Bad Debtor’s List (‘Fichero de Morosos’)

Raymundo Larraín Nesbitt, April, 8. 2014

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of April 2014

 

Introduction

Spain has ‘technically’ exited its seven year recession. However, the financial aftermath continues to look grim for most of the population (with the exception of our political class, of course). As a consequence, over 100,000 people are added each month to Spain’s dreaded bad debtor’s lists.

This article explains how you may be included in one of them (even unbeknownst to yourself!), the severe financial consequences this has (in Spain) and how to remove yourself from a black list.

What is a Bad Debtor’s List?

In Spain companies will include you on non-payment in a bad creditor’s list such as EXPERIAN, ASNEF or RAI which has dire consequences as it adversely affects your credit score and by extension hampers your future borrowing ability.

You may think that the people who are normally included in debtor’s black lists are in most cases professional non-payers or maybe families hit by the brunt of Spain’s financial downturn. However you would be surprised to learn there are multiple cases reported in which a person with a spotless credit track record is included out of spite by a company as a result of a legitimate dispute over a questionable invoice. At other times it may fall down to something as clumsy as a careless oversight on paying a service.

Examples:

  • Your telephone company charges you €800 for roaming fees on a five-day trip to Egypt. Your mobile was switched off all the time. You refuse to pay until they give you an explanation. The mobile company declines explaining and blacklists you immediately.
  • Your electric supplier increases your bimonthly invoice by 20% without providing a justified reason. You refuse to pay and are blacklisted as a result.
  • You fail to close properly a Spanish bank account, or forget to top it up regularly, and slip into the red. The bank will blacklist you after a couple of months. Lenders take legal action for non-payment spanning between 3 to six months after the first arrears.

 

Consequences of being included in a Bad Debtor’s List

These consequences are financial and will severely hinder your borrowing ability in Spain, or elsewhere, in the near future. On being included in a black list you may be turned down on some or all the following:

  1. Personal loan
  2. Business loan
  3. Mortgage loan
  4. Consumer loan e.g. cards from major high street retailers that allow you fractioned or deferred payment over the next months. Kiss goodbye to your “El Corte Inglés” card.
  5. Credit card application
  6. Barred membership by selected retailers i.e. gyms, video clubs, golf clubs

Amount of the Debt

There is no minimum amount. Less than €100 warrants you being blacklisted.

Duration of the Inclusion in a Debtor’s List

The duration normally spans six years. After said time your details should automatically be removed by the registry.

What happens if I am not notified of my inclusion in a Bad Creditor’s List?

This is an entitlement. Failure to comply by the registry gives you good legal grounds to request a cancellation and a full withdrawal from the debtor’s registry. In practice this may be more difficult than I make it sound and you may need a lawyer to assist you.

Removal of a Debtor’s Registry

Paying off your debt will not have you automatically removed from a debtor’s registry. You must proactively pursue your own removal or else appoint someone qualified to do it on your behalf i.e. a lawyer. The whole procedure will only be carried out in Spanish language.

The Four Steps to remove oneself from a Bad Debtor’s Registry in Spain

  1. Pay off the outstanding debt which triggered your inclusion in the debtor’s list in the first place. Keep evidence substantiating the debt is fully settled (receipt, bank transfer, correspondence with the creditor etc.)
  2. Contact (in Spanish) the registry which have you black listed. Request a cancellation request form (“solicitud de cancelación”, in Spanish).
  3. Complete the form in Spanish supplying the registry with all the necessary evidence that unequivocally demonstrates the debt is now settled. You will have to send all by registered post (“burofax”) along with a copy of your passport / DNI (national ID card). The register will contact your creditor to confirm the debt has been settled to their satisfaction (there may be interests accrued or penalties that also need to be paid besides the principal itself).
  4. Once a registry has concluded their own internal investigation they should remove you within the next 30 days.

Conclusion Bad Debtor’s List (“Listado de Morosos”)

Spain’s ongoing delicate financial situation pushes families to the brink. The inclusion in a debtor’s black list may not be an issue if you are non-resident in Spain but becomes a serious matter for those holding resident status as it will seriously hamper their borrowing ability as well as being an overall nuisance in their day-to-day life.

I strongly recommend you to avoid an inclusion in such lists. And if you do happen to get included, a lawyer – for a reasonable fee – can help you to clear your good name by cutting through the red tape and language barrier in an expedient manner.

“I spent a lot of money on booze, birds and fast cars. The rest I just squandered” – George Best.

Northern Irish professional footballer. Winner of the European Cup with the Manchester United in 1968.

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in conveyancing, taxation, inheritance, and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

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Raymundo Larraín Nesbitt is a property-specialist lawyer based in the UK qualified to practise in Spain

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

2.014 © Raymundo Larraín Nesbitt. All rights reserved.

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Buying and Owning Spanish Property through Companies: Pros and Cons

Raymundo Larraín Nesbitt, March, 7. 2014

The pros and cons of buying and owning Spanish property through a company structure, off-shore or otherwise, by legal expert Raymundo Larraín Nesbitt.

By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
7th of March 2014

 

 

 

 

Introduction

There was a time in which not a single Spanish law firm that prided itself would pass on the opportunity to heartily recommend its affluent non-resident client base (and even foreign residents) to acquire and own property in Spain by means of corporate structures ranging from the simple to the overtly complex often involving a multijurisdictional approach.

It was commonplace in the not-so-distant past to hear socialites in exclusive summer soirées on the coast boasting on how their law firm had devised and set up ingenious structures to the point that tax payment was negated and only a paltry sum was ever paid to the Spanish taxman.

Times change and legislation has moved on both in Spain and internationally since the events that led up to the tragic events of the 11th of September 2001. The war against international terrorism, unwaveringly led by the US, has meant intense pressure is exerted on the sources that finance it. These heartrending events coupled with 2008s financial sub-prime meltdown, and the ensuing world-wide credit-crunch, which left western countries’ coffers bereft, has meant that the once all-powerful and buoyant off-shore industry, now under intense scrutiny, has been forced to maintain a low profile in order to survive and accommodate to today’s imposed trends.

But even more fundamentally we have collectively assisted over the last decade not only to a change in laws but to a ground-breaking paradigm shift in social and moral values that no longer hold these structures as socially admissible as they are widely held in contempt by society and media at large i.e. the recent tax campaigns targeting Amazon and Starbucks amongst other high-profile companies.

You won’t find nowadays many Spanish-based law firms or lawyers actively recommending this option, much less clients boasting of their use. In fact, you will find many are even reluctant to the very idea and will likely try to dissuade you. This of course doesn’t rule out that it is still done, far from it, but it is not as widespread and most certainly not as openly publicized as before.

It is mostly foreign companies (which are not even law firms or FSA-regulated finance advisers!), located outside Spain, who now peddle a bespoke legal service offering “100% protection” to beneficiaries against Spain’s inheritance tax.

Spanish law firms located in Spain have been forced to take a back seat when it comes to offering and soliciting these legal services after new stringent legislation has been passed and tough obligations and controls have been set up across the board for lawyers and other professionals involved in their set up and administration.

Due to the enormous complexity of the matter, this article endeavours only to give a broad unbiased overview on the overall state of affairs, with particular focus in Spain, weighing in the pros and cons, albeit making no attempt whatsoever to delve in its complexity and most certainly being careful not to take stance on the matter one way or another.

 

Spanish Property Ownership through Corporate Structures

Advantages

 

1. Concealing Ownership

Several reasons may lead owners to conceal who really owns, controls and disposes of assets. Broad examples of such needs:

  • privacy
  • high-net-worth individuals (HNWI) have their wealth managed through companies run by family offices
  • ongoing marital disputes which in time may lead to an eventual break-up and disposal of assets. Pre-empting such scenarios unfolding
  • security reasons
  • defaulting on contractual obligations abroad – avoiding asset-hunting through non-asset disclosure

 

2. Tax Mitigation

One of the traditional reasons that drive clients to seek incorporating structures is to lower their tax bill. From income and wealth tax to Spain’s cumbersome inheritance tax (ISD/IHT) corporate structures may allow at times the means to circumvent, in a legally accepted manner, footing hefty tax bills. The latter is particularly efficient when shareholders are non-residents.

These structures should ideally always be incorporated prior to acquiring the real estate asset, not after for optimum results. Careful forward planning is key from the outset on devising and incorporating them which should be tailored to each client’s particular needs. There are no magical one-size-fits-all schemes as clients’ needs differ widely from one another and even evolve in time with, for example, new family members or changes in their civil status (divorce).

Corporate structures range from the most basic ones to really ingenious ones that border on fiscal engineering. Law firms in Spain will have no qualms incorporating a Spanish or foreign company i.e. a UK limited liability company (as long as not offshore or located in tax haven). This is perfectly legal. They may even offer them off-the-shelf for a reasonable fee and additionally offer bookkeeping services. The company will then be placed on top of the Spanish real estate. They will however, following new legislation, be reluctant (understatement) when it comes to devising and incorporating more complex corporate structures, specifically offshore ones. This fine red line marks the difference between tax avoidance (legally acceptable tax planning) and tax evasion (criminally pursuable).

3. Asset Preservation

Affluent families have a mandate to preserve and accumulate wealth for future generations. Some corporate structures (i.e. trusts, which are not recognised in the Spanish legal system) help to achieve this by ‘protecting’ assets, even from their current beneficiaries, by legally separating the property’s legal ownership and control from its equitable ownership and benefits thus facilitating their transmission to future offspring. Trust dispositions may allow their use but will bar of their disposal as technically they no longer belong to their ‘owners’. We can imagine this as being particularly useful in the event of a divorce settlement (gold digger deterrent) as the assets are effectively locked-up in a corporate structure and cannot be disposed of being jealously guarded by the trustees in compliance with the trust’s dispositions. This is also useful over many generations as it allows keeping significant properties within the family’s control (i.e. Scottish ancestral castle).

 

Disadvantages

 

1. Concealing Ownership

New laws, most notably Law 10/2010 on Anti-Money Laundering and Finance of Terrorism, have created a vast array of new obligations for all those involved in the setting up of corporate structures, ranging from lawyers, civil servants (notaries), financial advisers to bank employees.

It is now mandatory that the ‘ultimate beneficiary’ of such structures is disclosed and clearly identified not only at the time of setting up new structures post 2010 but also – incredibly – on those that pre-date this 2010 law e.g. banks have been formally requesting to disclose beneficiaries as recently as January 2014 on structures incorporated a decade ago, long before these laws even existed.

So basically this law marked a turning point no longer allowing a fool-proof system that accommodated the warm mantle of anonymity i.e. bearer shares on multilayered off-shore structures. Anonymity is now achieved, yes, but to a certain extent only, at a basic level, as it limits the exposure to third-party information requests. So anyone requesting information from a Land Registry search will turn up with nothing (particularly if you’ve not made the mistake of appointing yourself as company director). However, it will remain glaringly visible to the Tax Office, or a judge, if needed be under this new law.

2. Tax Mitigation

Spanish lawyers and financial advisers are under great scrutiny and face stiff penalties, including severe jail terms, if found guilty on devising and collaborating in the set-up of tax avoidance structures. Every week we are treated with an unpleasant new story on how some prominent law firm or lawyer has been found guilty and charged.

For this reason alone Spanish lawyers and law firms in general are now highly reluctant to devise, assist, create or abet in any manner whatsoever such corporate structures. Much less to accept appointing themselves as administrators of said companies.

From a client’s perspective it is now debatable on whether such structures are able to mitigate or negate income or inheritance tax as efficiently as in the previous decade. It is open to debate.

New treaties, such as the Double-Taxation Agreement with Spain dating from 1976 has been recently amended in London on the 14th of March 2013 in an attempt to plug existing holes.

Additionally, and more worryingly, inspired by the US’s successful FATCA agreement, five European countries – including the United Kingdom and Spain – signed in April 2013 a pilot initiative enabling an automatic exchange of fiscal information which overall impact still remains to be seen. Traditionally European countries had the onus of undergoing protracted and expensive multijurisdictional investigations requesting information on a particular individual or company from other European countries to which not all complied with or the information supplied was often scant, incomplete and outdated. This pilot scheme no longer requires the signatory countries to actively pursue the information; it is actually fed back to them on a regular basis automatically on a wide range of companies and individuals falling within certain parameters. The possibilities this leads to on cross-referencing information are significant if done right.

Only this week we’ve learnt that the Spanish Tax office has approved that 40% of a tax inspector’s wage will be contingent upon results going forward. This creates a spectacular perverse incentive as now inspectors have truly a vested interested of their own in targeting tax avoiders. And corporate structures holding real estate assets is always a nice red flag in their eyes, whether true or not, as it has been traditionally considered a ‘wealth indicator’.

Some regions now incentivize and are more lenient, specifically on inheritance taxation, on having property under your own personal name rather than through structures which is being increasingly more taxed.
In the case of non-resident companies owning property in Spain and located in what the BoS lists as tax havens they attract a special annual tax equating to 3% of the property’s value. Art. 40 et seq. Spain’s Non-Resident Act 5, 2004.

In light of the ongoing recession and high levels of unemployment some European countries, i.e. Spain, are cash-strapped and have become increasingly more aggressive pursuing tax offenders. Not exactly the best of times to be setting up structures to mitigate taxes really.

3. Running Costs

Depending on the structure chosen this can range from several hundred euros a year for basic bookkeeping services to raking up dozens of thousands on more complex structures. You really have to ask yourself, given your wealth level and coupled with the value of the underlying asset, if you can actually afford or even if it is worth your while engaging in huge annual running costs on the long run that may even come to negate altogether any tax mitigation sought.

