Under the guise of protecting families from home repossessions, the Government of Andalusia, or Junta, introduces a very nasty little piece of interventionist legislation which perverse effects remain to be seen in the overall picture.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8^th of May 2013

Introduction

When one walks around Edinburgh, soaking in its breathtaking historic beauty, one cannot help but notice how many historical buildings are scarred with what seem like bricked-up windows. Baffled by this I couldn’t help but ask one of my colleagues the reason behind such a peculiar habit. He politely explained that this was a result of the unpopular ‘Window tax’ which was in place in Scotland in the 18th and 19th centuries. Landlords were taxed on the amount of windows a property had. So obviously many took the matter into their own hands and bricked-up windows with the unpleasant aesthetic effects we now witness. This is just an example of how a tax law can greatly influence society even shaping it two centuries on. Nowadays we have the ‘bedroom tax’ in the UK; hopefully no one will brick up their spare bedrooms in council housing!

Moving on to Andalucía, the ruling left-wing coalition approved on Tuesday 09/04/13 decree 6/2013 to ‘assure the social function of housing’ (see Andalusia plans to expropriate homes in foreclosure). This decree has come as a result of the difficult social and financial situation Spain is facing, which in the case of Andalucía has morphed into a full-blown depression, particularly amongst the unemployed and those who are being evicted as a result of widespread defaulting mortgage loans. In the introduction to this decree, it states that in Andalucía alone there is an average of 45 lender evictions taking place on a daily basis. I had already denounced this foreseeable situation back in 2007 when I wrote my article on Spanish Bank Repossessions. Yet the Government and autonomous Communities are only taking notice of this alarming phenomenon over the last year when it is arguably too late for thousands of families.

The object of this decree is double; on the one hand the main aim is to help those struggling borrowers who have fallen into arrears and are in the midst of being evicted by their lenders following a repossession procedure. The Junta plans to expropriate these properties, on a temporary basis, and hand them over to those who would be left destitute after a bank-repossession.

On the other hand, the decree also targets empty bank and developer-owned property at a time were homeless families can be tallied by hundreds of thousands (in Spain, as a whole, not just Andalucía). It is estimated that between 400,000 to 500,000 empty properties are registered under the names of legal persons in Andalucía alone.

These measures, which prima facie may sound good and even necessary, are in fact a very nasty little piece of interventionist legislation which perverse effects remain to be seen in the overall picture. A legal measure nothing short of communist if you ask me. Without further ado, I explain why.

It introduces the following obligations exclusive to the autonomous region of Andalucía:

1. The Junta will now be able to temporarily expropriate (for no more than a three- year period) bank repossessions from lenders and hand them over to defaulting borrowers who are in risk of social exclusion. These borrowers need to meet certain low-income requirements. In exchange lenders will receive the ‘justiprecio’ (fair price) of 2% of the properties’ value (certainly gives a new definition to what fair price is…). After the three years have elapsed the lender recovers the legal possession of the property.

This aggressive assault is dangerously reminiscent of South American banana republics’ lack of respect for private property rights. In fact, we have witnessed in Andalucía, more and more frequently, occupations (‘liberation’ in their jargon) of privately-owned fincas by large groups of the so-called Andalusian Workers Union even abetted by career politicians such as Juan Manuel Sanchez Gordillo (he has never worked for a private company and is proud of it). Margaret Thatcher would approve, not.

2. The Junta may apply fines (of up to €9,000 or £7,700 per annum) on all empty property located in Andalucía owned by legal persons (that is by corporate structures). Property under the name of physical persons is excluded from this decree. These dwellings must have a LFO or be in the process of attaining one. By the concept of ‘empty property’ is understood as all property that within a six month period has not been lived in.

3. A property will qualify as ‘empty’ on ticking one or more signs not limited to the following list (the Junta may add more as it sees fit):

• No-one is ‘empadronado’ in the property (no-one is registered as living at the property). Town halls do not need to request permission from owners to supply la Junta the information it may request from them.
• All postal communications are re-directed elsewhere i.e. such as the social domicile of the company owning the real estate asset, normally a law firm
• No utilities contracts set up or else a very low annual consumption (gas, water and electricity). This consumption is determined by an annex to the law which is subject to be changed as and when required by the Junta’s needs. Following art 28 utility companies are now under the legal obligation of supplying la Junta all dwelling utility consumption for cross-checking purposes. Utility companies do not need to request permission from the owner to disclose this sensitive information.
• No internet or telephone connection
• No-one living in the property in a six-month period
• Inspectors inquiring neighbours on whether a property is occupied or not.
• Legal representatives blocking the Junta’s inspectors demands for more information on the property and its use.

