be very precisely presented in Court; however it is now a proven and effective legal strategy.

And the icing on the cake for our clients; monies received after refund is now at a more favorable exchange rate with the the interest paid mitigating any litigation costs and any costs incurred at the time of purchasing.

Many of our clients, upon receiving their monies back, found themselves in a position to purchase again (this time completed properties instead of off plan properties) in a market where the prices are far more reasonable and where they have been able to purchase more interesting properties at greatly reduced prices.

If you find yourself in a situation like this contact me now for a complimentary review of your circumstances and requirements.


This article was posted by Criado & Kraus
on Friday, March 30, 2012 - 11:50