4. Who’s really in Control?

So many scary stories over the years it is hard to list them all. When you relinquish control of your asset through a power of attorney in favour of a physical person or a company abroad you better be sure of what you are doing and ensure you are fully aware of the risks this entails that may lead your beneficiaries to lose control of the asset upon your death.

 

Dispelling Spanish Inheritance Tax Myths

 

Scaremongering, a time-proven sales tactic. Car and insurance salesmen, in my experience, have always been top of the game at this because they know exactly what makes a customer tick. You will read plenty of scary stuff on ex-pat newspapers and internet on inheritance taxation in Spain which aims to prey on the gullible and harp on people’s inbred prejudices. I will try to cast away some of these widely held misconceptions.

Examples of such are:

1. “Spanish Inheritance tax legal fees can be at least 40 to 50%.”

False
Fact: On average inheritors pay in Spain 15% in inheritance tax. Only in the most extreme cases would you pay such a high amount. To give an idea, a single beneficiary that inherits over €800,000 would stand to pay 34%. Normally there are multiple beneficiaries to an estate; it’s not just one person that inherits all. Also the beneficiaries of the bulk of the estate are normally children, not non-relatives (which do not qualify for tax allowances). The significance this has is that the taxable base (the 800k) would then be split amongst the heirs dramatically reducing the IHT liability as it follows a sliding scale. To this you must also add the legal and family allowances (both national and regional) which reduce the percentage to be paid even further. Also worth mentioning is the fact that the taxable base for property is well-below the true market value.

I’ll put this in perspective with the most common example on British nationals inheriting in Spain. In my experience expatriates have second homes in Spain worth on average €400k. This property is normally owned in joint names meaning each spouse owns 50% of the property. On average couples have two children. So when one parent passes away, his 50% (the €200,000) is normally inherited by his two children. Therefore the taxable base of each child would be €100,000 (as the €200,000 is split equally between them). The surviving spouse naturally still owns his 50%. The state inheritance tax on a taxable base of 100k would be approximately €10,000 (10%). Children are classified in Group I for inheritance taxation purposes. The state tax-free allowance amounts to almost €16,000 for each child. In other words, the state allowance completely offsets the inheritance tax liability (meaning they pay nothing on inheriting in Spain in this example). Additionally children under 21 years old have further annual reductions with a maximum cap of €48,000. On top of this there are autonomous regional allowances that children may benefit from. So in this particular example, which in my professional experience I dare say is the most common, each children would stand to pay zero on inheriting a taxable base of €100,000 each. When the surviving spouse passes away the same result will unfold again providing the laws are not changed. So basically each child will have paid almost nothing on inheriting €200,000 each when both parents are dead.

On the other side of the spectrum, we can imagine a parent passing away bequeathing a €3,000,000 property to a single child or to a friend. In this particular case the inheritance liability would indeed sky rocket (over a million). For this particular case I strongly advise obtaining an estimation on the inheritance tax the beneficiary stands to pay. In this example it is definitely worthwhile looking into corporate structures to mitigate exposure to ISD/IHT as much as possible.

2. “Heirs will be forced to sell the property in Spain to pay off Spain’s extreme inheritance tax”

False
Fact: Same as previous point. Selling a property would be exceptional. In fact I’ve never come across a single client in over a decade that has been forced to sell to pay Spain’s ISD/IHT on inheriting. Moreover, you cannot inherit anything until you have first paid inheritance tax. So no-one can sell the property they are inheriting to then pay off the tax as the property is technically not theirs to sell as it is still under the deceased’s name. Only once the tax duties have been settled and the property is lodged under the name of the beneficiary at the Land Registry is he free to sell on if he wishes as the property is now legally under his name to do with it as he pleases.

3. “The financial debt of your heirs is maybe as much as 50% of the value of your property”

False
Fact: Everyone inheriting in Spain would then be broke. Same as the previous two bullet points, on average inheritors (beneficiaries) pay 15% for IHT/ISD in Spain.

4. “Yours husband or wife will not be exempt from Spanish Inheritance Tax.”

Misleading
Fact: Spouses indeed are not exempt from paying inheritance tax in Spain but they qualify for legal tax allowances. If resident in Spain then the surviving spouse is entitled to further autonomous regional tax allowances. These allowances, both from the state and from the autonomous region where the property is located, may greatly reduce the burden. Additionally if the surviving spouse is resident in Spain they may qualify for a 95% reduction on the main home providing they have lived in it the previous two years and keep it the following ten years (with a maximum reduction of €122,000).

5. “Want to avoid up to 81% of Spanish Inheritance Tax?”

Misleading
Fact: Scaremongers love quoting the extreme 81.6% tax rate for IHT as if this were the norm on inheriting in Spain. While it’s true that Spain’s inheritance tax can be as high as 81.6 pc – in the most extreme case – this only applies to the following case:

a) the beneficiary inherits > €800,000
b) the beneficiary is already well-off (his pre-existing wealth before inheriting > €4,000,000 or £3,000,000)
c) is a non-relative of the deceased classified in Group IV (no family ties to him i.e. a friend)

Clearly a problem affecting only a privileged few. Not a problem that the vast majority of beneficiaries inheriting in Spain will have to contend with unless they are already multimillionaires.

6. “If you incorporate a UK Limited Liability company and place the Spanish real estate inside you will be 100% shielded against Spain’s ISD/IHT. After death, only the shares are reorganised, the company owns the asset, and so it doesn’t change hands. This falls outside Spanish inheritance tax. Win-win”

False
Fact: Resident beneficiaries are obliged to pay inheritance tax under article 17 of Spain’s Inheritance and Gift Tax Royal on inheriting real estate within Spanish territory; regardless on whether the property is locked up or not within a holding company structure and regardless of whether you inherit the property itself or the shares. Likewise non-resident beneficiaries of a property located in Spanish territory also stand to pay Spanish inheritance tax (ex art. 18 of same decree) regardless if it’s in a holding structure or not. Moreover, I believe in the latter you may even be liable to attract UKs IHT beside Spain’s if the beneficiary happens to be a UK national.

Additionally Spain’s Non-Resident Act 5, 2004 clearly states that any re-arrangement of company shares (regardless of company’s nationality) which main asset is real estate located in Spain is taxable in Spain (CGT).

Depending on how clumsily this tax avoidance scheme is carried out it may be labelled as tax evasion (criminally pursuable for defrauded amounts above €120,000 ex art. 305 et seq. Spanish Criminal Code).

And to close I would like to take the opportunity to dispel a malicious misunderstanding on misreading one of my articles: Non-residents – Six Advantages of Making a Spanish will. Making a Spanish will does not reduce or mitigate your beneficiaries’ inheritance tax bill in any way whatsoever (as highlighted in the article itself). But it is extremely useful to save your beneficiaries time, money and hassle at a time of bereavement.

Without a Spanish will a beneficiary will normally incur in penalties and surcharges for late payment on inheritance in Spain. The reason for this is because there’s a deadline of 6 months as from the time of the testator’s demise to file and pay Spanish Inheritance Tax. UK probate, in my professional experience, always exceeds the six months deadline if there is no Spanish will. In which case penalties and surcharges are accrued and added to the inheritance tax for late payment. So ‘in a way’, making a Spanish will helps to mitigate or reduce the inheritance tax bill by way of helping not to attract said surcharges and penalties as the beneficiary is able to pay in time within the six-month deadline thus avoiding a lengthy procedure. I hope this clarifies the misunderstanding.

Spain’s Statutory Four-Year Tax Limitation

Another matter is if Spanish authorities do not get wind on the death of an owner who holds company shares, property or other assets. The statutory limitation of 4 years on all taxes, including Spanish Inheritance Tax, may kick in timing out the obligation to pay inheritance tax altogether – there is nothing the Tax Office can do after said time has elapsed to claim payment of inheritance tax from the beneficiaries. It should be noted that – exceptionally – the statute of limitation for Spanish Inheritance Tax is 4 years, six months and one day. In the particular case of a non-resident in Spain it is extremely difficult for the Spanish Tax Office (understatement) to know if and when they have passed away; unless of course his beneficiaries take to pro-actively inform the Spanish tax authorities… (or for that matter their bank in Spain; which also has the legal obligation to disclose the death to the tax office).

Pros and Cons of Owning Property in Spain through Corporate Structures – Conclusion

Generalisations are often dangerous and even more so on this delicate matter. The only sound advice that can be given is that a case-by-case study is required before any decision can reasonably be taken. Each client has different needs which evolve over time so structures may need to be changed to accommodate their changing needs i.e. post-divorce, new heirs, change in tax laws.

Different experts will give you different amounts or thresholds based on different reasons on whether it’s worthwhile or not to incorporate a company (or string of companies) for tax mitigation purposes. I would generally recommend only looking into corporate structures, for tax mitigation purposes, on a taxable base of €600,000 or above (£500,000). Note the use of the term ‘taxable base’. It is not referring to the value of the underlying real estate, but the amount that each beneficiary stands to inherit from the estate. Also note that the taxable base, when referring to property itself, is normally well-below the current market value of the property; it is not an up-to-date property appraisal.

So, for example, on inheriting an estate of €800,000 located in one of Spain’s seventeen autonomous regions that actually do tax inheritance tax and there is only one inheritor (beneficiary) then in this particular case I think it may be worth looking at getting quotations on setting up a structure to mitigate exposure to ISD/IHT. In Catalonia for example you would pay €350 in taxes (as resident) and if this estate were located in Andalucía the beneficiary would pay €164,000. This whopping difference that makes a beneficiary pay 469 times more in one region than another on the same estate is explained because autonomous regions in Spain are empowered to rule on inheritance tax.

Following on the same example set above, if instead we had three children (three beneficiaries) to inherit the €800,000 estate my answer would change and I think it would no longer be worthwhile. Because the taxable base would now be split between the three of them, thus reducing the attraction of the IHT rate band which follows a sliding scale. After legal and family allowances kick in there will be very little IHT to pay by each beneficiary not making it really worthwhile to incorporate a structure and to pay annual running maintenance fees for bookkeeping services and tax compliance purposes.

Not to mention that potential buyers normally refuse buying real estate locked up in holding structures out of fear of non-disclosed debts and hidden liabilities. A due diligence must normally be carried out prior to acquiring a company holding real estate to rule off such legal risks. To sell on a property, the vendor is normally required to first unwind the holding company (inheritors stand to pay for this) at a great expense to actually sell the underlying real estate itself.

Non-resident beneficiaries unfortunately do not benefit as much as those holding resident status when it comes to legal allowances to reduce the IHT taxable base as the applicable law is the state law (which is less lenient than regional tax allowances available only to residents). Admittedly non-residents unfortunately, and unjustly, still do not qualify to opt for the full range of tax allowances that residents are entitled to. The EU is looking into this as it is tantamount to discrimination with fellow EU member nationals – unacceptable.

EDIT May 2015: The EU ruled on the 3rd September 2014 on the matter in favour of non-residents ending all tax discrimination on inheritance matters. You can read my in-depth article Changes To Spain’s Inheritance And Gift Tax Law.

Inheritance tax planning in Spain is a complex matter, so please seek legal advice from a qualified lawyer and be wary of anyone advocating property ownership through corporate structures is “always beneficial” – not the case and in fact may be even be counter-productive and a complete waste of money. Beware of companies offering bespoke one-trick ponies to circumvent Spanish inheritance tax by offering “100% protection” against it.

If you fear Spain’s inheritance tax (IHT/ISD) you should first ask for en estimation from a law firm (we offer a SITAR service) before you do anything rash such as setting up a Spanish company or UK limited company to place it on top of the Spanish real estate. Inheritance tax varies widely within Spain’s seventeen autonomous regions (in some it’s not even taxed!). Truth is that corporate structures are neither needed nor recommended for the vast majority of people.

“We don’t pay taxes. Only the little people pay taxes” – Leona Helmsley.

US billionaire hotelier.

 

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in taxation, inheritance, conveyancing, and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

 

Legal services Larraín Nesbitt Lawyers can offer you

 

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Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

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Bank Repossessions in Spain

Raymundo Larraín Nesbitt, February, 21. 2014

Spain’s property meltdown offers once-in-a-cycle investing opportunities through bank repossessions. The following beefed-up article from 2007 offers a complete legal overview.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
21st of February 2014

 

 

Original article from 21st September 2.007

 

Introduction

The amount of home repossessions in Spain has soared to unprecedented levels according to the latest figures of the Bank of Spain. Conservative sources estimate the figure in well over 250,000 repossessions since the real estate market collapsed in 2007. The real number may actually be higher. This tidal wave has in turn spawned and exacerbated other phenomena such a new breed of middle-class squatters in Spain.

The Government, in denial mode, claims it has been overwhelmed and even caught off guard on the wake of recent social events. I beg to differ. Any industry insider would have told you at the time a sharp rise in repossessions was taken for granted for all the reasons collated below.

 

Underlying Causes of the Bank Repossession Crisis in Spain

 

The causes underpinning this surge in home repossessions are mainly related to the economic ‘recession’ Spain wades seven years on:

1. High levels of unemployment reminiscent of the Great Depression (an eye-watering 28% and counting) leading to widespread mortgage delinquencies. That is six million people unemployed. 1.8mn families in Spain have all their members unemployed. National youth unemployment (under 25-year-olds) is a staggering 55% and in some communities exceeds well over 60%. This quadruples the world’s average and doubles the European rate. These statistics, a human drama hiding behind each one, eerily echo harsh times straight out of a novel by John Steinbeck. Source: INE (National Institute for Statistics).

2. Aggressive reform in Labour laws which made dismissals less cumbersome and onerous overall. Spanish politicians pursue a ruthless internal devaluation at any cost to regain international competitiveness which translates into severe wage cuts. Less monthly disposable income edge Spanish families closer to the brink.