4. Art 39.2 of this decree ‘reminds’ all town halls located in Andalucía that they are empowered to increase IBI tax (akin to UK’s Council tax) on all empty property by up to 50%, irrespective of whether it is owned by a physical or legal person. This is not new and is already ruled in art 72 of the LRHL. It was simply not used at all by town halls because of its unpopularity, that is, until now. It would seem the Junta is giving a gentle nudge to town halls, as if reminding them of this faculty they have to raise the IBI tax and create fiscal ‘incentives’ for owners not to leave their properties standing unoccupied.

5. Creation of an Empty Property Register. Inspectors will determine what properties qualify to be included in this new registry and subject of fulfilling their ‘social function’ i.e. letting them for a paltry sum to less well-off families so they can live in them

Excluded Property from this Decree

1. Property holding a touristic licence.

2. Second homes registered under the name of physical persons (not holding companies) i.e. foreigners who only use them during the summer season. These would not be fined.

3. Rented property that is used no less than 30 days a year.

4. Properties owned by physical persons are excluded from this decree.

Properties subject to be fined and included in the Empty Property Register (‘Registro de Viviendas Deshabitadas’)

1. Property owned and registered under the name of legal persons, such as holding companies. This is very frequent amongst foreigners who set up companies owning their summer homes for tax mitigation purposes amongst other reasons. Irrespective of whether this property is used during the summer season by its owners, family or relatives it will still be fined by the Junta with up to £7,700 per year as it does not fulfil its ‘social function’. Lenders and property developers will also be affected by this.

2. Properties lodged in this registry may be subject of la Junta’s action to ‘incentivize’ them going onto the rental market for an affordable let.

The Backstory

The Junta de Andalucía ‘sold’ this decree as a measure primarily to benefit struggling borrowers suffering repossession by expropriating the collateral (the dwelling) from the repossessing bank itself (!). The Junta will now expropriate family homes that are about to be repossessed for a ‘justiprecio’ (this is a legal term coined in Spain’s pre-constitutional Franco-era Expropriation Act dating from 1954) which amounts to 2% (yes, you read well, two per cent) of the property’s value. After the three years have elapsed the property would revert to the lender who instigated the repossession procedure. This is thought only for those worse-off families who would otherwise be left destitute. Their income must be no more than three times the monthly benchmark amount for entitlement to social assistance and grants, which for this year has been set at €532 per month.

This dramatically changes the rule of play for lenders in a spectacular fashion in a so-called ‘capitalist economy’. Hugo Chavez gives his seal of approval to the Junta’s new approach to social housing. This populist measure will translate into lenders incurring in massive losses and may even affect their credit-rating as well as hamper their borrowing ability, which frankly speaking is not exactly at an all-time high. It will foreseeably splinter society neatly furthermore in the two traditional sides (which waged war against each other during the Civil war) at a time when Spain is undergoing serious institutional instability at all echelon levels. This is not in the best interest for social cohesion really…

We are witnessing first-hand how the sacred legal principle of private property, enshrined in art 33 of the Spanish Constitution, is modulated ‘in the social interest’. This little tag of ‘social interest’ was added to art 33 by left-wing politicians during Spain’s Transition. Our Spanish Constitution is in fact an amalgamation of left and right-wing principles which find themselves united within a legal body as a symbol of compromise between both sides to reach peace and start over anew democratically at the end of Franco’s regime. This tag line was a testimonial wording, an anomaly, which one studies at Law faculty with no real relevance – until now.

These populist measures with a whiff of Communism, product of irresponsible regional politicians, may have far-reaching consequences for everyone – and none of them good.

At a time where Spain is desperately waging a losing battle in Europe and abroad to restore its tarnished credibility amongst foreign investors actions like this are counter-productive, to put it mildly. At a time where politicians, from all the ideological spectrum, should be acting united with one voice to bring the country back to its feet we witness how rogue autonomous communities are adopting legal measures that contradict the central government’s efforts in a spectacular manner. The image of Spain’s disjointed and disorganized political efforts, often in open contradiction with one another, before what is reckoned as the most serious challenge it has faced over the last 74 years is simply astounding.

Moreover these expropriations are unnecessary and redundant as the central government already passed a law last year (Royal Decree 27/2012) where bank repossessions would be paralyzed over a two-year period in the case of low-income families.

But it gets worse. The decree does not stop here. It introduces a battery of changes that will affect not only lenders, but real estate agencies, legal persons and even physical persons!

The Junta de Andalucía has its aim on the over the 500,000 empty houses in Andalucía region alone.

It will create an ad hoc body of ‘inspectors’ who will monitor empty property and added it to a special Empty Property Register in the community with the purpose of renting them at affordable lets.

I’m the first person to condemn the social tragedy that is going on, specifically in Andalucía, but this cannot condone the use of expropriations of private property or even fining housing that stands empty for perfectly good reasons. To incentivize the languishing rental market the government should pass legislation making tenant eviction quick and efficient as in a matter of weeks not months or even years. That is how you address the social housing agenda; not by stripping people or companies’ assets away by decree. State imposed re-distribution of wealth is called Communism in my book and we all know how that story ends. Making people equally poor is not the way out of the woods.

