Rescuing Failed Property Developments in Spain

In the era from 2007 to 2010-ish, there were lots of failed developments in Spain. Whether you were a buyer in one of those developments or you are a fresh investor looking to profit from property development in Spain, it's worth seeing if any of the disasters can be rescued.

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The scope of this guide

This guide covers what to do when a property investment in Spain – particularly an investment where you are one of many investors in a large project – goes drastically wrong. It should be read alongside our Global Guide to Rescuing Failed Property Developments, which goes into far more detail.

Introduction

Property development in Spain has always been a cyclical industry. Markets increase and then diminish, typically every seven years or so. During the bad years development projects often fail.

During the crisis of the mid- to late-2000s, Spain – like every other tourist destination in the world – suffered from a number of failed developments. A large number.

Now that the economy has picked up and there is a market for at least some new properties, it is time to look again at which of these development still has a future and how that future can be delivers. It is also time to review whether there is any possible redress against the failed developers themselves, their banks, their insurers of the government.

Video guide to rescuing real estate developments in Spain

You can get a quick overview of real estate rescues in Spain by watching this video interview (below) with Spanish lawyer Miguel Manzanares. Learn more by scrolling down and reading the detailed guide he has written with us.

The basic problem

The basic problem of failed property developments is the same around the world. During property boom years, land prices rise dramatically and people are prepared to pay a lot of money for villas and apartments. When the downturn comes, land prices fall – just as dramatically as they rose – and either people are only prepared to pay a great deal less for an apartment or a villa or (as in the crisis of 2007-12) there is, in effect, no market at all for them.

To make matters worse, banks are no longer prepared to help. Mortgages become unavailable to buyers and the developers lenders demand repayment of the finance they have provided to the developer.

The same applies to everything from airports to shopping malls.

This means that the developer cannot sell what he has built or wants to build and so the project fails.

Equally, it means that those who bought finished properties at the top of the market will find that their house is worth a great deal less than they paid for it. That, however, is not the subject of this guide.

Protection for buyers of off-plan property in Spain

There are two main dangers when buying an off-plan property, whether in Spain or anywhere else.  The first is that it is never built or delivered to you. the second is that it has defects. See our Guide to Buying Off-Plan Property in Spain.

As long ago as 1968 the Spanish government recognised the risks associated with off-plan sales. By law 57/68 – officially Ley 57/1968, de 27 de julio, sobre percibo de cantidades anticipadas en la construcción y venta de viviendas – was intended to address part of the problem.

Its title tells you that it is a law about advance payments relating to the construction and sale of dwellings.

Because this is so important, it is worth setting out the law in some detail. By law 57/68:

Article 1 days that developers will have to provide, free of charge to the purchasers, a bank guarantee or insurance policy to guarantee the refund of their stage payments plus interest in the event of the developer becoming insolvent. The interest rate is currently 4%.

For the purpose of this article we will refer to all of these guarantees, whether from a bank or an insurance company, as bank guarantees.

Article 2 makes it imperative to include a clause in the Private Purchase Contract (“PPC”) stipulating that all interim payments will be guaranteed by bank guarantees.

Article 3 says that if the deadline to hand over the property is passed without the development being finished (or even started) the buyer may, at his own choice, either:

  • Cancel the contract and enforce the bank guarantee, claiming from the bank a full return of any money paid plus legal interest
  • Grant a developer an extension to complete the property

Any extension must be expressly agreed, in writing, by the buyer and there must be an addendum to the PPC reflecting this extension to the delivery date.

Article 4 says that bank guarantees will only be cancelled upon the developer obtaining ( not just applying for) a Licence of First Occupation.

In summary, you can claim against a bank guarantee if:

  • A development has not been started after a reasonable period of time has elapsed
  • The construction is not completed within the period stipulated in your PPC
  • The developer has failed to attain a Licence of First Occupation after a reasonable period of time has elapsed

The Licence of First Occupation

Before going any further, we need to understand a bit about Licences of First Occupation.

The Licence of First Occupation (also known as Habitation Licence or Certificate of Habitation and in Spanish, Licencia de Primera Ocupación or Cédula de Habitabilidad) is the official municipal sign-off of the development and is necessary for a number of purposes.