3. Unparalleled levels of lax lending. Bordering non-existent in the case of Spanish savings banks (‘cajas de ahorros’). Basically anyone with a pulse qualified for a mortgage loan.

4. Irresponsible property overvaluation led by bank-appointed appraisal companies.

5. Reckless over-indebtedness. Families should never spend more than 30% of their disposable income on servicing a mortgage loan.

6. Rising inflation. Traditionally offset by leading monetary institutions by increasing the price of money; that is by increasing the applicable interest rates.

7. Euribor rate poised to increase. It is used as a benchmark index in over 95% of variable interest Spanish mortgage loans reaching an all-time high in 2008. This means mortgage borrowers face the grim prospect of increased monthly repayments.

8. Relentless fall in property prices (on average 50% across the board) have discouraged potential purchasers, who postpone buying expecting even steeper discounts further down the line. Asset depreciation likewise affects existing property owners who find it hard to borrow against their properties unlocking equity through equity release schemes or life-time loans in Spain.

9. Severe credit shortage. The lowest on record on a fifty-year period aggravated by creeping interest rates and Spain’s uncertain financial health. In addition, bad credit for banks stands at a stunning 13%. The former helps to explain, amid other reasons I won‘t delve into, why Spanish lenders are reluctant to lend (unless at exorbitant borrowing costs which act as a deterrent grinding the market into a standstill). Credit is the real estate market’s lifeblood. If this is sapped away it creates huge imbalances. This effectively translates into scores of struggling borrowers being unable to offload a glut of properties in fire sales as keen would-be buyers are themselves turned down by tight-fisted lenders on applying for mortgage loans in a vicious gridlock that eventually drives the former to being repossessed. Mortgage borrowing costs in Spain are now at an all-time high. Cash is king.

10. Additionally, and specifically in the case of non-residents, the strengthening of the Euro against other currencies such as the Sterling Pound or the US Dollar makes it harder for these currency holders to face their monthly mortgage repayments in Euros.

raymundo-forex

Definition of Negative Equity

A significant fall in property value translates into borrowers no longer being interested in servicing their mortgages as they have run into what’s known as ‘negative equity’ (they owe a lender more than what the property is worth).

How Can One Run into Negative Equity?

This takes place when the asset, or collateral, guaranteeing a mortgage loan is worth less than the loan amount itself.

Although this may seem difficult at first, the truth is that running into negative equity is surprisingly easy in Spain. In the following sections I explain how one attains negative equity:

i) steep drop in property price
ii) post-auction (repo) property

The reason why in nine out of ten public auctions in Spain no-one bids, besides the ongoing credit-crunch, is precisely negative equity. That is what’s keeping professional bidders at bay in such properties. Not all bank repos are a bargain, some are tripe; beware the hype. One should cherry pick them carefully assisted by a professional worth his salt (reputable estate agent, seasoned lawyer, expert investor).

I. Sharp Drop in Spanish Property Prices

The bank, on deciding if they will grant you a loan, will command an appraisal of the property on issuing a Binding Offer (‘oferta vinculante’). The property will act as collateral of the loan. If the value is unrealistic and is above the current market value of the property, should there be a fall in house prices, then a property may be worth less than the loan it is guaranteeing. This is the current scenario.

All mortgage contracts in Spain have a clause by which if the value of the property falls below 20% of the appraisal value the bank may request at their own discretion additional collateral to offset the financial shortage. In practice banks seldom opt to enforce it but they could legally.

In the event a lender seizes a property, it can auction it off publicly.

II. Public Auctions Mean a Further Drop in Property Price

As the influx of repossessed properties increases in the near future banks will eventually be forced to go through a public auction. In these auctions, should no-one bid, a lender is legally entitled to seize the property for 60% of its appraisal value. This has been recently increased by Law 1/2013 as before it was 50% which left the borrower in an even more precarious state.

Additionally, as I explain in detail further below, the extent of the liability is unlimited and personal. Meaning the lender will actually pursue the borrower for the outstanding unpaid amount (i.e. up to 40% plus associated repossession expenses).

This is precisely why overvaluing properties has turned out to be so harmful. Bloated appraisals have lead trustful borrowers to reel in shock as it dawns on them that the money fetched in a public auction falls well below the amount owed to their lender. On top of this you must also add the legal fees of the bank’s lawyers and the associated costs of a full-blown repossession procedure.

This is simply an injustice. As not only does a borrower stand to lose his property in an auction but must also withstand the additional aggravation of putting up with a lender that will relentlessly pursue him for the unpaid amount as the property value does not suffice to cover the loan amount plus mounting compound interests and associated repossession expenses. The debt will grow over time exponentially creating a debt spiral if left unchecked. This will turn many Spanish families into becoming lifetime financial pariahs; social outcasts with no hope of redemption.

Banks can legally pursue you abroad for a shortfall. Another matter is if it is worth their while.

Wait a Moment. I Have Already Paid X% of the Mortgage Capital During the Equivalent Period of Time!

Well, I’m afraid you haven’t! If your mortgage uses the French repayment method (as most of the mortgages granted in Spain do) then you will only have paid a small fraction of the mortgage capital upfront. The reason is that with the French system you pay interest-only during the early stages of a mortgage, as it gradually shifts to capital-only following a lineal sliding scale. This method is devised to allow that monthly payments terms remain fixed and equal throughout the duration of a mortgage.

To put it simply, during the first years of a mortgage you pay interest mostly. So if you default on the first years of a mortgage you practically have all the capital still outstanding to be paid off.

French vs German Mortgage Repayment Chart

French method on the left, German on the right. Source: De Finanzas.

Extent of Liability

Following article 1911 of the Spanish Civil Code on signing a mortgage deed you will be held liable with all your current and future assets. This translates to unlimited personal liability. The debt goes personally against you, not against the property. The mortgage is only a guarantee subject to the financial loan with the property, or underlying asset, acting as collateral.

The above has huge legal implications which borrowers ought to fully understand before signing a Spanish mortgage deed. This means that if you default on servicing your Spanish mortgage, a lender may seize the property acting as collateral. If you fall into negative equity a lender is additionally entitled to pursue you abroad, even in your home country, for the shortfall. This may lead to a debt spiral – a very sticky situation.

Unlike in the UK and the US, most of the time handing back the keys to a lender will not stop them chasing you for the outstanding debt. This can only be achieved through a formal legal procedure known as ‘dación en pago’ which I care to explain further below.

 

Five Useful Tips to Avoid Repossession if you cannot Service your Mortgage

 

If you are struggling to meet your monthly mortgage repayments you should not wait until you have slipped into arrears to start negotiating with your lender. If you foresee falling into arrears, pre-empt the situation by requesting from your lender a debt restructure. After three months of mortgage arrears Spanish banks start to take legal action and initiate repossession proceedings.

Pre-repossession negotiations with a lender may include, but are not limited to, all the following:

1. Extend the mortgage repayments a number of years. The longer the duration, the less you stand to pay a month. The caveat is that you will end up paying considerably more in the long run due to the ‘magic’ of compound interest.
2. Reduce the interest rate or move on to an interest-only mortgage (‘carencia’) for a few years on the hope your economic circumstances will improve over time.
3. Apply for debt consolidation. This immediately reduces your monthly outgoings
4. Swap your mortgage to a new lender with less onerous conditions.
5. Attempt a property fire sale as a distressed asset (offering it at a steep discount).

If a borrower has unsuccessfully pursued any or all the above-listed debt restructuring options, he may consider handing over the keys to a lender only as an option of last resort. In doing this a borrower will avoid the dire consequences of a repossessions procedure; namely still being chased years after for a shortfall in the mortgage loan post-auction as outlined above. This is carried out following an ad hoc legal procedure, explained in the next section, rather than just allowing a lender to unilaterally repossess a property.

shutterstock-274539845

Do all properties end in a repossession?

Not all properties end in a public auction, especially in those few cases in which a borrower is not in negative equity. Those who have slipped into mortgage arrears may strike with their lenders an out-of-court-settlement which basically entails handing back the keys following a legal procedure. This is known as ‘dación en pago’ in Spanish.

This involves signing a deed at a Notary Public relinquishing ownership and in exchange a lender fully discharges a borrower of the remaining mortgage debt, not holding you liable in the future. The catch is that the property must not be in negative equity. This procedure is loosely modelled after article 140 of Spain’s Mortgage Act.

The whole point of following a dación would be to avoid repossession at all costs.

Sadly, as described in my updated article, ‘dación en pago finally a borrower’s right’, lenders no longer offer this option freely.

 

The Six Stages of a Bank Repossession

 

A repossession procedure generally follows in 6 steps:

1. The borrower falls into arrears – The borrower fails to service his mortgage repayments. Delay interests (‘intereses de mora’) accrue to cover penalties. The lender contacts the borrower and first attempts an out-of-court settlement.

2. In technical default – Three months from the first arrear (Law 1/2013). After 3 months in arrears a client’s file is passed onto the bank’s legal debt collection department which tries in a last-ditch effort to recover the debt. A lender will then initiate an Executive Procedure against the encumbered property filing it before a local ‘first court’ where the property is located. The bank is then forced to set aside a provision to offset the potential loss. This mandatory provision helps on to explain why lenders are open to negotiate before a default because these must be deposited before the Bank of Spain which undermines lenders’ liquidity ratios. Banks, with the ongoing current credit-crunch, will go to great lengths to avert this as it effectively hampers their own borrowing ability in the money markets. And credit is eventually shut to them leading to unpopular government bail outs.

3. Foreclosure and notary intervention – Depending on the chances of a debt recovery, 15 to 20 days after the technical default. A registered letter is sent by a Notary Public, with acknowledgement of receipt, informing a borrower that a repossession procedure is underway.

4. Repossession order – The court contacts the property owner to pencil a date for the trial. The judge notifies the borrower of impending repossession proceedings. The judge requests from the Land Registry a full report of charges and liens against the property. The value of the asset in the public auction can be either the one that is lodged at the Land Registry in the Mortgage deed or else the bank may command an updated appraisal. This updated appraisal will also be useful for the bank to decide on whether it is worthwhile or not to proceed with the repossession as this has high associated expenses. I must point out that a borrower may still successfully halt repossession at any time before the pencilled date for the auction so long as he pays the outstanding amount plus the full associated repossession expenses (easily over £8,000). These funds (outstanding monthly repayments with accrued delay interests plus the full associated repossession expenses) will have to be lodged both before the court that is ruling on the Executive Procedure before the date set for the auction. So time is of the essence.

5. The court sets a date for the public auction – Normally between 6 to 12 months after initiating the Executive Procedure. The judge sets the date of the auction. The value for auction purposes cannot fall below 75% of the appraisal value. However if no-one bids the gavel falls and a lender is legally entitled to seize the property for 60% of its appraisal value. The bank tries to recoup the outstanding loan debt instigating a public auction. However, post-repossession, after the property has been assigned to a winning bidder or to the lender; the amount fetched may not be high enough to cover the debt plus all the associated repossession expenses (i.e. because the borrower had run into negative equity). A lender will then be entitled to pursue the rest of the borrower’s assets, even if abroad, due to the personal and unlimited liability of a borrower ex art 1911 of the Spanish Civil Code. Should there be a guarantor on the mortgage deed the bank will chase their assets first it is easier to seize them. The property will now be lodged under the name of the new owner at the local Land Registry (normally the lender).

6. Eviction – In the event the now ex-owner still dwells in the property, after a period that normally spans six months, police officers will arrive at their door step with a locksmith and judicial bailiff to evict them by force, if necessary. There are a few instances in which delaying tactics may be employed albeit ultimately the outcome will be the same so it’s only buying time before the unavoidable.

Interested in Buying Repossession?

Repossessions offer great value for money. They are genuine unique investing opportunities as they have heavily built-in discounted prices for all the legal reasons explained above. Although repossessions offer the highest rewards to the undaunted they also have associated the highest risks. There is a clear correlation between risk and reward which a shrewd investor should ponder carefully in his decision-making before committing. The current market meltdown offers one-time buying opportunities that will likely take decades to be seen again. The timing is ideal for cash buyers who do not need to rely on a mortgage loan to acquire property. You will be spoilt for choice.

For more details read on my article on Buying Distressed Property in Spain which offers a detailed overview. It explains the different types of distressed asset classes, ranging from Non-Performing Mortgage Loans (pre-auction or key-ready properties) to Bank Repossessions (post-repossession properties) as well as the pros and cons of each. Repossessions are the real deal.

Spanish Bank Repossessions – Conclusion

Defaulting on a Spanish mortgage is a serious matter that may jeopardize your assets abroad as well as dealing a major blow to your credit rating score in your home country (hampering your future borrowing ability) as the debt will be against you personally and not against the asset itself.

Unlike in the UK, for example, in which we have a statute of limitations on debt after six years in Spain it works differently in practice. There is a statutory limitation of twenty-year years but it can be renewed at any given moment on the lender contacting a borrower to claim the principal plus compound interests accrued. Lawyers, acting on behalf of creditors, make sure to contact borrowers at regular intervals to avoid the limitation becoming firm. So in practice, never.

If everything else fails, the only option left is to try to negotiate with your lender. Lenders are open to renegotiate the lending terms providing you are not in arrears with them. Even borrowers saddled with debt should try to speak with their lender to find a way out. Lenders are reluctant to add yet another repossession to their books and so are keen to be flexible and accommodating.

To close I would like to imagine that lenders in general, and borrowers in particular, have learnt from the harsh lessons and in future cycles will avoid overstretching their finances saddling themselves with debt. Guessing it’s too much to ask for.

“Never was so much owed by so many to so few” – Sir Winston Churchill.

