Is Litigation Against Spanish Developers Worthwhile?

Raymundo LarraĆ­n Nesbitt, May, 23. 2008

A lawyer will previously endeavour to reach a satisfactory settlement with the other party, resorting to litigation only as last option. Having reached a point in time whereby it is apparent that the only path left is to litigate, one should consider a number of cases in which it is unadvisable to sue on certain grounds as the ruling will most likely turn against the plaintiff – you.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
23rd of May 2008

 

Original article from the 23rd May 2.008

 

Introduction

All those who purchased off-plan property in Spain and who unfortunately do not have a valid Bank Guarantee or Insurance Policy securing their stage payments stand to lose their funds if their developer files for bankruptcy. This potential threat of insolvency has soared at an alarming rate during the first quarter of 2008.

With many developers in breach of contract for not delivering properties in time (or with no hope of delivering them at all!), there’s an interesting debate on whether it’s a good idea to start a litigation process with the purpose of seeking the return of the deposits paid plus, perhaps, a possible compensation. Those that say it’s a bad idea to do so claim that developers are penniless, and will not be able to return the funds even if there’s a favourable court ruling. They even go as far as claiming that “no one has ever received their deposit back from a developer”. In this article we explain why these claims are false, and that litigating is not only a possibility but in many cases the only option left for many off-plan buyers who have not been able to complete on their property.

 

Litigation: A last Resort

Litigation should only be used always as last resort. Lawyers endeavour to negotiate on behalf of clients a reasonable settlement with the developer prior to going to court. This avoids lengthy and protracted legal proceedings thus saving both time and money. Unfortunately this is not always feasible, particularly with some developers.

Typical Cases

The following examples sum up what we encounter in our day-to-day legal practice:

  1. Mr White purchased an off-plan property. According to the contract’s clauses the developer was obliged to hand over the property in two years time. Five years on, the development remains unfinished because, due to planning illegalities, the developers have not attained either a Building Licence or a Licence of First Occupation which are granted by the local town hall. Mr White cannot complete on the property as no bank, other than the developer’s, is willing to grant him a mortgage because the development lacks the required administrative licences.

    Mr White is concerned on his interim payments which amount up to 50.000 GBP (almost his life savings) and he has no Bank guarantee securing his stage payments. Therefore, in the event that the developer folds-up, Mr White would be likely to lose his down payments in full.

    Mr White, after trying to negotiate a refund of his payments with the developer to no avail, is tempted to file a law suit against the developer. However, he has been told that the developer is undergoing serious cash flow problems and that even if he hired a litigation lawyer he wouldn’t recover any amount of money. So he thinks “Why put good money after bad paying litigation fees & expenses?”
  1. Mr Grey purchased what he thought was an off-plan property as an overseas summer home for his family. It has now turned out that unbeknownst to him, he was actually misled to purchase an aparthotel or an apartamento turístico".He has since found out that this type of property has its own laws governing it, making it altogether unsuitable as a summer home.

 

5 Top Misconceptions about Litigating Against Spanish Developers

 

Both Mr White and Mr Grey are now desperately trying to find out what is their best course of action in order to find a solution to their problems. Therefore, they ask friends or acquaintances on what to do on their particular case, but the truth is that there is no substitute for professional independent legal advice.


I have gathered a list of the most common misconceptions that are widely spread.


1.    Instead of taking the developer to court, it’s better to just wait and do nothing.


This is really just burying your head in the sand and hoping that things will somehow sort themselves out. The risk is that, if there are no issued Bank Guarantees – or Insurance Policy – and time goes by there is an increased risk that eventually the developer may file for bankruptcy. Nowadays, all too frequently, you see newspaper headlines stating how developers are increasingly filing for bankruptcy.

Returning to our first example, if Mr White were to act as such in his case, he is likely to lose all of his stage payments.
What happens if a developer files for bankruptcy?

In accordance with Law 57/68 a purchaser can claim on their bank guarantee or insurance policy during the construction process, as they are executive titles which secure their interim payments. If they don’t have the guarantees or insurance they stand to lose all their down payments.

That is why if you do not have a bank guarantee, on filing a law suit, a litigation lawyer will request provisionally for a hold to be placed on the developer’s assets until the final ruling. This stops the developer from selling these assets and they act as a sort of guarantee (it isn’t really a guarantee in the sense of a bank guarantee) to recover the stage payments at a later date. The judge has to decide on whether they will allow it or not. The plaintiff’s lawyer will have to prove not only that his client has a case but also that the developer is undergoing a delicate financial situation which may lead him to insolvency in the future.

On seizing the developer’s assets the judge will request that you place an amount of funds in court as a guarantee for the developers’ frozen assets. This amount varies for a standard off-plan purchase in proportion to the value of the assets requested to be frozen. The aforementioned amount is refunded to yourself when the final ruling is published, which puts an end to litigation (long before the assets are sold off in a public auction). However, if your lawyer loses the case these funds may be used by the defendant as guarantee. A further non-refundable amount of approximately €2,500 will have to be paid as well as associated expenses on executing the developer’s assets (auction appraisal, execution procedure, barrister fees etc).

However, in many cases the developer’s bank accounts are frozen (with funds in them) or out-of-court settlements are reached before the ruling, so there is no need to provide the guarantee on the developers’ frozen assets because the stage payments may be obtained by other means.


It is important to understand and distinguish two different concepts: cash flow and assets.


Although a developer may be experiencing a cash flow problem due to the recent credit crunch, one must not forego the fact that they normally own a sizeable portfolio of real estate assets.