It is issued by the local Town Hall (ayuntamiento) and is granted once the building works have been completed. It allows the purchaser to dwell in the property legally.
Although it is not illegal to complete at purchase of a at the notary without a Licence of First Occupation, not having one will prevent you from having access to water and electricity supplies for the property. It will also mean that no bank will be willing to grant you a mortgage. Since 2016 it also means that you can’t register your property as one that can be let to tourists.
The property developer is responsible for applying for this licence, once the Certificate of End of Construction has been issued.

So what went wrong?

This all seems pretty simple.  If the developer doesn’t deliver your house and a Licence of First Occupation, you get your money back from the bank.
Unfortunately, when the crash of 2007 came, it did not work as smoothly as that.

Developers

Developers, in many cases, simply ignored the law.
Sometimes contracts said there was a bank guarantee when, in reality, there wasn’t.
Sometimes contracts contained what appeared to be get out clauses for the developer. Clauses such as:
  • The bank guarantee will expiry on a given date
  • The bank guarantee expires upon the developer attaining the Certificate of End of Construction (Certificado Final de Obras) rather than the Licence of First Occupastion
  • The bank guarantee expires on the developer applying for (rather than obtaining) a Licence of first Occupation
Such clause are illegal and void but gave lots of scope for delay are argument.

A bank guarantee cannot, under Article 4, expire until a developer has a Licence of First Occupation physically issued by a town hall and the developer has handed the property to the buyer.

Banks

Banks tried to wriggle out of their responsibilities.  The tens of thousands of properties that had not been built would have bankrupted them, especially during the financial crash.

the banks were big and powerful. The buyers were small and weak. thee banks ruthlessly exploited that advantage.

There were also some ‘cowboy’ insurance companies set up to take advantage of the building boom in the late 1990s and early 2000s. Invariably, they were incorporated abroad so as to outside the reach of the Spanish jurisdiction. They then fail back up the guarantees they have issued. The process of trying to make them accountable is long, expensive and very often fruitless.

The courts

Initially, the courts seemed disinterested in this problem and, if anything, keen not to put yet more pressure on Spain’s devastated economy.  They sometimes ruled that very long delays were acceptable or even a case of force majeure (unforeseeable circumstances that prevent someone from fulfilling a contract), meaning that the developer was not responsible for them.

What has happened since then?

Over the last few years, several cases have reached the Spanish courts, been decided, gone to appeal and, in some instances, appealed again. The economy has also improved and the government has recognised the devastating reputational damage caused to its construction industry: it needs to sell homes to foreign buyers.

The courts – including the Spanish Supreme Court – have interpreted the law in a way very favourable to buyers who have lost money. Lower courts are bound by these Supreme Court decisions.

They have said that the banks have joint liability (along with developers) when no valid bank guarantees were issued to off-plan buyers.

This means that, for the first time ever, buyers can claim directly from banks (or insurance companies) in respect of defective guarantees.

More importantly, buyers can make a claim against a bank where off-plan deposits were paid into that bank when no valid bank guarantee was issued to a buyer by the developer (as is mandatory by law 57/68).

You can also now claim directly against the bank, rather than having first to pursue the developer – who, in most cases, will have gone bust years ago.

All this, coupled with the fact the Supreme Court had made it clear that the statutory limitation to litigate is 15 years, opens the possibility for thousands of claims.

This is, clearly, good news from the buyers point of view but not so great for the banks!

Yet this will not solve everybody’s problem. There will still be some people who will be unable to claim or for whom claims will be risky. However, if you have lost money on a new development in Spain it is time to see your lawyer!

If you are thinking of going to court, it is worth putting in a word of caution. The banks will not just accept liability and pay out. A lot of their money is at stake. Their track record shows that they can be expected to fight and to grasp every technical point of defence available to them.

Finally, and just as it looked as if this drama was almost over, the Spanish government has moved the goalposts: but only a bit.

In 2016 Spain repealed the old law and replaced it with a new one: Law 20/2015 or ley 20/2015, de 14 de julio, de ordenación, supervisión y solvencia de las entidades aseguradoras y reaseguradoras

This is a large law covering many issues concerning banks and insurance companies but a part of it deals with these bank guarantees.