Eminent British career officer, artist, historian, and laureate writer – awarded the Nobel prize in Literature in 1953. Was even known to dabble in politics in his spare time; nobody’s perfect.

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in inheritance, conveyancing, taxation and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

Mortgage-related articles

 

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. Voluntas omnia vincit.

2.007 and 2.013 © Raymundo Larraín Nesbitt. All rights reserved.

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Mortgage Collar Clauses Revisited (‘Cláusulas Suelo’)

Raymundo Larraín Nesbitt, December, 8. 2013

The purpose of this article is to raise public awareness on collar clauses as many struggling borrowers in Spain are still being abused by them in 2013 when Spain’s Supreme Court has ruled them out as null and void.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of December 2013

 

 

 

Introduction

I have been asked to revisit the subject of collar clauses (‘Cláusulas Suelo’, in Spanish) in light of Spain’s recent Supreme Court rulings. When I first wrote on the matter, back in 2009, there was no jurisprudence whatsoever. I felt at the time compelled to write and denounce these mortgage clauses publicly as I regarded them as abusive due to their one-sidedness in favour of lenders. They were an accident waiting to happen. So much so that in my article on 10 Common Abusive Clauses in Spanish Mortgage Loans I gave them the dubious honour of listing them in first place. I should have also added SWAP clauses to it.

Five years on, rulings against them are a daily occurrence that no longer makes the headlines. Spain’s Supreme Court has now established in 2013 a line of uniform jurisprudence on the matter declaring them null and void across the board as from the 9th of May 2013 onwards.

Abusive Clause: Definition

Spanish law requires two conditions are met for a clause to be flagged as abusive:

a) The clause must inflict harm on the consumer, whether financial or of some other nature. The consumer can either be a physical or legal person.
b) The clause must benefit the professional who’s drafted the contract within a business relation. This professional will be either a company or professional acting privately or publicly.

Only a judge can rule if a clause is deemed as abusive. In which case, the clause will be lodged in a special registry of abusive clauses.

Collar Clause: Definition

Is an arrangement in which the maximum limit (ceiling or cap) and/or the minimum limit (floor) in a loan is fixed.
In theory is a financial service that is tagged onto your loan whereby if the interest rate to which the loan is referred to (normally Euribor plus a spread) exceeds a capped amount you are charged only the capped amount (ceiling) saving yourself considerable money i.e. the official interest rate reaches 10% and your collar clause has a ‘ceiling’ set at 7%. You save yourself paying the difference (3%) on hiring this financial service.

Conversely should the interest rate fall too low you are likewise charged a capped amount (floor or ‘suelo’ in Spanish).

Collar clauses clearly fall in the category of an abusive clause for the reasons I explain below.

Insight into Collar Clauses

The idea of collar clauses on paper sounds all good and well.

In practice, they play out very differently. When lenders set out to mis-sell this financial service en masse in 2008 it was clear to anyone who followed the markets that the Euribor had peaked off in October 2008. Therefor benchmark interest rates indexed to loan agreements (chiefly Euribor for over 90% of variable interest mortgage loans) were bound to fall sharply in the ensuing months, not to increase. It is precisely at that moment in which lenders knew for a fact that interest rates would drop sharply that they set out to mis-sell a financial product that could only benefit a consumer if interest rates soared. Lenders and credit institutions merrily set off to mis-sell collar clauses to borrowers at large scaring them with apocalyptic double-digit scenarios. Mark Twain’s quote comes to mind: “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain”.

Lenders took an unfair advantage over consumers through their superior financial know-how on knowing for a fact that the FED was leading a world-wide concerted strategy, in tandem with all key central banks including the ECB, to lower interest rates and pave the way out of the ongoing recession that started with the US’s subprimes in 2007. The likelihood of a return to double-digit rates was negligible; a chimera at best. Albeit trusting borrowers largely ignored this when they were flogged collar clauses as a panacea by lenders in 2008.

Lenders, on mis-selling this complex financial service to laymen, who were invariably not financially savvy, focussed the sales pitch on interest rates soaring and how much money a borrower saved on average on hiring them over the long-term. Fear always makes an attractive sales proposition.

Lenders were only too keen to conjure nightmarish visions of rising interest rates reminiscent of the eighties and nineties reminding borrowers that 10% interest rates were the historical average in Spain. Over-indebted borrowers, reeling in fear, were all too eager to rush on ahead and hire a collar clause like there was no tomorrow. In other cases these clauses were simply tagged onto mortgage loans unbeknownst to unsuspecting borrowers.

While it’s true that 10% is the historical average for interest rates in Spain this does not take into account the fact that Spain joined the Eurozone. This implied Spain losing its monetary policy in favour of the EU’s ECB. This brought as a result stable, low interest rates for the long-term. So a scenario of a 10% interest rate, so long as Spain remains within the protective mantle of the EU, is far-fetched and non-plausible. But few people care to think on such things, much less on hiring a financial service.

Lenders loaded the dice by drafting clauses where the collar clauses were set with a spread as high as 3 or 4% plus Euribor when the official interest rate was bound to plunge below one per cent (!). When interest rates (so very predictably) fell in the wake of the FED’s new Quantitative Easing monetary policy these clauses started kicking in. Borrowers simply failed to grasp how instead of paying less a month (as they had been repeatedly promised by lenders on flogging these collar clauses) were in fact now being requested to pay increasingly more!

My inbox as a result was deluged by aggravated borrowers over the ensuing months complaining on being overcharged by lenders. They were (mis)led to believe that dropping interest rates would translate to sharp cuts in their monthly repayments on hiring a collar clause. The harsh reality proved stubbornly the opposite. Not only did they not pay less, they ended up paying even more than they reasonably should have.

Additionally lenders worded loan agreements reserving themselves the right to revise and amend the applicable loan rate on a monthly basis (if it benefitted them) or else on an annual basis (it if benefitted the borrower). In other words lenders could swiftly react to any rate change that benefitted them (and so they did) as rates continually dropped to new lows whereas borrowers were only able to do it once a year, on average. As a result lenders were quick as a cheetah to amend applicable rates in loan agreements and slow as a tortoise if it benefitted a borrower. That’s fairly one-sided in my book.

Collar Clauses: Jurisprudence

Spain’s Supreme Court has only recently upheld in 2013, across multiple appeals raised by lenders, the nullity of such clauses i.e. STS 241/2013. The matter is no longer contentious as there is a string of like-minded rulings set by the highest court in the land which sets precedence over legal matters.

As a result Spanish lenders are (in theory) legally forced to remove collar clauses from their loan agreements. In practice, they are not so proactive and often would seem to adopt a complacent attitude overlooking such rulings.

Unlike in the UK, where lenders took an active stance mandatorily setting aside billions of pounds to compensate mis-selling PPI insurance covers, this is not likely to take place in Spain. Although UK lenders offer a (paltry) compensation, private claim companies can get you, on average, triple the amount you are initially offered. In the UK we have witnessed how PPI-claim companies have been setup with the sole purpose of claiming compensation on behalf of borrowers harassing prospective customers day and night with text messages.

Back in Spain, lenders are in no rush to compensate or remove such clauses. At no time are lenders going to volunteer offering borrowers any sort of compensation, unlike their UK counterparts. In practice lenders require that borrowers (or their appointed lawyers) claim proactively compensation and/or have collar clauses removed. Many borrowers, in my experience, were misinformed and remain blissfully unaware – even today – that their loan repayments are subject to a collar clause as they were tagged on by lenders unbeknownst to them as an ancillary non-requested financial service.

And this is precisely where lawyers come in to play; by stepping up to enforce the nullity in mortgage loan agreements or even claim compensation on behalf of customers, where applicable.

Are You a Victim of a Collar Clause?

If you think you may (still) be a victim of a collar clause you should not hesitate to contact your lawyer to revise your mortgage loan agreement. Several rulings declare these as null and void and you should at no time be overpaying as a result of them on monthly loan repayments.

You can of course attempt to cut out a lawyer saving yourself money by contacting a lender on your own, in Spanish of course. Any letters in any language other than Spanish will be binned, as it is logical.

In practice the route of cutting out a law professional seldom works as a borrower lacks the gravitas and leverage of a seasoned lawyer in the eyes of a lender to have a collar clause removed from your contract; much less to claim compensation.

You can arrange a free consultation with a lawyer to see if you are eligible. Once a lawyer determines you qualify (for collar clause removal and/or compensation) you may decide on whether it is worthwhile or not to hire them. You should look at the long-term on making a decision. It is foreseeable that the ECB will hold its interest rates low in the mid-term which in turn translates into the Euribor (not directly under the ECBs control) remaining low for a long period. Which means that you are going to be overpaying a lender for quite some time (years). A lawyer’s low fee amply justifies hiring him to have these cumbersome collar clauses removed. And if you are additionally eligible for compensation, all the better!

Spanish Mortgage Collar Clauses – Conclusion

It is a widespread financial product that was mis-sold by lenders at large in Spain. Unbeknownst to many borrowers, who are now struggling to make ends meet, they may be overpaying Spanish lenders on their monthly (mortgage) repayments when legally they should not. Moreover, they may be even entitled to compensation!

If you think you may be a victim of a collar clause you should contact your lawyer to have it removed from your loan agreement. The money you will save yourself on the long run (in a scenario of low interest rates) clearly offsets a lawyer’s fee. Always worth a shot.

If there is something in life we can safely rely on (besides death and taxes) is lenders’ relentless ‘creativity’ to come up with new exotic financial services to flog us. A sarcastic would write ‘greed’ in lieu of creativity. God forbid!

“Those who cannot remember the past are condemned to repeat it” – George Santayana.

Philosopher, essayist, poet and novelist

 

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in conveyancing, taxation, inheritance and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

Related articles

 

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

2.013 © Raymundo Larraín Nesbitt. All rights reserved.

 

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Dación en Pago or “Handing Back the Keys”

Raymundo Larraín Nesbitt, December, 8. 2013

A dación en pago procedure means handing the keys back to a lender. It involves signing a deed before a Notary public whereby a struggling borrower relinquishes ownership in exchange for being fully discharged of his mortgage liability.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of December 2013

 

 

 

Original article from 21st November 2.008

 

Introduction

For all those who’ve slipped into mortgage arrears in Spain, or are likely to, and are thinking of handing back the keys as a solution, there’s a formal legal procedure to do it known as dación en pago (‘datio pro soluto’). It is one of the proposed solutions I highlight in next month’s article on Bank Repossessions in Spain. Article 140 of Spain’s Mortgage Act allows a borrower to cancel a lenders’ debt by handing in exchange the encumbered asset.

Dación en Pago: Definition

In plain English, a ‘dación en pago’ (or dation in payment) means handing the keys back to a lender, and in exchange the lender will discharge in full the mortgage liability not holding a borrower liable in the future. They will renounce pursuing the debt in your home country or elsewhere against any other assets you may hold. This solution of last resort puts an end to many borrowers’ growing nightmare as the mortgage debt mounts up exponentially over time eventually becoming unbearable.

Why hand back the keys?

The reason why struggling borrowers follow a dación is because on being repossessed in Spain if the property slips into negative equity (meaning you owe more money than what the property is currently worth post-auction) a lender can actually pursue the borrower for the difference (art. 579 LEC). As I analyse in detail on next month’s article on Bank Repossessions in Spain it is extremely easy to slip into negative equity territory post-repossession. Hence why the last thing a Spanish family does is stop servicing their mortgage.

A dación is particularly interesting for those holding property, whether in Spain or abroad. What a mortgage borrower seeks on following a dación is to set a legal firewall that will avoid a lender jeopardising the remainder of his assets. It is basically safeguarding the family’s financial interests by (legally) drawing a line on the sand. If you hold no assets then you may wish to skip this article altogether.

Following article 1911 of the Spanish Civil Code a mortgage loan borrower’s liability is personal and unlimited with all their assets, both now and in the future. In other words, the debt goes personally against the borrower on the balance owed to a Spanish lender. The property itself, the collateral, is accessory and was only guaranteeing the bank loan, which is the principal.

Many defaulting borrowers realize with shock post-auction, that in despite of a lender having repossessed their Spanish property, they are still being chased in their home country or elsewhere for the outstanding debt. As they owe, in addition to the mortgage loan shortfall, the repossession associated expenses, lawyer’s fees, procurador’s fees and on top the mortgage default compound interest. The compound default interest on average is over 20% p.a. which only adds more pain on the long run as the overall debt builds exponentially over time.

That is why many defaulting borrowers in lieu of being repossessed, and face all the above legal and financial dire consequences, would rather sell the non-performing mortgage loan as a distressed asset or else follow a dación procedure if they are unable to find a buyer in time to avoid repossession.

Requirements

1. No negative equity rule: the property should not be in negative equity (in fact, I advise it should have at least over 20% equity)
2. No repossession procedure underway: it is critical a lender has not started repossession proceedings against the property

Procedure

The outline of how it works would be as follows:

1. A borrower must be on time with the repayments as well as with the Community fees and local taxes. The latter can actually be negotiated with the lender.

2. The borrower contacts his lender and proposes it to them.

3. The lender will typically require the property to be reappraised. You will be expected by your lender to pay this in advance. On average it amounts to 350€.

4. If on average the new valuation of a property covers the outstanding mortgage loan plus 12% of the associated legal expenses the lender will accept to take the possession of the apartment, cancelling your debt and will waive taking legal action both in Spain and abroad in your home country. As a rule-of-thumb I would personally advise the buffer of equity to amount to at least 20% of the property value for it to be successfully accepted. The higher the positive equity buffer, the more likely a lender is to accommodate to the idea of a dación.

5. The day of signing the deed at a Notary, the borrower will surrender the keys, and leave the property clear of furniture and tenants.

