By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of April 2015
It has rained a lot since I first wrote my article on bank guarantees on the 12th of November 2008. At the time of writing it the property bubble had just collapsed and we were witnessing a tidal wave of litigation against failing developers. The property honeymoon, which lasted over eight years, had come to an abrupt end. Credit dried-up almost overnight with the banking crisis that originated in America’s sub-prime market leading us to an unprecedented global credit-crunch which aftermath we are still enduring.
When lenders pulled the plug they left property developers on free fall; reeling developers scrambled to makes ends meet and complete pending developments. Buyers, investors and property flippers in general frantically pulled out in baying hordes escaping a falling house of cards. The musical chairs game was over. Scores of off-plan buyers, which had purchased off-plan property in good faith, found themselves trapped in the ensuing mayhem. Most, not all, had their stage payments guaranteed by a safety net known as ‘Bank Guarantees’ which are ruled by Law 57/68 (for further in-depth information on what bank guarantees are, please read my revamped article Bank Guarantees in Spain Explained with an Example Document, from the 8th of April 2013).
Conveyance lawyers found themselves swamped left, right and centre by clients trying to execute bank guarantees as developers were teetering on the verge of bankruptcy with developments being stalled with no realistic hope of completion post-credit-crunch. However on trying to execute these, theoretically a straightforward matter, we found that we were forced to litigate against insurance companies and lenders which had guaranteed buyer’s new-build deposits despite Law’s 57/68 clear wording.
The legal outcome of these litigation cases in first hearings were a mixed bag, to say the least, although most were won at second hearings (on appeal). A few cases were appealed to the Supreme Court, which is Spain’s highest court of law. These appeals take on average several years to be heard (five plus). The Supreme Court’s rulings bind all lower courts in the land as they set jurisprudence when a string of two or more rulings rule on a particular matter in an identical manner.
Seven years on the Supreme Court has now had the opportunity to release very interesting pro-consumer rulings on bank guarantees that are both protective and positive to off-plan buyers’ interests. The purpose of this article is to update what I had previously written on the matter in light of the recent high court rulings which open up new venues for litigation to off-plan buyers, irrespective of whether they were handed or not a bank guarantee; it no longer matters as I explain below.
EDIT July 2016: It is advisable this article is read in tandem with this other one:
Bank Guarantees – Definition
Bank guarantees are a legal tool devised to secure off-plan buyer’s stage payments (including the initial reservation deposit that strikes the property off the market) should a property not be delivered on time or should a developer file for bankruptcy.
A bank guarantee may take the form of an insurance policy or an ad hoc bank guarantee to safeguard buyer’s anticipated deposits until a property is built and deemed to be legally completed and fit for human habitation (when the planning department of a town hall issues what is known as a Licence of First Occupation, LFO for short).
Following article 4 of Law 57/1968, bank guarantees only become null and void when two conditions are met:
1. As from the time a developer attains a Licence of First Occupation from the town hall’s planning department.
2. The developer makes the new-build property available to a buyer (as in physically handing it over to him).
Expedida la cédula de habitabilidad por la Delegación Provincial del Ministerio de la Vivienda y acreditada por el promotor la entrega de la vivienda al comprador, se cancelarán las garantías otorgadas por la Entidad aseguradora o avalista.
Bank Guarantees – Legal Overview
It is compulsory for developers to hand out bank guarantees to off-plan buyers to safeguard their deposits acting as a safety net. These obligations derive from two regulations:
I. Law 57/1968, of the 27th of July of Anticipated Deposits paid in the Construction and Sale of Properties (popularly dubbed as the “Bank Guarantee law”).
II. First Final Disposition of Law 38/1999, of 5th of November of Construction (Spain’s Building Act). This law amends Law 57/68; a buyer can claim his full deposit plus legal interest (but not the 6% interest that Law 57/68 mentions; this has been overruled by this new law).
The following Supreme Court rulings are relevant because they establish pointers that change and shape the way we have known bank guarantees to work in practice. These rulings set jurisprudence, meaning all lower courts are bound by them.
• STS 499/2013
Establishes that handing a bank guarantee is regarded as an essential element in an off-plan purchase providing two elements are met:
i.- The property isn’t finished yet; still under construction.
ii.-The property is not apt to be handed over and dwelled i.e. no Licence of First Occupation has been attained.
Handing a bank guarantee is essential to the point that is considered as just cause to cancel a Private Purchase Contract in its own right on non-compliance ex article 1.124 of the Spanish Civil Code (SCC, for short). Failure of a lender or insurance company in not handing them out allows a buyer to legally withdraw from the contract by cancelling it and claiming back his deposit plus all interests due in full (accrued up until the time he is effectively refunded the anticipated deposits).
Before these rulings it was unclear on whether a bank guarantee was regarded as an essential element of the contract with enough entity unto itself to actually justify suing for cancellation exclusively on the grounds of a lack of bank guarantees.