Surely there are other more sensible venues to explore to tackle ongoing social problems in Andalucía rather than instilling cold fear in investors and creating unnecessary legal insecurity by moving the goal posts mid-play? Foreigners are already reeling with the new asset reporting law for Spanish residents with stiff fines for all those who fail to comply. Let us not add more problems to the ones we already have at hand – please – or we may threaten economic recovery by setting it back several years.

I can only hope the Central government steps in – decisively – and quashes this decree for its obvious aggression to constitutional principles such as the sacred principle of private property. If not, whatever next? Expropriation of bank deposits on all accounts in excess of €100,000 for the ‘greater good’? Oh wait…

“Politics: the art of creating new problems where none existed.”

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. No delusional politician was harmed on writing this article. VOV.

2.013 © Raymundo Larraín Nesbitt. All rights reserved.

THE VIEWS EXPRESSED ARE THE AUTHOR’S ALONE

The Nota Simple is one of the most important documents used in the Spanish property conveyancing process. This FAQ by Raymundo Larraín Nesbitt, a solicitor qualified to practice in Spain, answers all your questions about the Nota Simple.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8^th of April 2013

What is a Nota Simple?

It is a short legal report of the property (garage, dwelling, store room etc.) obtained from the Land Registry. In English the Nota Simple is called a Property Registry Filing.

What information does a Nota Simple contain?

• The current owner(s)
• Type of ownership
• General description of the property i.e. number of bedrooms, kitchen, living room, etc.
• Total built square metres and percentage of communal areas. Common hold quota and its share
• Boundaries of the property
• Any charges, debts, easements or encumbrances that limit the use of the property i.e. mortgages, rights of way, rights of view, unpaid council tax, community debts, private debts, embargo pending legal resolutions, usufruct right, foreclosure procedures etc.
• Classification of property i.e. residential, agricultural, VPO (‘Vivienda de Protecccion Oficial’; social housing)
• If there is a mortgage against the property it will have an overview of the basic details: total amount owed, total number of years to repay it, number of monthly instalments, outstanding debt, applicable interest rate, default interest rate, full mortgage liability etc.
• And sometimes even the cadastral reference; only if you are lucky

Is the information always accurate?

No. Boundaries, particularly for rural property, are hazy at best as the boundaries are described subject to the names of neighbours who may be long dead. Also the description of the property may be completely inaccurate. For example, if the owner has undertaken works to refurbish the property or made extensions to it these will obviously not be recorded at the Land Registry.

In the case of rural property, many owners took advantage of a legal loophole and using a licence for ‘aperos’ (rural shed tool hut) built instead a luxury villa with swimming pool. At the land Registry the property’s description will remain as the original agricultural land with an orange grove with a small tool hut of 10 square metres. If this owner plans to sell on the property without having updated the Land Registry’s details the buyer will have trouble on seeking finance from a lender. The lender will only see rural land while in reality there may be a 2mn euros property sitting on the land. The lender will only lend a small percentage of the value based on what it deems the rural land to be worth which will be considerably less. The seller will be forced to update the land registry details if he wants to sell.

The nota simple is like taking a legal photograph of a property at a certain moment. It’s accurate at that time but may change over time. If you request a nota simple one week and the following week a charge is placed against it this will obviously not appear in the nota simple of the previous week. So basically a property has a dynamic legal status which is subject to change over time. The nota simple takes a still picture of the legal status at a given moment only. If you want an update you will need to request and updated nota simple as it is logical.

What do I do if the information is not correct?

The property owner(s) needs to fix it himself, at his expense. You normally will need to hire a lawyer to sort out the inaccuracy. On the above example, where a villa has been built on rural land, the lawyer will need to draft what is known as a ‘Declaración de Obra Nueva’ (New Build deed). The owner will have to pay the associated taxes to the town hall for this extension and only then will this new deed be allowed to be signed before a notary. Once the new build deed is signed by the notary it will be lodged at the Land Registry. The Land Registry details will be automatically updated after some time to match the changes made to the property following the new build deed.

What is the Nota Simple used for?

A nota simple is very practical and has multiple uses.

• Buying or selling property. If I want to buy a property; I would want to check if the property has charges, liens, easements or encumbrances against it.
• Loans. Maybe an owner needs funds and requests a loan against the property. The lender will verify what percentage of the property they own or if it’s freehold and if there any other debts or charges against it.

Who signs it?

A nota simple is not signed. You can apply for it in person or online.

On the other hand, a ‘certificación registral’ is a formal document the Land Registrar signs personally which is ‘authentic’ and makes proof of the content of the Land Registry (i.e. in judicial proceedings). It is more expensive.

Where is it kept / stored?

A nota simple is really just an extract of the Land Books, so it is not kept anywhere. The Land Books are physically stored at the Land Registry and the custodian is the Land Registrar assisted by other civil servants.

Is it possible to get a copy in English, or do I have to arrange my own translation?