6. The property will now be lodged under the lender’s name.

Expenses Involved

A dación en pago works basically the same as a conveyance procedure only that instead of getting paid in exchange of signing away your property you are fully discharged of the mortgage liability being allowed to simply ‘walk away’ from the problem (without legal repercussions).

  • 7 to 10% Transfer tax depending on the autonomous region of Spain where the property is located
  • Plusvalía tax (Municipal Added Value tax)
  • Notary fees
  • Land Registry fees
  • Gestoría fees (may not apply)

 

All these expenses should ideally be negotiated to be paid for by the lender. A lender, on becoming the new owner, will contribute towards the Community fees just like any other commonholder in a Community of Owners. That is the reason why there must be sufficient equity in the property to offset, not only the associated completion expenses and taxes, but also the community ongoing maintenance costs and property taxes until a lender manages to sells on the property. Banks are not real estate agencies and do not cherish having large stocks of unsold properties on their books; that is not their core business.

Signing the Notary Deed

You can either sign a dation yourself or else appoint a lawyer to sign on your behalf. It is not compulsory to hire a lawyer for a dación en pago in Spain. What is compulsory is that you appoint a translator to act on your behalf should your command of Spanish not be high enough.

However, I just cannot stress enough how important it is to appoint a lawyer. He will act as a translator and also verify that indeed your debt with the lender is being fully discharged on you signing this deed relinquishing ownership. Besides, your lawyer will be able to negotiate with the lender on your behalf, as some lenders will try to make borrowers pay for some (or all) the associated expenses.

I have witnessed cases in which borrowers, acting without a lawyer, were misled into signing before a Notary what they thought was a dación but was in fact only an assignment of assets and rights without fully discharging the mortgage liability which remained very much outstanding.

The Notary is not there to give you legal advice as they act impartially to either party.

If a Bank refuses it – Can I Challenge it?

Yes you can, but being practical I wouldn’t recommend it. Only if a lender had turned down the proposal unfairly when clearly there was more than enough equity to offset it against all the expenses would I consider it a viable option. What’s important to note is that a dación is not a borrower’s right. What many fail to understand is that on accepting a dación this entails ongoing maintenance costs and expenses for a lender. So it only makes financial sense for a bank to accept it if a property is significantly into positive equity territory so as to offset the expenses of running the property until the time a buyer is found.

It is pointless to challenge their refusal if it’s apparent you are in negative equity or close to it. It will be expensive, time-consuming and fruitless. Besides, lenders in general have shut the door on daciones en pago. The property must be significantly in positive equity territory for them to accept it.

In some borderline cases in which a lender may be reluctant to accept the dation en paiement because there’s a small shortfall of a few thousand Euros I advise a borrower to shoulder the difference so the dation is accepted. The alternative is a full-blown repossession procedure with all the legal and financial consequences this entails (unlimited personal liability).

Bad credit stands at a staggering 13% for Spanish banks. This helps to explain why lenders have been understandably reluctant to accept them over the last years (because of widespread negative equity due to bloated property appraisals; ironically commanded by lenders themselves for the purpose of securing a mortgage loan).

The Government realizing this was the case tried to pass a piecemeal law that ‘forced’ lenders to accept a borrower handing back the keys in restricted cases. So much so in fact that less than five hundred families have qualified to take advantage of it since the law was passed in March 2012. The Government is now working to lower the yardstick to allow yet more families to qualify and benefit from a dación en pago. For the time being this measure can be safely labelled as ineffective due to its negligible overall impact. You can read further in my updated article The Dación en Pago: Finally a Borrower’s Right.

Dación en Pago – Conclusion

A dación en pago is a win-win for both parties really.

A borrower is free at last having managed to successfully secure his assets, whether in Spain or abroad, from the lender or any law firm or debt collection agency hired to pursue the outstanding debt.

A lender on the other hand will now own the property outright and will have successfully waived a lengthy, protracted and expensive court procedure (bank repossession) without having to set aside the mandatory provisions before the Bank of Spain to make up for this dubious loan which affects its liquidity ratio. A repossession procedure lasts 2 years minimum and may easily entail for the bank expenses running up to 20% of the properties’ value. These provisions set aside by lenders are being looked upon closely by credit-rating agencies post credit-crunch as they hinder their borrowing ability and ultimately dent their share value.

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in conveyancing, taxation, inheritance and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

 

Legal services Larraín Nesbitt Lawyers can offer you

 

Related articles

 

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

2.009 and 2.013 © Raymundo Larraín Nesbitt. All rights reserved.

 

 

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Home Insurance in Spain

Raymundo Larraín Nesbitt, November, 8. 2013

I would like to bring closure to the line of insurance articles I’ve been writing over this year with one focusing on what arguably is the most important affecting homeowners: Spanish home insurances.

 

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of November 2013

 

Introduction

One cannot stress enough the importance of hiring home insurance in Spain regardless of whether you live in the country full-time or else live abroad. I have written this article to give a sweeping overview of what home insurance entails and what you reasonably may expect it to cover.

 

 

Defining Spanish insurance terms: ‘continente’ and ‘contenido’

As a starting point on the subject it is important we first distinguish and define what is understood by the above two legal concepts.

a) Continente: refers to the physical property itself, the building and its fixtures
b) Contenido: makes reference to your personal belongings within the property, the contents

Typically, on choosing home insurance, you will be asked by your insurance broker on whether you are interested in a policy that covers one or the other or is comprehensive and includes both.

Naturally the more your cover insures, the more expensive the premium. As it stands to logic, there is a direct correlation. When it comes to insuring property and its contents I would always rather err on the safe side than trying to save a few dozen pounds. On the long run you are saver paying a more expensive premium. The silver lining, talking out of experience, is that home insurance in Spain is cheaper than its UK counterpart.

Building Insurance in Spain (‘continente’)

This includes both the building and its fixtures. It covers any and all of the following:

1. Fire, explosion, implosion
2. Smoke
3. Lightning strike or lighting-induced power surges
4. Adverse weather (i.e. strong winds, heavy rain, hailstorm, snow)
5. Open faucets, water leaks
6. Vehicle collision
7. Vandalic acts
8. Broken windows, glass

Contents cover (‘contenido’)

This basically refers to all your personal belongings. Anything that is not nailed down or bolted to the floor. The more ‘secure’ your property is deemed by an insurance company (location, shutters, bars, alarms, communal private security services etc.) the less you stand to pay.

It would cover any and all of the following in case of theft, for example:

1. Jewellery
2. Art, antiques
3. Furniture
4. Clothes
5. Electrical appliances

 

Spanish Home Insurance FAQs

 

Is it mandatory?

No, unless you have taken on a mortgage loan. In which case a lender may reasonably impose you have adequate home insurance and may even tag it on to the mortgage as an ancillary service.

Do I need to hire my own home insurance if my Community of Owners already has a cover in place?

Yes, they are completely unrelated. The former covers your home (building and or contents) and the latter covers (mainly) the community.

I would strongly recommend that you hire your own insurance to cover your home. The communal policy is geared normally to cover almost exclusively communal areas and facilities. Its purpose is not to cover the contents of your private home within a Community of Owners. On very few occasions will the communal policy actually cover an accident in your own home and it will only be indirectly at best i.e. water-related damages originating in communal areas, such as a badly sealed gutter in the rooftop, that results in water seeping through into your master bedroom.

By the same token you can also be held liable if your own home causes a flood that extends to adjacent neighbouring properties i.e. split internal pipes. This is not covered by communal insurance and you will have to pay for all related damages and repairs.

Far-fetched claims such as “there is no need to hire a home insurance for contents if your community already has an insurance policy in place” are grossly misleading and unfounded. They should be disregarded as ill-advice. If you want to be appropriately covered and insured hire and pay your own private home insurance policy. There is a wide array available to suit all pockets. Be advised that normally on taking on a mortgage to buy property in Spain lenders will throw in the deal some form of home insurance. This is a linked product to your mortgage and you normally have little choice over it. Please read section six in my article on Spanish Mortgage Loans: Beware of Abusive Clauses (January 2009).

What if I rent out my property?

There are special covers available specifically for this contingency. These for example go into fine details such as a tenant trashing your property or including legal representation in the event of tenant eviction. I advise you hire one if you plan to let your property.

Third-party liability insurance (‘seguro de responsabilidad civil a terceros’)

Not all home insurances include it. Please read the small print. Examples of this would be:

a) Underage children throwing an object over the balcony and landing on someone’s head in the street below.
b) A leak originating in one of your split internal pipes that spreads to an adjacent neighbouring property.

Arranging home insurance

This can be done in either of three ways, from cheaper to more expensive:

i) Through your lender (mandatory on taking on a mortgage loan). The cheapest option albeit not necessarily the most suitable.
ii) Through a local insurance broker. Many have foreigners working for them or may even be foreign-owned; so language shouldn’t be a problem.
iii) Arranging it in your home country. This has the advantage that you will always be dealing with professionals in your own language; but you will pay a higher premium for it. Many UK companies now offer comprehensive insurance covers for overseas properties. Make sure they are duly registered and supervised by the Financial Services Authority (FSA).

Home insurance in Spain – Conclusions

I close my article once again reiterating the importance of hiring an adequate insurance cover for your Spanish real estate.

I strongly recommend before signing anything that you first seek qualified advice from an expert, such as a lawyer or an experienced insurance broker, to assist you choosing the right cover for you. And the reason is because most people I know have the bad habit of never reading the small print – more so if it’s in a foreign language such as Spanish.

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in inheritance, conveyancing, taxation and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

Legal services Larraín Nesbitt Lawyers can offer you

 

Related articles

 

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

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Investor Guide to Spain’s Golden Visa Law (investor visa)

Raymundo Larraín Nesbitt, November, 8. 2013

Solicitor Raymond Nesbitt takes us through the so-called “Golden Visa” law that offers residency permits to non-EU nationals in return for an investment of €500,000 in Spanish real estate.

Article copyrighted © 2013. Plagiarism will be criminally prosecuted.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of November 2013

 

 

 

 

Spanish residency permits for property investors

The Spanish Government has finally approved the long-awaited Investor’s Residency Law (popularly dubbed as ‘Golden Visa’ law). Keen to give the ailing real estate sector a gentle nudge, it had long been mulling the idea of investor visas. Inspired by similar laws in fellow European Union member countries, Spain enacted on the 27th of September 2013 the Entrepreneur’s Law. It introduces, amongst a wide array of measures, for the first time residency visas and permits for non-EU investors.

A Law For Entrepreneur And Property Investors

Law 14/2013, of the 27th of September 2013, on support for entrepreneurs and internationalisation introduces in articles 61 through to 67 the conditions that have to be met by non-EU investors to qualify for Spanish residency. The law distinguishes clearly between residency visas and residency permits. I will elaborate in more detail what these are further below.

This new law allows non-EU investors to qualify for the highly coveted so-called Golden Visas. To summarise, this new law enables non-EU nationals to attain qualified residency permits in return for investing in Spanish real estate (and other assets), leading to permanent residency in Spain if certain conditions are fulfilled.

Investors’ General Requirements

Applicants pursuing investor visas / permits need to comply with the following general requirements which are specific to Non-Lucrative Residency Permits (art 62):

– Non-EU national (art 61)
– The investor applicant must be of legal age (18-years-old or over)
– The investor must not hold a criminal record whether in Spain or in the previous five years where he has resided
– Not be already in Spain irregularly
– Have access to medical insurance whether private or public
– Have sufficient financial means to support both himself and his family whilst in Spain. This should definitely not be an issue for those who have the socioeconomic profile to qualify for a Golden visa in the first place; it goes without saying.
– Pay the relevant application fee

Distinction between Investor Residency Visas and Residency Permits

In addition to the above general requirements set out in art 62 which are common to both types, applicants must also meet those stipulated in articles 63 (Investor Residency Visas) and article 66 (Investor Residency Permits).

This law distinguishes two types of permits:

Residency Visas (art 63): on following the requirements (see below) one qualifies for a residency visa which entitles an investor to reside in Spain for up to one year (art 65).

Residency Permits (art 66): however, if an investor wishes to stay longer he must qualify additionally for what is known as a residency permit. This permit entitles an investor to live for up to two years in Spain and is renewable providing the requirements are still met (art 67). This permit will be granted on the following twenty days of having applied for it. It can be granted by the Administrative Silence Rule (ASR) in case of non-reply by the Authorities. This path leads eventually to Spanish citizenship.

In both cases the investment needs to be maintained during the validity of the Residency Visa or Permit. Spanish Authorities may carry out routine checks to verify this is still the case.

Investor Residency Visas

One may attain a residency visa on investing in any of the following asset classes in compliance article 63.2:

a) Investing at least €2,000,000 in Spanish Treasury bonds
b) Investing at least €1,000,000 in shares of publicly trading Spanish companies or non-trading ones
c) Depositing at least €1,000,000 in Spanish bank accounts
d) Acquisition of real estate located within Spanish territory of at least €500,000 per applicant
e) A ‘major’ business investment which fulfills at least one of the following three conditions:

i) Meaningful job creation as a direct result of the investment
ii) Significant socioeconomic impact in the geographical location where the activity will be carried out
iii) Technological or scientific impact

The law adds that the investment can be made by either a physical or legal person. The legal person must not be located in one of the countries deemed as a tax haven by the Bank of Spain. A physical person must demonstrate it exercises a holding control of the company’s shares. This translates to the investor being able to control, directly or indirectly, the majority of voting rights besides having the power to name and remove the majority of members sitting in the board of directors.