On filing a law suit against the developer, the litigation lawyer will request that some of these assets are frozen on behalf of his client, to secure his financial interests. This allows the creditor to be positioned higher up in the creditor’s ladder in the event of a receivership although he will not be regarded as a privileged or secured creditor under Spanish law. In the event of the developer filing for bankruptcy for whatever reason, if some of his assets have already been frozen, they help to position you higher on the creditor’s list. This means that even if the developer enters into liquidation, Mr White will be able to recover his money or part of it at a later date. However, this can take many years depending on the complexity of the receivership.


2.    Completion without a LFO is illegal.


This is a common misconception. Completion on a property, before a Spanish Notary Public without a LFO is legal in Spain and the property will be lodged under your name at the land registry. However, it is not legal to occupy/live in a property without the mandatory administrative LFO. So basically you legally own a dwelling which is uninhabitable legally until the LFO is granted by the town hall.

This discussion about the LFO is not directly linked to the litigation process, but it has to do with determining whether you should complete on a finished property without a LFO or, on the contrary, litigate.


What exactly is a Licence of First Occupation and why is it so important?


Upon the granting of the Certificate of End of Construction, the Developer may apply for a Licence of First Occupation (LFO). The LFO is a document which the Town Hall grants and states that the development fully complies with the original Building Licence that was granted by the Town Hall, as well as complying fully with all Planning laws. The inspection to grant this Licence is carried out by Town Hall technicians that certify that the dwelling fully complies with health, access, security, planning and construction laws and is deemed fully fit for human dwelling. No one can speed up the granting of a LFO; attainting it depends solely on the Town Hall’s civil servants.


What are the associated problems of completing on a property without a LFO?


Although it is legal to complete in such a case, it has numerous legal and practical drawbacks which ought to be highlighted by your lawyer to aid you in making an informed decision. To name a few:


•    Primarily, you will not be able to take out a mortgage on the property or remortgage it - if needed be - by any bank other than the developers.
•    You will not be able to benefit from the official utility supplies; only from the developers supplies (water and electricity) with all the associated problems this has, namely that you may be cut off at any time as it’s the developer who is paying for it and if they go into receivership you will be cut off. Besides this, the developers’ electrical supply doesn’t have the same strength and power surges are fairly common if simultaneously turning on various electrical appliances.
•    Any future prospective purchaser, or their lawyer, will haggle with you and only pay a lower purchase price if you lack a LFO. In a resale, the purchasers in turn will undergo the same problems to secure finance by means of a mortgage loan. Lack of a LFO implies that you are actually reducing the base of potential purchasers for your resale.
•    If there are planning issues, the town hall can set a charge against the property and you as the new owner –and not the developer- may be held liable to pay the fine for the planning illegality.


So, should I complete without a LFO if I lack a Bank Guarantee?


Generally it is not advisable to do so. However, there are some exceptions to this general rule. Until completion the property belongs to the developer. So if you still have not completed and the developer becomes insolvent the property lodged under his name may be seized by the developers’ bank or any other creditor that places a charge on it at the land registry. If you have no Bank Guarantee and afore happens it is then very likely you will forfeit your down payments.

In cases in which there is a significant delay in granting the LFO, the development complies fully with all the required planning permissions, there’s no ruling affecting the building licences due to planning problems, and there is a high risk of the developer filing for bankruptcy, the short answer would be yes. In this particular scenario, litigating is not recommended. The property will be now lodged under your name at the land registry. You will still have to wait until the LFO is granted but at least now there is no risk of you losing your funds if the developer becomes bankrupt.

However, cases differ and require a case by case study by your lawyer.

 

3.    Litigation fees are very expensive in Spain and that you need at least £15,000 to litigate.


This is untrue. Litigation, in a court of First Ruling (Primera Instancia) often averages less than half the said amount. These fees already include the procuradors’ fees (Barrister).


4.    Litigation takes on average 20 years in Spain until you obtain the final ruling.

This is also untrue. The timescale for the first ruling ranges typically between 12 and 15 months. Depending on whether this ruling is appealed, this would set back the whole process approximately a further 9 months until the second hearing. On obtaining this final ruling, in the event that the seized developer’s assets need to be executed to obtain a refund a new procedure will be started. This is not always the case. The total legal procedure, from the time of filing the law suit until the stage payments are actually refunded, may last approximately three and a half years if execution is involved, if not then much less. The legal system in Spain is slow so patience is required.

In some cases, out-of-court-settlements are reached with the developer, thus avoiding lengthy procedures.

5.    Hearsay has it that no one has had their deposit returned from developers by means of litigation.


This is untrue. We confirm that our law firm has recovered client's deposits from various developers, in many cases by means of litigation. Often these rumours are spread by people who have vested interests in others not litigating for various reasons.


Conclusion


A lack of Bank Guarantee coupled in with no Building Licence or LFO attained due to serious planning issues is the scenario in which purchasers are potentially more likely to lose their full deposits. Developers are increasingly more reluctant to refund deposits regardless if they are in a clear breach of contract quite simply because they do not have the funds. In such cases in which developers are very late in delivering properties as per the Private Purchase Contract’s clause, litigation is often the only means to recover the deposits, even in a scenario in which the developer is likely to file for bankruptcy (*according to statistics, there has been a rise of 78.6% in Spanish bankruptcies during the first quarter of 2008 of which 45.7% are from the construction and property industry).


*. Source: Daily Financial newspaper Cinco Días (06-05-2008)

 

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