The main change is that, in future, bank guarantees (or insurance policies) will only be valid from the time a developer has attained a Building Licence. So, if the developer never even gets that far, any guarantee issued will be worthless.  Never make any payment until a developer had secured a valid Building Licence from the town hall’s planning department!

All off-plan contracts signed before 1st January 2016 will still be governed by law 57/68.

Legal remedies available in Spain

Under Spanish law, there are a number of legal remedies available to people who bought into projects where the property was never delivered to them. Usually, only the first and second remedies would be applicable to individual private buyers. Remedies three to six  normally only apply to organised groups of investors, professional investors, banks or insurance companies.

  1. Execute the bank guarantee/insurance policy: If the property was not delivered to you by the date stated in the contract you have the right to cancel the contract and demand your money back through execution of the bank guarantee or insurance policy that the developer should have taken out.The exact process may vary between different policies but, in general, it starts with an official communication through registered fax (Burofax). In this letter you communicate the breach of contract by the developer. You include your contract and proof of the payments which you have made. Your lawyer will coordinate this process.
  2. Sue the bank: See above.
  3. Sue the developer: If the property was not delivered to you by the date stated in the contract you have the right to cancel the contract and demand your money back.Unfortunately, in these situations the development companies are usually bust and so there is no money with which to repay you. Their only assets tend to be the land (which may already have been seized by other creditors) and that is likely to have fallen so much in value that it may be next to worthless or – at best – to be unsalable to any other developer until the market recovers. Unless you are lucky enough to have bought from a developer with lots of assets, suing the developer is usually not very successful. See our Guide to Disputes & Court Cases in Spain.
  4. Take criminal or other action against the developer: If the sale to you was part of a fraud then you may be able to take action against the developer through the criminal courts. This means that the developer could end up in jail. This tends to focus his mind and sometimes means that he might raise money to repay you from otherwise unavailable sources such as members of his family. Despite what some people claim, very few developments are fraudulent and even where you have cause to suspect one might have been it is very difficult to prove that the development was fraudulent via the criminal courts. See our Guide to Crime & Criminal Cases in Spain.
  5. Liquidate the development company and seize its assets: The buyers of properties in a development, as a group, can apply for the company to be liquidated and – in many cases and subject to the rights of any other creditors – can seize its assets.This may do them no good in the short term because the only major asset is likely to be the land and (depending upon where it is located) this will probably be unsalable until the market recovers. However, the recession has now come to an end and these investors will, at least, have protected what value they can by taking this step.
  6. Reach an agreement with the developer that the investors take over the company: This is less expensive and often quicker than liquidating the company but, of course, it does require the consent of the developer. Just as in the case of liquidation, it may bring little immediate benefit to the investors but it will produce some long-term benefit if and when the value of the land recovers.In the meantime, the investors can often raise some money themselves with a view to finishing off the partly-built houses so that they have at least something to show for the money they’ve invested and somewhere to spend their holidays. Ironically, there is still a lot of money to be made out of these development projects: when the time is ripe to complete them.

Advice about failed property developments in Spain

The execution of a bank guarantee or insurance policy is quite straightforward, but dealing with failed developments is a specialised area of the law and needs lawyers who are experienced in the field – and who are good at managing what can be quite complicated arrangements involving lots of buyers.

If you are involved in a failed development, it is vital that you seek good legal advice as soon as possible. The sooner you take action the more likely you are to see a good outcome to the problem.

Your lawyers will usually have to bring in the services of other professionals such as accountants, engineers and surveyors and so dealing with these cases is never cheap. Fortunately, in the case of bigger developments where there are many buyers, the cost can be split amongst quite a large number of people.

This kind of work will involve the investment of further money and the obvious risk of ‘throwing good money after bad’. You will have to decide whether, in your case, the extra investment is worthwhile.

Conclusion

Investing in a development that then fails is always a huge disappointment and can be expensive.

Fortunately, the existing laws of Spain oblige developers to issue a bank guarantee or contract an insurance policy for all payments received. When a developer breaches the contract in terms of delivery dates, the guarantee/insurance can be fairly simply executed.

Further Information

Please contact the author if you would like any further information. See the sidebar for their contact details.

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