Investor Residency Permits

To attain a residency permit one must comply with the following (art 66):

a) Comply with the requirements laid out in art 63 (see above for more details)
b) Hold a valid investor’s residency visa or one that is not overdue by more than 90 days from the expiration date
c) Have travelled to Spain at least once during the validity of the visa stay (you must be able to support this claim with evidence)
d) Provide legal support to uphold the investments made in art 63.2.a) (see above for details) have been held during the mandatory minimum legal period required by law. Depending on the first three cases different legal documents will be required to support this claim.
e) Having complied and be up to date with all Social Security and Tax related obligations

 

Spanish “Golden Visa” Residency / Visa Permit FAQs

 

1. Can I request a mortgage on investing €500,000 in Spanish real estate?

Yes, but only for the excess above €500,000. The law only requires that the first €500,000 is unencumbered – meaning the equity threshold must be free. The excess can be indeed financed through a mortgage loan if necessary. What is important to understand is that the first half million euros must be mortgage-free. So an investor is expected to have the financial means to come up with these funds unassisted by a lender, whether national or foreign.

2. I have read that I need to spend in Spain more than six months to qualify for residency. Is this true?

Generally yes. However this new law specifically targets affluent individuals who will normally be residing elsewhere. The law purposely waives this requirement and only requires that a would-be investor has travelled to Spain at least once during the validity of the visa (and is able to support it through evidence). So residing six months is not necessary for the specific case of a so-called Golden Visa applicant. In fact, as can be surmised from what I’ve written, an applicant may be out of the country for more than six months and still be able to qualify for it. However if you are aiming for Spanish citizenship your main business interest must be located in Spain despite not having to reside in the country continuously for six months. Prolonged absences of over six months will not prejudice the right to attain permanent residency (five years onwards).

3. Can I attain permanent residency or even Spanish citizenship through this law?

Yes eventually, assisted by lawyers specialising in residency.

4. Does this law preclude pre-existing ways to apply for permanent residency?

No it doesn’t. Existing permits and procedures are still valid. This law is specifically tailored for affluent non-EU investors and basically helps to cut the red tape.

5. Is this proposal retro-active? I already have invested €500,000 (or more) in Spanish real estate. Can I still qualify?

No, sadly you cannot. The law came into force on the following day of being published in Spain’s Official Law Gazette (B.O.E.) which was on the 28th of September 2013. Any investment made prior to the said date will not qualify for the purposes of Law 14/2013.

6. Are there any strings attached?

None, besides parting with your money.

7. Just the investor, or investor and family?

The law specifically requires that each applicant makes an investment. However a husband/wife and children under 18 can be considered included under the same application (art 62.4).

8. Are taxes included in the investment threshold?

Short answer is no i.e. you buy a new home for €460,000 plus 10% IVA = €506,000
The applicable VAT (€46,000) would not count towards being above the €500,000 threshold. So the application would be turned down on grounds of not meeting the threshold.

9. Do holders of the so-called Golden visa have unrestricted access to move within the European Union?

Holders of a Spanish Residence Permit will not require a visa to enter the Europe Schengen area. They can transit and enjoy free movement within the Schengen area for a maximum period of three months (90 days) per half-year from the date of first entry. However, please be advised that not all countries within the European Union are party to the Schengen Agreement i.e. the United Kingdom and the Republic of Ireland maintain opt-outs.

10. Where do I apply for a visa / residency permit?

Through us, just contact us.

 

“Golden Visa” Spanish Investor Residency Visas / Permits – Conclusion

Spain’s widely-publicized struggling economy offers unique investing opportunities for those savvy investors with the risk appetite to profit from today’s irrational rock-bottom prices.

Spain’s housing market has clearly turned the corner in 2013. The Government has been busy approving the necessary legal amendments advised by the Troika to help pave its way out of the recession on the road to recovery. As evidence of such a recovery we have witnessed over the last six months a spectacular stock rebound across the board, led by foreign capital, which has driven blue-chip Spanish shares to former highs.

In due course, in the real economy, a resurgence of the real estate market will follow over the next years fueled by foreign capital profiting from Spain’s (still) ridiculously low real estate prices. Granted it will not be as spectacular, and will likely take longer, than a stock rebound but it will materialise nonetheless.

It really goes without saying that the main focus on investing in Spain for residency purposes should be the asset itself. The visa or permit will follow in due course. I strongly advise before committing to invest in Spain that one first takes qualified advice from reputed experts or companies.

 

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in taxation, inheritance, conveyancing, and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

Legal services Larraín Nesbitt Lawyers can offer you

 

 Golden Visa related articles

 

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

2.013 © Raymundo Larraín Nesbitt. All rights reserved.

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Community of Owners' Insurance Policies

Raymundo Larraín Nesbitt, August, 8. 2013

Every community of owners in Spain should have an insurance policy. This article is an FAQ and sweeping overview of what a community of owners insurance policy (normally) entails.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of August 2013

 

Is community of owners insurance mandatory in Spain?

It depends where you live in Spain. Spain’s Horizontal Property Act in its article 9.1.f stipulates that Communities of Owners (C.O.) are free to take out an insurance policy to cover all damages. So from a national point of view there would be no obligation. However, as Spain is divided administratively into seventeen different autonomous regions, each act like mini-estates, these have their own powers to pass laws that affect matters within their territory. Some of these regions have made a C.O. policy mandatory i.e. Madrid and Valencian Comunity.

 

How is it funded?

It is mandatory that all C.O.s set aside 5% of the annual community budget to help build a communal reserve fund. The community insurance policy would be one of the expenses paid out from this fund. So basically all common-holders are actually pooling into this fund.

What does it normally cover?

This is a general question to which there is no specific answer. The correct reply is “it depends”. There is a broad range of policies available in the market with different price ranges. The difference in price is explained because the more expensive ones cover more accidents. So basically a community will tailor its insurance according to its own needs and circumstances. For example, it may not make much sense for a Community of Owners located in Marbella to pay a premium for additional cover against falling airplanes. However, this would make perfect sense in a Community that’s in the vicinity of a busy airport. So bottom line, you pay what you get. There is no general communal policy acting like a blueprint to match one and all Community of Owners. It’s left at the discretion of the Communities’ governing body to ensure what events require cover.

You would typically expect a Community of Owners policy to cover any and all of the following:

Fire-related damages
• Fire, explosion, lightning ray
• Smoke, acoustic noise, vandalism
• Faulty electric wiring
• Earthbound transport collision, aircraft collision
• Fire extinguishing expenses
• Rescue, demolition, debris cleaning, appraisal expenses
• Forced eviction or uninhabitable
• Rental loss
• Documents and archive replacement
• Automatic cover of insured capital

Water-related damages as well as those caused by adverse climatology
• Water-related damages in communal drains, gutters and waste pipes
• Faucets left accidentally running
• Leaks, damp patches and resulting mould growth
• Fire-proof installations
• Additional expenses borne by abusive use of community water
• Water damages caused in non-communal areas (privative)
• Plumbing expenses: localising the origin of the problem, repair of communal and non-communal areas
• Heavy rain, hailstone, snow and flooding. Mud-extraction (as a direct result of flooding in low areas such as underground garages and basements)

Further damages
• Broken communal crystals and floor tiling including skylights. Photovoltaic systems or solar panels
• Workmanship to have them mended or replaced

Additional guarantees
• Employee non-loyalty
• Faulty machinery and electrical equipment
• Health and Safety. Employee accidents within premises

Civil liability
• Of the Community, of the ‘Mancomunidad’
• Of community employees
• Of individual owners blunders i.e. forget to turn off a water tap and cause a small flood

Legal assistance
• (Legal) advise over the telephone
• Representation and litigation before Spanish courts of Justice
• Litigation against non-paying community owners for outstanding community fees

Aesthetic repair
Aesthetic damages to building facade or interiors (communal areas)

24-hour emergency repair assistance
Handymen urgent services i.e. locksmith

Unforeseen events
• Consortium
• Total loss. Demolition-related expenses. Professional fees
• Frost-related damages

Theft
• Theft, petty larceny, hold-ups (of goods located in communal areas; not in private dwellings)
• Communal fund misappropriation and mismanagement
• Theft-induced damages (i.e. broken windows due to break-in) in communal areas

Do I need to hire home insurance policy if my Community already has one?

Yes, they are completely unrelated. The former covers your home contents and the latter covers (mainly) the community.

I would strongly recommend that you hire your own insurance to cover your home contents. The communal policy is geared normally to cover almost exclusively communal areas and facilities. Its purpose is not to cover the contents of your private home within a Community of Owners. On very few occasions will the communal policy actually cover an accident in your own home and it will only be indirectly at best i.e. water-related damages originating in communal areas, such as a badly sealed gutter in the rooftop, that result in water seeping through into your master bedroom.

By the same token you can also be held liable if your own home causes a flood that extends to adjacent neighbouring properties i.e. split internal pipes. This is not covered by communal insurance and you will have to pay for all related damages and repairs.

Far-fetched claims such as “there is no need to hire a home insurance for contents if your community already has an insurance policy in place” are grossly misleading and unfounded. They should be disregarded as ill-advice. If you want to be appropriately covered and insured hire and pay your own private home insurance policy. There is a wide array available to suit all pockets. Be advised that normally on taking on a mortgage to buy property in Spain lenders will throw in the deal some form of home insurance. This is a linked product to your mortgage and you normally have little choice over it. Please read section six in my article on Spanish Mortgage Loans: Beware of Abusive Clauses.

Conclusion

While it’s true that a communal insurance is only mandatory in some parts of Spain the fact is that it only makes common sense to have one hired. Its annual cost can be greatly reduced by eliminating many of the above-listed covers leaving only those deemed as ‘essential’.

While most of the events covered are related only to communal areas there will also be some instances, particularly those induced by heavy rainfall, where privative areas are also indirectly covered as a direct result of induced damages originating in communal areas. So private owners may indeed claim against the Community insurance in such cases. The insurance company will send its own ‘peritos’ (qualified experts) to assess the cause and extent of the damage to ascertain if the community is indeed liable. In which case it will have to pay for the repairs.

Rainfall-related water damages are typical of communities dotting the Spanish coastal areas as properties, in my experience, are in general built ill-equipped against heavy rainfalls resulting in damp patches and aggressive mould growths. If these are left unchecked by the owner, over the winter period, they will likely lead to unpleasant surprises when he comes to enjoy his overseas property during their holiday break. Which is why it is strongly recommended to leave the property keys to someone of trust (family, friend, neighbour, estate agent) who may regularly drop by and take a quick peek at your property in your absence during the rainy season to ensure everything is above board and raise the alarm if not.

“The rain in Spain stays mainly in the plain” – Eliza Doolittle. My Fair Lady.

 

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in taxation, inheritance, conveyancing, and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

Legal services Larraín Nesbitt Lawyers can offer you

 

Related articles

 

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

2.013 © Raymundo Larraín Nesbitt. All rights reserved.

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New Measures to Bolster Spain’s Ailing Rental Market

Raymundo Larraín Nesbitt, July, 8. 2013

The Government has drafted a new rental law in an attempt to bolster and streamline the ailing rental market, but curiously one of the biggest beneficiaries will be the hotel industry.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of July 2013

 

 

 

Introduction

Property ownership in Spain is deeply embedded in the national psyche as I have analysed over the years in my articles. Some would even call it a national obsession (followed by football and not necessarily in the same order). Property ownership is widely viewed as ‘superior’ to renting almost as a social status all unto itself (!). Several popular well-known mantras upholding such (false) belief have endured over the boom years. But the receding tide of prosperity, induced by this recession, has exposed them for what they always were – false myths:

  1. “Alquilar es tirar el dinero” which loosely translates as ‘renting is throwing away (good) money’
  2. Another good one is “nunca bajan” translated as ‘(house prices) never fall’
  3. And last is my all-time favourite: “siempre lo podrás vender” translated as ‘(don’t worry) you can always sell it’; yeah right!

Spanish parents are obsessed with leaving their children property when they should really be concerned on gifting them a top-notch education allowing them a chance in life to win their spurs.

Unsurprisingly, because of this historical national fixation for property ownership 83% of properties in Spain are inhabited by their owners as opposed to only 17% being rented out. Compare these (very) sad figures with a far more developed rental market in Europe which boasts an average of 30 to 40% rental occupation. Moreover, all this money that is (foolishly) ploughed into property is a wasted opportunity cost that could be better put to use in the money markets investing in companies and start-ups, creating jobs and wealth, rather than saddling with debt legions of Spanish families who now face the grim prospect of a lifetime sentence in the form of a financial millstone around their necks for the remainder of their existence. A huge change of financial culture in Spain is urgently required in line with Protestant countries (historically more financial savvy) that can only be achieved through education from an early age at school. I venture that one positive outcome of this ‘recession’ will be that scores of Spanish will now be forced to rent as opposed to buying outright.

The underlying historical reasons on this fascination are numerous and exceed the object of this article so I won’t digress. What matters is that the Government, with millions of properties standing empty and millions more of young – and not so young – workers unemployed, has finally smelled the coffee. They have been busy drafting a new law in an attempt to bolster and streamline an ailing rental market in the hope of making it more dynamic and robust.

Ley 4/2013, de 4 de junio, de medidas de flexibilización y fomento del mercado del alquiler de viviendas

Ley 4/2013 is the law published in Spain’s Official Law Gazette on the 5th of June that heralds these changes. The official line is that it brings on a slew of novelties which will hopefully bring a breath of fresh air into a stale rental market. This new law significantly amends Spain’s all-important Tenancy Act (Ley 29/1994, de 24 de noviembre, de Arrendamientos Urbanos). Popularly known by its acronym ‘LAU’.

However I speculate that the ‘real’ agenda being pushed by this law is another and I elaborate further in my conclusion below. In my opinion this is yet another patchwork law that attempts, for the umpteenth time, to do something about Spain’s chronically failing rental market – and most likely will fall flat on its face.