In my litigation article (first published in 2008), Ten Reasons Why Your Case Against a Developer can be Thrown out of Court in Spain, I specifically mentioned as the sixth point not to litigate on grounds of a lack of bank guarantee as the case could be dismissed (based in litigation experience). In light of the recent Supreme Court rulings this advice no longer holds true and one can indeed litigate against a lender requesting a full refund of deposits despite there being no bank guarantee. Additionally one can terminate an off-plan purchase if no bank guarantees are supplied by a developer.
Other like-minded Supreme Court rulings: SSTS 25th of October 2011, rec. 588/2008, 10th of December 2012 2012, rec.1044/2010, 11th of April 2013, rec.1637/2010, and 7th of May 2014, rec. 828/2012.
• STS 2391/2014
The insured amounts are the full amounts understood as the initial reservation deposit you pay at the estate agency plus all the anticipated funds prior to completion at the Notary Public. The reason on why this is relevant is because even if an insurance policy or a bank guarantee stipulate that the amount guaranteed is less than what was actually paid by the buyer the Supreme Court upholds that it is in fact the full anticipated amount paid up until the time of completion that is guaranteed; in other words, all the monies paid prior to completion at the Notary Public. This is a consumer right enshrined by article 7 of Law 57/68.
This is particularly relevant because often lenders or insurance companies actually guaranteed less than what was actually paid for by a buyer. So there were nagging doubts on whether the full amount could be claimed upon (plus legal interests) despite the restrictive wording of some bank guarantees. Moreover even if a buyer agrees, for whatever reason, to have insured an amount which is less than what he’s actually paid for the Supreme Court considers that a buyer cannot waive his consumer rights enshrined in Law 57/68 and regards any such agreement as null and void
Other like-minded rulings: SSTS of 3rd of July 476/2013, rec. 254/2011, and 25th of November 2014, rec.1176/2013.
• STS 275/2015
Following article 2 of Law 57/68 it is the exclusive obligation of a developer to place all the anticipated funds received by off-plan purchasers in a special account that the developer must open ad hoc.
In accordance with article 7 of Law 57/68 it establishes that it cannot be imposed on a buyer to deposit these anticipated amounts in a special account. In other words the full refund of off-plan deposits to a buyer cannot be conditioned to the fact that a buyer has deposited said amounts in a special account as it is exclusively the developer’s obligation; not a buyer’s.
• STS 426/2015
It makes it clear that a breach of article 1.2 of Law 57/68 (handing a bank guarantee to an off-the-plan buyer) has a statutory claim period of 15 years ex article 1.964 of the Spanish Civil Code. The limitation period used to be less.
The relevance of this is that buyers who purchased off-plan and were never given a bank guarantee can now claim their deposits from the lender where the monies were being paid into. Regardless of whether their developer is already under insolvency proceedings or not; it doesn’t matter. In other words, off-plan buyers would be claiming from a lender which – presumably – has money; not from a bankrupt developer. The timeline to do this is 15 years to be counted as from the time the deposits aren’t refunded on grounds of a lack of bank guarantee. I know for a fact many people are caught in this dire situation.
• STS 429/2015
This ruling makes it clear that a buyer can sue a lender, or insurance company, first without having to sue a developer as a pre-requisite. They are all jointly and severally liable for the breach. The significance of this is that when we sued a lender or insurance company they would oppose at court that the developer had to be sued first. The Supreme Court now establishes that this is no longer needed and that litigation lawyers can sue lenders or insurance companies without any need to sue a developer first. This is relevant because most developers are on the brink of insolvency (if not bankrupted already) so what’s critical is to chase the party that has funds and is able to refund a buyer in full.
Other like-minded Supreme Court rulings: SSTS 3rd of July 2013, rec. 254/2011 and 2391/2014 of 7th of May 2014, rec. 828/2012.
Rulings 2391/2014 and fundamentally 429/2015 are pivotal as they introduce a major milestone regarding contract cancellation. They make it clear that any and all off-plan purchase contracts subject to Law 57/68 are out with the scope of article 1.124 of the Spanish Civil Code (which rules on contract cancellation due to breach of contract and applies to all civil contracts in general). These new rulings break the line of jurisprudence established by the Supreme Court (STS of 9th of June 1986) which construed article 3 of Law 57/1968 (new-build contract termination).
Article 1.124 of the Spanish Civil Code required in off-plan contracts that a contractual breach was studied carefully to ascertain whether a breach was regarded as important or not. If it actually frustrated the goal pursued in the contract itself (‘frustración del fin contractual’). This required that lawyers reasoned with great care why terminating a new-build contract was justified – this is no longer the case.
The Supreme Court has performed legal microsurgery extricating Law 57/68 from the sphere of action of article 1.124 of the SCC. The change is extraordinarily relevant from a legal point of view (nothing short of groundbreaking). Up until recently lawyers recommended that a buyer had to wait a ‘reasonable’ time after the date set in the Private Purchase Contract (PPC) to complete to sue for breach of contract. The Supreme Court’s jurisprudence establishes that off-plan purchase contracts subject to Law 57/68 now work as automatic contractual resolutions. There is no longer a need to justify in a lawsuit if the breach is relevant or not as it operates automatically. The most common breach is when a developer delivers a property late; after the date set in the PPC.