Yes, you can obtain it in English online. You have to pay extra for the work of the translators that are outsourced by the Land Registry. This will be a document that is drafted in double column Spanish-English. A standard nota simple (only in Spanish) is cheaper.

Are copies legally accepted documents, or do you have to have the original?

No, they are not. A nota simple is a non-certified document only suitable for general information purposes. A nota simple has no legal validity as proof. If there are any errors in it no one is held liable.

If you require a legally accepted binding document you have to request the more expensive ‘certificación registral’ signed and sealed by the Land Registrar himself which is ’authentic’ (it is a public document) and can be used in any legal proceeding. If there are any errors in it the Land Registrar is held personally liable and will have to pay compensation to the affected person out of his professional indemnity insurance cover.

I’ve lost my copy, how do I get a new copy?

You can apply for a nota simple in person at the Land Registry or online.

What information do I need to obtain a copy?

There are a number of ways, as explained at the Registradores.org website:

• IDUFIR. This stands for single property registration identifier. The fastest search.
• Search by particulars of the property. You have to provide the town details, land registry details, volume, page, number etc. Ideally the best way is if you already have the land registry number of the property. This information is normally in the title deed or in the mortgage deed. If you have an old nota simple this will normally also have it.
• You can also look for properties if you have the name and surname of the owner(s). Additionally if you have their NIE or passport number. If the property is under the name of a company it may be more difficult.
• Search using a street address. This is the most challenging search.

How long does it take to get a copy?

If you apply for it in person it is usually ready on the following day.

If you apply for it online it takes between 24 to 48 hours.

How much does it cost?

We offer this service from €50 (plus VAT). English translation also available (additional fees apply).

Follow this link to our service: Nota Simple - Land Registry Search (LRS).

A certificación registral will set you back more.

Generic Nota simple Example

Click the link below to see a sample copy in Spanish & English. This generic nota simple is dissected and fully explained in English.

Nota Simple example

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

• Nota Simple - Land Registry Search (LRS)
• Legal Property Report (LPR)
• Company Registry Search (CRS)
• Conveyancing – Buying
• Conveyancing – Selling

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2.013 © Raymundo Larraín Nesbitt, All rights reserved.

The Escritura – Spanish for Title deeds – is one of the most important documents used in the Spanish property conveyancing process, as it everywhere that recognises private property. This FAQ by Raymundo Larraín Nesbitt, a solicitor qualified to practice in Spain, answers all your questions about the escritura / title deeds in Spain.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8^th of April 2013

What is an Escritura?

‘Escritura’ is a generic term. In this FAQ it is understood as the Title deed to a property.

1. What information does it contain?

A Title deed is a long legal document that has a great deal of information. It will contain:

• Former owner(s) personal details (seller)
• Buyers personal details
• Details of the legal representatives involved
• Details of the translator
• Land Registry details
• Property address (which rarely matches the real street address)
• General property description which is usually obtained from a nota simple (dwelling, garage, store room)
• Cadastral reference
• Property price
• Taxes involved
• Breakdown on how the price is being paid
• Reference to the mortgage – if applicable. The full mortgage details are in a separate deed called the Mortgage deed
• Miscellanea:
• i) Certificate of the Community of Owners stating the property is debt-free and up-to-date with its communal payments.
• ii) Utility bills
• iii) Council tax bills
• iv) Cheques
• v) Copy of the Licence of First Occupation (if buying off-plan)

2. Is the information always accurate? What do I do if the information is not correct?

Yes, it normally is accurate. You contact your lawyer to sort it out.

3. What is it used for?

A Title deed is a public document that certifies the change of legal ownership. Once the Notary signs it, it will then be used to lodge it at the land registry to change the ownership details.

4. Who signs it?

The seller, the buyer, the lawyers involved, the translator and the Notary.

5. Where is it kept / stored?

It is kept at the Notary before whom it was signed.

6. Is it possible to get a copy in English, or do I have to arrange my own translation?

Not possible. You will need to arrange your own translation.

7. Are copies legally accepted documents, or do you have to have the original?

Copies are not legally accepted documents. They are not signed or sealed. There is no ‘original’. The copy that is handed to you at completion is not an ‘original’. You can lose it and it will not matter. You can always request more copies.

A legally accepted document is the ‘copia autorizada’ which is signed and sealed by the Notary himself.

8. I’ve lost my copy, how do I get a new copy?

You can request it from the Notary before whom it was signed. It may take several days.

9. I want to get the escritura for a property I am interested in. How do I go about it?

Unless you have a legitimate interest you cannot. Only the vendor, or his lawyer, can supply you with a copy. In many autonomous communities in Spain it mandatory for real estate agencies to store copies of title deeds for properties in their books. So if you are interested in a copy they should be able to provide you with one.

10. Where do I get a copy from?

From the Notary before whom it was signed.

11. What information do I need to obtain a copy?

With a copy of your passport or NIE number it is sufficient.