Major Highlights of Spain’s Amended Rental Law

  • The exclusion of Spain’s Rental Act for touristic property lets. This is hands down the most significant change in my opinion made by this reform as it now purposefully leaves out what are known as ‘touristic tenancies’. The LAU used to rule on all tenancies (except those deemed as ‘luxury’ rentals). Touristic tenancies will now be ruled by Spain’s seventeen regional autonomous communities. To make it more complicated, not all autonomous regions have such laws implemented. Touristic rentals require a licence from the local administration. The matter is so complex that it easily merits its own article given the fact there are seventeen autonomous regions in Spain capable of enacting their own laws on the matter compounding it furthermore. Always making administrative matters easy.
  • The legally mandatory five-year rental period for long-term rents is now reduced to a three-year period.
  • As a direct result of the above, deposits must now be reviewed after the three-year period has elapsed (as opposed to the former five-year period).
  • The tacit renewal is reduced from a three-year period down to one year.
  • A landlord may now recover the possession of the property after a year has elapsed under certain circumstances. Unlike before, this now does not have to be expressly worded into the contract.
  • The landlord may now sell the property and the new owner may terminate the existing tenancy agreement so long as it is not lodged at the Land Registry. Before this law, the new owner was forced to respect the existing mandatory tenancy until it ended. This is a very welcome measure indeed. So for all new contracts signed after the 5th of June 2013 it would be advisable for a tenant to have their tenancy agreement lodged at the Land Registry if they want some degree of protection against the owner selling the property and the new owner moving in and have them vacated. On lodging the tenancy agreement if the owners sells on the property, the new owner will be forced to respect the tenancy for the mandatory three-year period (used to be five years before this law).
  • Tenants may now notify their landlords, at any moment, with only 30 days in advance of their will to terminate a tenancy provided they have already rented it for a six-month period. Before a tenant needed to wait until almost till the end of the tenancy or else face compensating the landlord for the lost rental if they decided to bail out ahead of time. Notwithstanding a suitable compensation can still be agreed. This is an advantage for tenants really, not for landlords, as it allows them more flexibility to terminate a tenancy.
  • If in agreement, the let can now be forfeited for a set period of time so long as the repairs in the property are shouldered by the tenant. This must be mutually agreed.
  • Both parties may now opt-out of the IPC, as the annual benchmark to increase a tenancy, and choose another index. IPC stands for ‘Índice de Precios al Consumidor’ which is a Consumer Price Index which is widely used in Spanish contracts as a benchmark to increase services in line with the annual rise of inflation.
  • It can now be agreed by both parties that long-term tenants may waive their pre-emption and buyout rights (‘derecho de tanteo y retracto’) in a resale as is stipulated in section 25 of Spain’s Tenancy Act.
  • Changes to Spain’s all-important Civil Jurisdiction Law, (1/2000 – LEC) to further streamline the eviction procedure. Non-paying tenants will now be given only a ten-day deadline to bring arrears up to speed. The more legal fat is stripped away, the more efficient and streamlined will the resulting eviction procedure turn out. This is frankly positive but hardly groundbreaking.

 

Conclusion: more beating around the bush

Although some of the above changes are indeed a positive step in the right direction, most are superficial. I remain largely sceptical of this new law because, once again, it doesn’t really address the main issues which historically hamper Spain’s rental market, and only beats around the bush.

So why on earth bother to approve a law that seemingly won’t make much of a change in the rental market? The cynic in me can’t help but think that, brushing aside negligible cosmetic changes in the overall picture, the real agenda being pushed is that of the hotel industry.

After a decade of booming construction, where thousands of new-build properties were bought en masse and let out to foreigners at large, the hotel industry has experienced massive losses as a result of all the unregulated competition from a myriad of humble property investors dotting the Spanish coastlines. It has reached the point where many first class hotels now close down during the low season, something unheard of previously. This new law – quietly but relentlessly – effectively introduces a restriction to letting by private individuals, leaving it to autonomous regional communities to rule on the fine details of what a touristic licence actually entails. Which is why I place it as the first, and most significant, point on reviewing and listing above the amendments brought about to Spain’s Tenancy Act (LAU).

One would have to ask oneself: who stands to benefit with this reform and whose interests are served by it? Cui bono? Certainly not the countless foreign small-time investors looking into buy-to-lets to make some money on the side to supplement their (meagre) income. Again an ill-conceived political measure that meddles in the economy that will prove to be counterproductive on the long-term as it will foreseeably deter would-be buyers who would have otherwise invested had they unrestricted freedom to rent. Talk about shooting oneself in the foot.

Forcing home owners across Spain to ensure their properties comply with the same regulations already imposed on hotels (minimum quality standards, health and safety, kitchen appliances etc.) is daft and may be safely labelled as an unnecessary exercise of interventionist legislation aimed to thwart or restrict the sacred use of private property (in benefit of the hotel industry). No to mention treating as equals those who are financially unequal as both hotels and private individuals stand to comply with the same set of standards if they want to attain a licence to rent. In any case, let’s not rush ahead as the fine details will be ruled by the seventeen autonomous regions so we will just have to wait and see before judging in advance regional legislations. Few communities have already ruled on this i.e. the Balearics.

EDIT 2015: My conclusion was correct. Fast-forward two years for the new batch of holiday rental laws that restrict private rentals:

Holiday Rental Laws in Spain - Explaining The Latest Changes – 8th of March 2015

 

Back on topic, to foster a robust rental market we’d be better off taking a bold stance and resolutely reworking the whole eviction system from the root rather than approve a string of half-hearted piecemeal laws which honestly will scarcely make a dent on matters. What would *really* kick-start the rental market in Spain would be chiefly:

  1. Change the predominant Spanish mentality towards rental and ownership achievable only through an early education at school. Rental must stop being demonised by society at large and accepted as a perfectly valid option in life. State and private schools should teach finance to children. A long-term goal.
  2. Have non-paying tenants evicted in less than ten days from a property instead of having to wait for months on end or even years to make it happen. A short to medium-term goal reworking the legal (procedural) system.

These two measures would greatly help to nurture and consolidate a budding rental market in Spain. Granted, it wouldn’t happen overnight. It takes considerable time to change people’s mentality. Besides, there are far too many legal constraints and guarantees safeguarding non-paying tenants’ rights. What about the landlords I ask? Long eviction periods lead to tenants trashing properties, to landlords losing rental to offset their mortgage repayments (which in turn may even lead to a repossession of the rented property), besides unnecessarily increasing tenant eviction legal fees paid for by distressed landlords. This nonsense should clearly be put to an end.

The rental sluggishness in Spain can largely be pinned down to landlords being afraid of renting out properties given how biased historically laws are in favour of (non-paying) tenants. This is the crux of the problem – fix it and you are half way there to pave the way to a robust rental market.

It is Spain’s ruling political class who wield the power to alter matters if they willed it – but I guess they don’t have the backbone for change; too unpopular and ‘politically incorrect’ or maybe they are simply complacent with the current status quo. Real statesmen do, at all times, what’s best for their country no matter the unpopularity or electoral cost. Because they have a long-term vision of matters with their hearts set in the country’s future prosperity as opposed to career politicians who take decisions on the hoof based on short-term opinion polls. Piecemeal attempts from career politicians will only further the pain and foreseeably set back recovery by several years.

But hey, politicians and lawmakers, in general, are also entitled to make a (very) nice living by drafting and publishing half-baked laws, such as this one, to justify their outrageous public stipends and perks whilst the rest of the country languishes bearing the brunt of an unending ‘recession’.

“Off with their heads!” ? Lewis Carroll. Alice in Wonderland.

English writer, mathematician, logician, Anglican deacon and photographer.

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in conveyancing, inheritance, taxation, and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

 

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Buying Off-Plan Property in Spain

Raymundo Larraín Nesbitt, June, 8. 2013

An up-to-date legal guide to buying off-plan property in Spain by Raymundo Larraín Nesbitt, a solicitor qualified to practice in Spain.

The following article is my third part on a five-part series focused on How to Buy Property in Spain Safely. You may also be interested in reading Buying Resale in Spain, Buying Distressed Property in Spain, How to Buy Commercial Property in Spain or How to Buy Rural Property in Spain.

By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
8th of June 2013

Original article from 18th April 2.010

 

Introduction to buying off-plan property in Spain

Not so long ago there was a time in which purchasers gleefully bought en masse their dream homes in Spain. A few on the prowl to make a quick profit, the majority just wanted a quiet place to settle down and retire leading the relaxed lifestyle for which Spain is renowned.

Unfortunately for some, their dream turned sour for a number of reasons and we are now witnessing the consequences of it in the aftermath of Spain´s property bubble collapse. The majority of these problems could have been avoided by doing some research yet in other cases purchasers, in despite of being careful and taking all the necessary precautions, still encountered difficulties.

This gloomy outlook will no doubt change in the future when we start a new property cycle. The million-dollar question is second-guessing when that will be! Don’t hold your breath.

Your guess is as good as mine.

The aim of this article is to do a brief rundown on the basic legal checks that ought to be done prior to committing yourself on buying Spanish off plan.

 

Tips on Buying Off-Plan Property in Spain

 

The following 14 useful tips will help you avoid the majority of off-plan hazards. You would do well to follow them.

1. Hire a Qualified Registered Lawyer

I will refer on this to my first point in my prior article Buying Resale property in Spain in which I elaborate it in more detail. And yes, it’s also a shameless plug to peddle my legal services! The advantages are summed up in my article Buying Property in Spain – 10 Reasons to Hire a Lawyer.

Specifically on buying new build, it is highly advisable that you retain a registered lawyer before you commit yourself signing any document or else paying any amount. Initial down payments, such as security deposits which strike the property off the market, are non-refundable unless specifically agreed otherwise. If you pull out you will likely forfeit the deposit. Many legal problems may be easily avoided following this simple advice. So don’t be in a rush to hand over the money without having hired an independent lawyer first; do not allow yourself to be pressurized by estate agents. Rash decisions often turn out to be expensive mistakes.

Your home country’s consulate will hold a list of recommended independent English-speaking lawyers.

2. Is the Plot of Land Registered under the Developer’s Name?

In some cases developers marketed and sold on whole developments without even owning the land. This is what, for example, developer AIFOS used to do. They sold on entire off-plan developments without owning the land; they only had an option to purchase, within an agreed deadline, a plot of land.

One should not buy an off-plan unit in a land that is still not registered under the developer’s name. There are far too many associated risks to take a gamble with your hard-earned money.

The land should be appropriately classified to be built upon. Be very wary if you are being sold an off plan in a land that is still classified as rural. It may be a good idea to check with the local Planning Authorities that you are not buying in a land of special protection such as green belt land.

Naturally a lawyer will do the above checks for you as part of his conveyance due diligence. But it never hurts if you also have the time to spare and carry them out yourself.

3. Has the Developer Attained Planning Permission?

The basic recommendation would be not to sign a Reservation Contract or a Private Purchase Contract (PPC) unless the town hall where the property is located has issued a Building Licence (‘Licencia de Obras’ in Spanish) for the development.

Notwithstanding the latter, let us examine the nuances that spice up life.

I would, in general, recommend that a Building Licence (BL, for short) has not been obtained by means of what is known as the Administrative Silence Rule (ASR) as it may be successfully challenged should it have been attained breaching Planning laws, for example. Just to clarify, obtaining a BL through the ASR rule is perfectly valid in our legal system. However, if it has been obtained breaching planning laws it may be deemed void.

Additionally a BL must not have been challenged administratively e.g. imagine the case of a Building Licence issued by a town hall’s planning department. Someone may buy a property relying on the town hall’s licence. However, unbeknownst to this buyer, this may lead to an ongoing dispute between the local town hall and Regional Planning Authorities over the legality of the issued BL. Regional Authorities may actually override the town hall’s authority on planning issues so they are bound to win. Remember the Priors?

This is by far the biggest mistake that – unbeknownst to many – a buyer can possibly make. Many problems could easily be staved off on following it. The Building Licence will ensure that the building is above board and the property is not being built in green belt land, for example. Your lawyer will be able to verify the BL is not being challenged at court by anyone, including Regional Planning Authorities.

4. Do You Have a Bank Guarantee Securing your Stage Payments?

Once your lawyer has checked the plot of land is under the developer’s name and there is a valid Building Licence it’s time to sign the contract.

The instalments paid while the property is being built can be guaranteed by means of what is known generically as a ‘bank guarantee’. Please read for more information my detailed article on Bank Guarantees in Spain.

Bank Guarantees are a legal tool devised to secure the deposits of prospective off-plan purchasers should their properties not be delivered on time or their developers file for administration. Post credit crunch, all the bank guarantees we are executing are acting as safety nets for many stressed new-build purchasers who find themselves bogged down in mire out of no fault of their own i.e. developers filing for receivership.

Spanish bank guarantees may be a daunting legal minefield for many, albeit with the assistance of an independent lawyer acting on your side you will be able to dodge the pitfalls, both safely and successfully.

A Spanish Bank Guarantee may be either an Insurance Policy or Guarantee issued respectively by either an Insurance Company or Bank. Both types can be grouped under the generic term bank guarantee for simplicities’ sake. A bank guarantee’s purpose is to secure the full amount of deposits paid by off-plan purchasers. It secures the initial reservation deposit, which strikes the property off the market, the interim or stage payments as well as the applicable VAT paid on said amounts. On top of this you are also entitled to the legal interests on the amounts secured.

A bank guarantee is of critical importance acting as a safety net securing your full deposits should something go wrong. Bank Guarantees should have no expiration date as per Law 57/68. Bank Guarantees should expire only upon the developer attaining a Licence of First Occupation.