In my litigation article from 2012, Ten Reasons Why Your Case Against a Developer can be Thrown out of Court in Spain, I advised would-be litigants on my first point that they should wait prudently at least six to nine months after the contractually scheduled delivery date of a property to sue for breach of contract and demand a full refund of their deposits (plus interests). This was done so that a law court did not dismiss the case ab initio without even examining its merit, as was the case in 2008.
The relevance of this change in criteria by the Supreme Court, and other recent like-minded rulings, is that off-plan buyers are no longer required to wait a prudent timeline before terminating their off-plan contracts. They can in fact litigate as from the very next day set in the Private Purchase Contract to deliver the property. Providing they do so in good faith, which the Supreme Court regards as essential to balance the opposing interests of both parties to the contract.
E.g. an English couple buy a two-bedroom off-plan property in 2015 with a delivery date in the PPC set as the 4th of August 2017. If the property is not ready by the 4th of August 2017 they can terminate the contract and request a full refund of their deposit plus interests on the following day. Before this major change this couple would have had to wait to at least February/April 2018 before terminating their contract besides having to justify in great detail the contract cancellation so that a judge approved it.
Whilst this may seem rather one-sided in favour of buyers, it is in fact tempered by article 3 of Law 57/68 which allows developers to cancel a PPC and sue a buyer for non-performance when they skip or pay late just one stage payment in an off-plan purchase in tandem with article 1.504 of the SCC. The Supreme Court understands it is not lopsided as there is equilibrium to both opposing interests in Law 57/68; they can both resort to an automatic contractual resolution given the case.
Personally I would take this with a pinch of salt. The ‘good faith’ limitation on exercising a buyer’s automatic cancellation right introduces a grey area that is fairly relevant. Having acted on behalf of developers I can clearly see how a developer’s lawyer can drive a wedge, and latch onto it, modulating or exploiting it in a developer’s interest by creating a shadow of a doubt in a judge’s mind.
The following pointers can be gleaned from the above Supreme Court rulings.
• Bank guarantees are regarded as an essential contractual element in off-plan purchases. If none are supplied by a developer, a buyer can resolve a contract and demand full refund of his stage payments plus interests.
• A buyer can still sue a lender for his deposits even if no bank guarantee was handed over (joint liability of banks).
• Bank guarantees only expire upon meeting two conditions: when a Licence of First Occupation is attained by a developer and when the developer is able to hand over the property to the buyer. Expiration dates on bank guarantees are null and void.
• It is the exclusive obligation of a developer to open and set up a special account where all stage payments will be deposited for safekeeping interim the building process.
• 15-year limitation period to file a lawsuit (statute of limitations).
• The insured amounts are all the anticipated deposits (stage payments) paid by a buyer prior to completion (including the initial reservation deposit paid to the estate agent) regardless of the amounts secured in a bank guarantee’s wording (which may be less).
• An off-plan buyer cannot waive the consumer rights enshrined in Law 57/68. And even if he does agree to waive them, the agreement is considered null and void.
• Developers and lenders (or insurance companies) are jointly and severally liable for safeguarding a buyer’s anticipated deposits (stage payments). Meaning a buyer can sue a lender or insurance company first without any need to sue a developer beforehand and be forced to wait for the outcome (as most developers are bankrupt nowadays). This significantly cuts down litigation time and ensures a refund as lenders or insurance companies have liquidity or else they would not be trading (subject to supervision by regulatory bodies that ensure minimum liquidity ratios).
• Any extension to the scheduled delivery of a property set in the PPC requires a written addendum that a buyer must sign in agreement. It does not suffice that one is notified of the extension; it must be signed by the buyer.
• A buyer can terminate the contract on the following day stipulated in a PPC as the scheduled delivery date of the property (automatic contractual resolution) in the event of late delivery. The developer must be formally notified (by recorded delivery). It is imperative this is done in good faith; otherwise the cancellation may be dismissed by a law court.
Spain’s Supreme Court Rulings on Bank Guarantees – Conclusion
The gist of this article is to highlight Spain’s Supreme Court sensitivity towards off-plan buyer’s plights. Its rulings are remarkably pro-consumer in off-plan purchases and are setting the stage for lower courts in future litigation. This is very promising and welcome news for new-build buyers wishing to litigate on grounds of a Law 57/68 breach. Even in cases where a bank guarantee was never supplied a buyer can still sue for a full refund of his deposit plus legal interest providing the 15-year statutory limitation has not elapsed.
Law 57/1968 is a pre-constitutional law that is now forty seven years old. It was widely held as ‘revolutionary’ at the time as it pioneered consumer rights in Spain when these were not regulated by law (Spain was still under a dictatorship). Five decades on it is undeniable that it is in urgent need of a reform given the importance the construction sector has in Spain’s overall economy and the widespread predominance of consumer rights which are prevalent in modern democratic societies.
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