12. How long does it take to get a copy?

A simple copy (‘copia simple’) a couple of days at most. A ‘copia autorizada’ (signed and sealed by the Notary himself) may take longer.

13. How much does it cost?

It has no fixed cost. The price will vary according to a number of elements such as the number of pages. On average €40 to €50 (£30 to £40).

14. Can I get request a copy online?

No.

15. If not, what information about a property can I get online?

You need to request a nota simple from the Land Registry which is a different document altogether. Please see my Nota Simple Explained FAQ.

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

• Land Registry Search (Nota Simple)
• Company Registry Search
• Conveyancing – Buying
• Conveyancing – Selling

 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.

The Licence of First Occupation (LFO) is a crucial document in the Spanish conveyancing process. This article tells you everything you need to know about it.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8^th of April 2013

Fact sheet from 2.005

Original article from 29th January 2.009

Abridged article here: Licence of First Occupation

Introduction

Overwhelmed by the sheer amount of client queries on what a Licence of First Occupation (LFO) was in the boom years, I decided to write a fact sheet back in 2005. Over time it evolved, as I added more and more FAQs, resulting in the extended revamped article you are now reading. A LFO is also commonly referred to as a First Occupancy Licence, First Occupation Licence, Cédula de Ocupación or Cédula de Habitabilidad.

Over the last years we have read in the press countless horror stories about people buying off plan properties in Spain which had not attained a Licence of First Occupation (LFO) at the time of completion, and all the woes they are now facing as a result of it. But what really is a LFO and what importance does it bear on an off plan purchase?

In this article I strive to demystify it, shedding light on the matter to cast away widespread misconceptions and highlight the basics.

What is a Licence of First Occupation?

Upon the granting by the developer’s architect of a Certificate of End of Construction (CEC) for newly-built property, a developer will apply for a Licence of First Occupancy. The Licence of First Occupation (LFO) is an administrative licence which the town hall, where the property is located, grants and verifies the development is in full compliance with the Building Licence (BL) and all associated Planning laws.

This is a legal concept applied only to new build property (also known as off plan); it does not apply to resale. A LFO allows the owner to dwell or rent the new build legally. Each newly built dwelling will have an individual LFO granted albeit in large developments the LFO are normally grouped for economies of scale. Resale properties will already have a LFO granted.

The attainment of a LFO is a major legal milestone in an off plan purchase as it marks the ‘legal birth’ of a property. I will analyse in depth these legal implications in my next article on Buying Off Plan Property in Spain.

No one can speed up the granting of a First Occupancy Licence, neither the developer nor us the solicitors; its granting depends solely on the Spanish town hall’s civil servants. Town halls allow time for a developer to mend any planning irregularity or pending communal work which may push back the attainment of a LFO until these outstanding issues are settled (by several months or maybe even years in the more serious cases).

A Dissected and Demystified LFO

A Licence of First Occupation is basically a document consisting of one or more pages issued by a town hall and addressed to the developer who applied for the licence which states that the Licence of First Occupation has been granted for the property or group of properties in the application.

It normally has the following elements: Example of First Occupancy Licence (LFO)

1. Logo of the town hall issuing the licence
2. Stamp with the date in which the document is issued and an accessions register number.
3. File Number
4. Plot of land planning reference
5. Developer’s name
6. Number and type of properties which are being granted licence
7. Date on which the LFO was attained
8. Name and signature of the town hall secretary who grants the licence and town hall’s stamp

Why do you need a LFO?

The LFO is critical for two reasons:

1. Its granting means the developer has built the dwelling complying fully with the original town hall’s Building Licence (BL) 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 the dwelling is in full compliance of Health, Access, Security, Planning and Construction Laws and is deemed as apt for human habitation.

2. It is also required by a property to have full unrestricted access to official utility companies (water, electricity, gas and telecommunications). Spanish law requires the granting of a LFO to hook up the dwelling to the grid supply. Although in some parts of Spain there have been cases of supply companies waiving this and connecting you without said licence. In such cases the only requirement was showing the application of having requested a LFO from the town hall. As I write, this is exceptional.

Lenders normally require a LFO before they consider granting a mortgage loan against a property. The only exception would be the developer’s bank which has already underwritten the whole development and is able to offer a mortgage loan without it because they are eager to spread the developer’s default risk. Also, taking on the mortgage developer’s mortgage has many advantages as it reduces the legal set-up expenses borne by the prospective purchaser. But it is not mandatory, you have may swap the developer’s mortgage to another lender of your own choice.

How Long Does a LFO Take on Average to be attained?

It depends. If the town hall’s technicians detect irregularities in a development or deviations from the original BL then the LFO will be delayed until the developer fixes these problems. In a smaller town you can reasonably expect the LFO to be issued within a few months of the developer having submitted the Certificate of End of Construction providing the development has no major irregularities. In large cities its granting may be pushed back by several months, or more, due to the work overload of town hall’s planning departments.