5. Has the Dwelling Attained a Licence of First Occupation (LFO)?

A Licence of First Occupation (or ‘Licencia de Primera Ocupación’ in Spanish) is a certificate issued by a town hall that confirms that a newly-built property fully complies with all planning and building regulations, and is ready to be used as a dwelling. A LFO allows off-plan purchasers to dwell in a property legally. You can read more on this subject in my detailed article on the Licence of First Occupation.

The LFO is important mainly for two reasons:

  1. It provides a check on the planning legality. A LFO means the developer has built the dwelling in compliance with the original town hall’s Building Licence as well as complying with all Planning laws. The inspection to grant this licence is carried out by town hall’s chartered technicians who certify that the dwelling complies fully with Health, Safety, Planning and Construction Laws and is deemed apt for human habitation.
  2. It is required by utility companies to have access to official supplies (water, electricity and gas). Spanish law requires the granting of the LFO to hook up the dwelling to the supply grid. Although in some parts of Spain there have been reported cases of supply companies waiving this and connecting you without the said licence. In such exceptional cases the only requirement was showing the application of having requested the LFO from the town hall.

I would advise, in general, to complete only once a Licence of First Occupation has been attained; however I must point out that completing without a LFO is legal in Spain and the property will be registered under your name at the Land Register. It is legal to sell properties without a LFO.

The following are just some of the drawbacks you may face if you happen to close on an off plan property lacking a LFO:

  • Primarily, you will not be able to take out a mortgage on the property or remortgage it – if needed be – by any lender other than the developer’s bank.
  • You will not be able to benefit from the official utility supplies; only from the developer’s supplies (water and electricity) with all the associated problems this has, namely that you may be cut off at any time as it is the developer who is paying for it and if they go into receivership you will be shut off. Besides, the site supply electricity doesn’t have the same strength and power surges are fairly common on simultaneously turning on various electrical appliances such as air conditioning. Until the LFO is attained, the developer has to pay, by law, for the utility supplies.
  • Any future prospective purchaser, or their lawyer, will haggle with you and require a steep discount 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. A lack of a LFO tacitly implies that you are actually reducing the pool 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 of an off-plan and not the developer, may be held liable to pay the fine for the planning illegality.
  • Needless to say, you cannot rent a dwelling without a LFO.

 

off-plan

There may be nonetheless exceptional circumstances in which it may be advisable to complete without one. Specifically if there’s no bank guarantee securing your down payments and the developer is in risk of going into administration, provided that there’s no ruling or legal procedure affecting the Building Licence due to planning issues (as explained above in point three).

It is very important to realise that until completion the property still belongs to the developer. So if you still have not closed and the developer becomes insolvent in the interim, the property lodged under his name may be seized by the developers’ lender or any other creditor that places a charge on it at the land registry. If you have no bank guarantee and the above happens, it is very likely you will forfeit your down payments. However, cases differ and require a case-by-case study by your appointed solicitor.

The issuance of the LFO by a town hall is the major milestone in the off-plan procedure. In fact, from a legal point of view, it marks the turning point whereby the property is now deemed to have been delivered legally to the purchaser. Once the LFO has been attained and the developer has sent you a registered letter compelling you to complete within a deadline before a Notary public, you should no longer withdraw from the PPC and litigate for a refund as you are bound to lose at court (specifically read point three in my article 10 Reasons Why Your Case Against a Developer may be Thrown out of Court in Spain). This is known as ‘forced completion’.

Developers can actually pursue you abroad against your home country’s assets once they’ve obtained a favourable judgement from a Spanish court. Do not think for one moment you can walk away breaching an off-plan contract and that there will be no legal consequences arising from it. Some developers will be happy just withholding the stage payments as compensation and yet others will sue you on top demanding fulfillment i.e. that you close on the property.
Indulging in reckless litigation may leave you seriously out-of-pocket.

6. Ghost Developments

Some new communities remain largely unsold post credit crunch and you may find additionally that many common holders are not contributing to the communities´ expenses. This nasty surprise may create practical problems such as green swimming pools, lack of security, derelict gardens and even break-ins. It may be recommendable before buying into a community that you ask around first. This will no doubt change in the future when the market picks up again and moves to a new cycle.

7. Coastal Laws

On buying off plan, make sure it is not within the protected area of Public Domain or else you may risk your house being pulled down, at your expense, by the local Authorities. Spain’s Coastal Law was passed in 1988 but it hasn’t been until recently that the Government has decided to enforce it harshly. There have been significant amendments to the point there has been a de facto coastal law amnesty.

8. Buy-to-Let

If you are buying to rent the property out, either as short or long-term, make sure the region of Spain in which you are buying allows for this. Some regions, i.e. Balearic Islands, have stringent regulations whereby a special licence is required to rent. Failure to comply will result in the town hall fining you. Disgruntled neighbours always make apt whistle-blowers, so be warned. Other regions in Spain, such as Andalusia, do not require letting licences but do have their own regulation in place on letting out property i.e. Decree 218/2005.

Please read my article on Renting in Spain: Top 10 mistakes as well as Letting in Spain: The Safe Way for more information on this subject.

The Government, pressured by the hotel industry, has recently passed a new law which will effectively restrict touristic private rentals (short term leases). I will comment on this on a separate article.

And as a final word of caution, unless your property is in a prime location, do not rely on the let to offset the mortgage repayments – won’t happen.

9. You do have a NIE number, right?

A NIE number is a Fiscal Identification Number for foreigners and is required, among other things, to buy property in Spain. You can read this detailed FAQ on Spanish NIE numbers. More details in my article: NIE Number Explained.

10. Applying for a Mortgage Loan

Most of off plan buyers will require a mortgage loan to secure a purchase. You can read my detailed articles on Spanish Mortgages Loans: An Overview and Spanish Mortgage Loans: Beware of Abusive Clauses to get you started with. The latter provides useful tips on the type of (abusive) mortgage clauses that Spanish lenders have a penchant for and you should be wary of signing. Spain’s Supreme Court has declared in 2013 (STS 241/2013) collar clauses as abusive; something which I had already been denouncing for years as they were clearly one-sided in favour of lenders.

11. Snagging List

Before you complete on a newly-built property you should always do a snagging list of the property. You can either draw up a snagging list yourself or else appoint one of the many experienced companies that may carry it out on your behalf. It goes without saying that lawyers do not carry out snagging lists! This is why I strongly advise you hire a chartered surveyor.


On inspecting the property they will draw a list of all the flaws the property has i.e. mismatched tiles, damp patches, mould growths, leaking faucets, flaked painting, damaged appliances, unsuitable drainage etc.

I highly advise not to complete on an off plan until you have fully carried out a snagging list and also followed it up ensuring the developer has indeed repaired each and all of the problems highlighted by your inspection. Once you complete it will be very difficult to have these fixed as your bargaining position will be considerably weakened on handing over the money. So play your card rights and demand they are repaired always pre-completion, not post-completion. Once you are satisfied with the repairs you may then complete.

For post-completion flaws and their repair, please read my article on Off-Plan Construction Flaws: Know Your Rights so you learn what your rights are and how to defend yourself once you have completed on a new build property. Post-completion, flaws may become apparent which were either not picked up during the snagging list or else are new.

12. Post-Completion: Make sure the Property is Now Registered under Your Name

I refer you to my previous article on buying resale in Spain and registering your title deeds or escritura in the property register. You would do well to request what is known as a nota simple. Please read my FAQ on the nota simple for more details. It is highly advisable to check the title is clean and there are no charges, liens or encumbrances against the property (other than the mortgage you may have applied for given the case).

13. Post-Completion: Dealing with Property Taxes, Utilities and Community Fees

Once you have acquired your new property, you will now have to face all the associated running expenses. Make sure you have budgeted this carefully so as to avoid unpleasant surprises! Some of the luxury gated communities with lush tropical gardens and beautiful infinity pools that dot the Spanish coastlines may have pretty steep maintenance expenses. Any unpaid community bills will result in the Community of Owners placing a charge against your property which may lead to auctioning it off publicly to recoup the debt! This legal procedure in Spain works fairly efficiently (as in twelve months on average). Besides be warned that a hot legal industry has developed over the last years to pursue these community debts abroad, both in the UK and the RoI, against debtor’s home assets.

Post-boom many new build developments remain largely unsold. Developers or ailing owners have been forced to hand over their properties to lenders on slipping into arrears. These lenders in turn are some of the worst offenders on community payments which translate into an increase of the fees borne by the remaining community members to offset this loss. Only Spain’s most prominent lenders are actually paying the community fees on their properties. Spanish savings banks are particularly notorious for not being up-to-date with their community fees. This is creating a vicious spiral putting the properties at stake of those financially weaker community members as they themselves struggle to remain afloat because the supposedly financially ‘stronger’ EU-bailed-out lenders are not contributing to their fair share of community payments. Bringing a legal case against them will mean community members will have to hire a lawyer which entails additional expenses.

You should open a Spanish bank account if you haven’t done so already. Utility companies do not accept overseas payments and like setting invoices as standing orders against your Spanish account. You should set at least as standing orders all the following:

  • IBI tax. Paid once a year (akin to the UK’s Council tax).
  • Rubbish collection tax. Paid twice or once a year depending on the town hall.
  • Utility bills (invoiced quarterly in the case of water and monthly with electricity).
  • Community fees (only if you’ve purchased in a Commonhold). Usually quarterly but can vary.

 

The particularities on buying off-plan are for example that IBI tax will not be usually readily available to pay until two years after you’ve purchased the property, maybe even more. You will be nonetheless held liable for those two previous years on the backdated IBI tax. Failure to pay IBI tax may lead to your house being auctioned off to recoup the debt. More on these taxes in my article Non-Resident Property Taxes in Spain.

Regarding utilities, even when a LFO has been issued you may find yourself waiting for some time before you are officially connected to the supply grid with your own individual water and electrical meters. Regarding Community fees you are liable for them since the LFO was attained by the developer, not before.

On buying off plan you may become part of what is known as a Community of Owners. You should make yourself acquainted with your Community of Owners rules (‘Ley de Propiedad Horizontal’ in Spanish or simply Commonhlod law) as well as how to challenge Assembly resolutions if necessary (both AGMs and EGMs).

You are also liable to file Income tax on owning property in Spain every year for which you may need to appoint Fiscal Representation.

Finally I cannot stress enough how advisable it is that you make a Spanish will to dispose of your Spanish estate. This will not preclude any other made in your home country and is limited exclusively to your Spanish assets. It will save your beneficiaries time, money and hassle at a time of bereavement.

14. Careful with the Tax Office on Buying or Selling at a Discounted Price

And now that I’ve established it is a great time to buy property in Spain – the bad news. Due to Spain’s ongoing real estate depreciation many buyers are securing properties at such knockdown prices they are unwittingly drawing the attention of the Tax Office. So much so that over the last years many will have received a letter from Spain’s Inland Revenue some six months after completion demanding complementary tax is paid on the property. This is known as “la complementaria” in Spanish legal jargon and affects resale property. You can read further in my article La Complementaria or Bargain-Hunter Tax on how to pre-empt it and how to appeal one.

In the case of Andalusia, with which I’m more familiar, on buying distressed Spanish property you should pre-empt this by requesting beforehand an assessed property valuation specifically for tax purposes. This will be a legally binding report which your lawyer may use at a later date. Regional Tax Offices in charge of tax transfers will have a value on properties, from which they will not budge, and if you happen to buy below said value they will request tax on the difference as they will suspect you may have under-declared at completion – which I can assure in most cases is simply not the case; it is merely one more consequence of today’s depressed market.

If you have already received this letter you can either pay the requested tax or else appeal it. Providing the difference is not ‘significant’, your chances of appealing it may be fairly high. Obviously if it is a low amount it may not warrant the expense of hiring a lawyer to appeal it. But for high-end property it may be worth every penny.

Buying Off-Plan Property in Spain – Conclusion

Although off-plan property may have fallen foul of buyer’s tastes due to all the associated post-credit crunch problems featured in the press, it will no doubt claw its way back. This is likely to take place when we exit this gloomy deflationary environment and enter a new cycle of real estate appreciation. Property cycles in Spain take, on average, fifteen years from peak-to-trough. The last cycle has taken from 1993 to 2007 approximately. For a recovery to materialise we need foremost low interest rates coupled with banks willing to lend. With neither liquidity readily available nor lenders prone to take chances (lending in Spain is at a staggering fifty-year low!) the property market’s lifeblood is sapped away leading us onto a languished standstill.

As always it will be shrewd investors who, having second-guessed correctly the ailing property market, will snap up the most sought-after units at knockdown prices, profiting from today’s irrational fear; much like in a stock market rebound. Many will look back with everlasting regret on not having seized the buying opportunity of a decade grabbing themselves a bargain under the sun in a bottoming out market.

Or conversely you can always wait to catch the next train which is not due until another fifteen years’ time!

 

“Caminante, no hay camino, se hace camino al andar” – Antonio Machado. Proverbios y Cantares XXIX. Campos de Castilla (1912).

Translation: "Wanderer, there is no path, the path is made by walking."

Brilliant Spanish poet and one of the leading figures of the Spanish literary movement known as the Generation of ’98.

 

Must-reads on the subject:

Buying property off-plan in Spain. Advice by the Foreign & Commonwealth Office, 12th of March 2013

Buying off plan. SPI article from 2010

Advantages and disadvantages of off plan property. SPI article from 2010

 

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in conveyancing, inheritance, taxation, and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

 

Legal services Larraín Nesbitt Lawyers can offer you

 

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Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

2.010 and 2.013 © Raymundo Larraín Nesbitt. All rights reserved.

 

 

 

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