Is Every Off-plan Development Issued a LFO?

Yes. As previously written, each dwelling has its own individual LFO granted, although in large developments they are normally grouped for simplicities’ sake. A detached villa will have its own individual LFO whereas large developments consisting of various phases will have grouped LFOs issued. Each of these phases normally has its own LFO. So for example in a huge development of 300 units grouped in 4 phases there could be four different building licences and you would have one all-inclusive LFO granted for each individual phase grouping 75 dwellings at a time.

This could well mean that, even within the same finished development, some properties may be ‘legal’ (a granted LFO) yet others are not legally deemed as habitable because they lack a LFO. Physically all of them may seem identically finished but legally only some can be dwelled in. You could only tell which are which by means of thorough legal analysis.

What are the Risks of not having a LFO Granted?

If a LFO has not been granted one year or more after the Certificate of End of Construction was submitted it usually means there is a serious underlying problem. The said problem can arise from a myriad of causes such as planning problems (e.g. the development had only been granted a building licence for two storeys and four have been built, the property has been built in an area zoned as green belt, or an archaeological site of interest has been uncovered), or could mean there might be a health hazard because there is a breach of Health laws (e.g. the sewage pipeline is incorrectly laid out).

One of the most recent cases has taken place in the peaceful town of Catral in Valencia, Costa Blanca, where several developments have been finished and the purchasers have completed on the properties without a LFO been granted. More than 1,000 houses are now deemed illegal. It turns out many of those dwellings were built within the perimeter of a National park zoned as green belt land. The Government has announced that it may pull down some of them.

I Have Read Online that Completion without a LFO is Illegal.

No, this is a widely spread misconception. Completion on a property, before a Spanish notary, without a LFO is legal in Spain and a property will be lodged under your name at the land registry.

However, it is not legal to occupy/live in a property without the mandatory administrative LFO. So basically you legally own a dwelling which you may not occupy nor rent from a legal point of view. Another matter is if local Authorities actually bother to pursue actively those who live in, or let properties which lack the mandatory LFO.

Many off-plan purchasers on having waited for years on end to attain a LFO, or with no prospects of it ever being granted due to planning issues, have decided to cancel the purchase contract and litigate to obtain a full refund of their stage payments. This contract cancellation has to be done by means of a lawyer and may require a judicial ruling.

What is the Difference between a Standard LFO and one Attained by the Administrative Silence Rule?

None, both LFOs are equally valid from a legal point of view. Under Law 30/92 if a town hall does not reply to a licence petition within three months it is automatically considered granted. This is known as the Administrative Silence Rule (ASR) and is a special administrative procedure which enables licences to be attained after a certain period of time has elapsed (currently 3 months), if no response has been obtained from a town hall. A LFO obtained through Administrative Silence it is just as valid as a standard one obtained expressly through a town hall under Spanish Administrative Law. It is pointless to challenge a licence obtained by Administrative Silence as it is perfectly legal in our system, provided it wasn’t obtained breaching any laws.

The latter is a fairly important point. Licences, in general, may not be attained ‘contra legem’, against the law. This is a long-standing legal principle enshrined by jurisprudence and doctrine i.e. STS 1051/2013 (Spain’s Supreme Court ruling). When disciplinary action is taking place for breach in planning laws one cannot attain a LFO by the ASR.

i) For example, an off plan development built on green belt land may not attain a LFO as it was done so breaching Planning laws.
ii) A town hall’s Master Urban Plan has a land zoned for individual detached dwellings and a developer builds instead a three-storey building to make more money.

A LFO applied for by ASR may be challenged successfully in such cases. The off plan purchase contract may be resolved and the would-be buyer is entitled to apply for a full refund of his stage payments. This, which may sound easy on paper, may entail years of protracted litigation. Litigation should never be entered into light-heartedly and you should always seek first an alternative solution – if possible – with a developer. Trust me, this will avoid you much aggravation over the following years.

What are the Associated Problems of Completing on a Property without a LFO?

Although it is legal to complete without a LFO, it entails numerous practical and legal drawbacks which ought to be carefully pondered. To name but a few:

1. You will not be able to take out a mortgage on the property or re-mortgage it by any lender other than the developer’s.
2. You will not be able to benefit from the services from utility companies; only from the builder’s supply (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, a builder’s supply is only intended for construction, not for domestic purposes. Site supply electricity (‘luz de obra’) has limited strength and power surges are commonplace on simultaneously turning on multiple electrical appliances such as air conditioning and a dishwasher.
3. You will have problems re-selling it. A prospective purchaser – or their lawyer – will haggle with you a steep discount if you lack a LFO in a newly built resale. In a resale, purchasers in turn will undergo the same problems to secure finance by means of a mortgage loan. A lack of a LFO implies that you are actually reducing the pool of potential buyers for your resale.
4. If there are planning issues, the town hall may set a charge against the property and you, as the new owner of a new build, may be held liable to pay the fine for the planning illegality (and not the developer).
5. You will not be able to let the property, at least legally.

Should I Complete Without a Licence of First Occupation?

I generally advise clients to complete on off-plans only if a LFO has been granted by a town hall. However there are qualified exceptions to this general rule which ought to be carefully considered.

For example, if a development complies fully with all the required planning permissions, you lack a bank guarantee, there’s no ruling affecting the building licence due to planning issues and there is a high risk of the developer going into administration in the near future, it would be highly advisable to complete. You would still have to wait until a LFO is granted before you can live or rent the property, but at least now there is no risk of you losing your funds if the developer becomes bankrupt.

It is very important to realise that until completion before a notary a property still belongs legally to the developer. So if you still have not closed and the developer goes into receivership in the interim, the property lodged under his name may be seized by the developers’ creditors. They will place a charge against it at the land registry. If you have no bank guarantee and the above scenario unfolds, it is very likely you will forfeit all your down payments as you will be regarded – by law – as a non-secured creditor (meaning you are almost piled at the bottom of the creditor’s ladder standing little to no chance of recovering your stage payments).

In such a particular scenario I encourage clients to complete on the off plan property ASAP even if it has not LFO. After four years elapse post-completion, authorities must grant a LFO providing no disciplinary action was taken. So if the worse comes to the worse and the developer goes under you will at least have a property lodged legally under your name (thus having secured your stage payments) and in four years’ time post-completion it will be fully legal.

Can I be forced to complete without a LFO?

Not in general. Now come into play the nuances or grey areas…

In an ideal legal world one shouldn’t complete on a newly-built property until the LFO is attained by a developer for all the associated practical problems I’ve highlighted above. That’s how it should work in theory and there should be a national law that rules on this. In practice only a handful of autonomous communities in Spain, such as Andalucía, have legislated on this matter.

However, in practice at times some Private Purchase Contracts (PPCs) have been drafted by developer’s lawyers with such devious wording that completion hinges on some document other than the granting of the LFO. This leaves the buyer in a tricky position at best as they leave the door ajar to litigation – and it is not clear cut who has the upper hand; it will pretty much depend on the judge’s take and can easily be argued both ways to be honest.

Some judges argue the buyer, or his lawyer, had – theoretically – the ‘freedom’ not to sign such a clause (abusive perhaps?). In practice developer’s contracts are identically and mass drafted for everyone (and not subject to individual negotiation or amendments) and this ‘theoretical’ freedom as seen in the eyes of some judges is, in practice, non-existent leaving purchaser’s lawyers treading in uneasy ground on having signed it.

Example of such wording: “completion will take place upon the granting of the Certificate of End of Construction (CEC)”. The CEC is actually signed by the architect who happens to be on the developer’s payroll! Not exactly unbiased, is it? The CEC as I explain at the beginning of this article is the document that is required by the developer to apply for a LFO. But the LFO itself is the licence that verifies that the development was built in accordance with the granted Building Licence and all planning laws. How can you possibly be expected to complete on a property which hasn’t even been inspected by the local planning authorities? There could be all sorts of problems and there usually are.

What the above entails is that completion is left at the discretion of the developer with this wording. When the developer thinks it is high time for completion he will urge the architect to issue the CEC. This of course doesn’t imply the development is anywhere finished or even within reasonable expectation of being granted a LFO any time soon.

There will always be time for the town hall to point out all the outstanding issues and thus push back on the granting of the LFO until all flaws are mended by the developer. But this could take months or even years!

Yet, in the meantime, the developer is legally compelling the off plan buyer to complete by means of a registered letter or notary communication as technically the CEC has already been granted as per the PPC’s wording (at his behest, by his own architect!). So technically the buyer is at contractual breach (!) if they fail to complete once legally compelled (ex art 1504 SCC). This is of course open to debate as there is no LFO in place. The developer could take years on end to attain one and yet you are deemed to be in breach of contract! It is ludicrous. As I write this is a grey area that developer’s lawyers will exploit to its fullest at the cost of buyers consumer rights.

In my humble opinion the law should be addressed asap at a national level to clearly and resolutely require, once and for all, the granting of a LFO to complete to plug this nefarious legal loophole in most autonomous communities. Only then will buyers (and their lawyers) play confidently on even ground. Until then the door is left ajar, open for abuse by one party, which happens to be the strongest and the one who actually worded the contract in the first place creating this imbalance to suit their interests. This does not create legal security for foreign buyers / investors and should be addressed at a national level to plug it.

Specific focus on Andalucía

Andalucía’s Decree 60/2010, of Andalucía’s Urbanistic Discipline, requires in its art 27 that a notary must request at completion both the Licence of First Occupation and the Certificate of End of Construction (CEC). This looks pretty clear, doesn’t it? Well it is not. It’s clear as mud from a legal point of view.

Before you crack open the champagne, the problem is that decree 60/2010 has a rank below that of a law. And the law itself, Andalucía’s Building Act (LOUA), is at best unclear and lax in its terms and at no point requires specifically a LFO to be granted for completion. A general legal principle in Spanish law is that a law of lower rank cannot contradict, or exceed the competence, of a higher ranked law. This is the problem at hand. The LOUA which is from 2002 does not clearly require a LFO for completion. But a lower-ranked law, such as decree 60 from 2010, does specifically require it. A notary in Andalucía could, depending solely on his criteria, require – or not – a LFO to complete. This is unacceptable in my opinion. Developers will always try to impose a notary of their own choice at completion…hence the importance of a buyer’s right to freely choose before which notary he wants to complete.

Moreover the DGRN (Dirección General de los Registros y del Notariado), which sets the nationwide guidelines for all notaries in Spain, specifies that there is no (national) law that requires a LFO as a prerequisite for completion in new builds – and they are unsurprisingly spot on. So in truth an able lawyer, or notary, could argue it both ways in the specific case of Andalucía.

Afore just highlights the problem in Andalucía, but there are sixteen other communities in Spain which are likewise empowered to enact their own laws on the matter compounding the problem furthermore creating a legal Tower of Babel – shades of grey.

Can I be forced to Complete when a LFO is attained by the Developer?

Yes, this is known as forced completion. As from the moment the developer attains it off-plan purchasers, regardless if they have completed or not, will be held liable for the outstanding Community fees.

The fact that a buyer has not completed on the property is not the fault of the developer and he cannot be held liable to pay for these Community fees, unless he specifically agrees otherwise.

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 (specifically read point three in the link supplied) for a refund as you are bound to lose at court. That is why it is known as a ‘forced completion.’

Even developers under Judicial Administration can force you to complete once the LFO is attained. The fact they are under an insolvency procedure does not stop them legally from being able to compel you to complete ex articles 1.124 and 1.504 of the Spanish Civil Code (SCC).

Conclusion

A LFO only applies to new builds or off plan property, not to resale. A LFO is important as it draws the line between a new build being legally fit – or not – for human habitation. A lack of a LFO may imply serious underlying problems. You need a LFO to be connected to utility companies.

As from the moment a developer attains a LFO they can legally compel you to complete by means of a registered letter / notary communication.

Bottom line, as rule of thumb do not complete without a LFO.

Qualified exceptions are few and far between. Individual cases differ and require a careful case-by-case study.

I strongly advise you to appoint a competent lawyer with enough experience in Spanish property law to ensure your interests are fully protected.

“Nothing in the world is black or white, forever shades of grey.” – C.B. One of a kind woman.

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.

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• How to Buy Property in Spain – Advice by the Foreign & Commonwealth Office
• Buying Distressed Property in Spain – 8th August 2011
• Community of Owners in Spain: Challenging Assembly Resolutions – 10th October 2011
• Off-Plan Construction Guarantees – 8th November 2011
• Rent-to-Buy in Spain: The Smart Choice – 8th April 2012
• Non-residents: Six Advantages of Making a Spanish Will – 8th August 2012
• Community of Owners, or Comunidad de Propietarios – 8th July 2012
• Buying Resale Property in Spain – 21st February 2013
• Title Deed Explained – 8th April 2013
• Nota Simple Explained – 8th April 2013
• Licence of First Occupation – 8th April 2013
• Bank Guarantees in Spain – 8th April 2013
• Buying Off-Plan Property in Spain – 8th of June 2013
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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.

2.005 and 2.013 © Raymundo Larraín Nesbitt, All rights reserved.

Bank guarantees in Spain are a legal tool devised to secure the deposits of off-plan buyers should their properties not be delivered on time or their developers file for bankruptcy. Post-credit-crunch, bank guarantees are acting as safety nets for many purchasers in dire cases. Law 57/68 rules on bank guarantees.

Original article from 12th November 2.008

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8^th of April 2013

Introduction

Bank guarantees in Spain have been a controversial subject over the last years which have sparked heated debates. Regrettably I have witnessed how some financial institutions are in fact refusing to honour bank guarantees. It is in such cases in which the need of a specialized litigation lawyer comes into play to help enforce them before a law court. Bank guarantees may be a daunting minefield for many albeit with the assistance of an independent lawyer acting on your side you will be able to waive the pitfalls both safely and successfully.

The purpose of this article, along with my article on Licence of First Occupation, is to pave the way for my upcoming article on Buying Off-Plan in Spain. These are essential mosaic articles that allow a focused study on a particular subject and, as a jigsaw puzzle, are part of a broader picture which aims to shed light on buying off-plan property in Spain.

I recommend this article is read in tandem with Supreme Court Rulings on Bank Guarantees and Law 20/2015 New Bank Guarantee Legislation which changes and shapes our understanding on how bank guarantees work in practice.

Bank Guarantees for Off-Plan Property in Spain

Buying off-plan property in Spain has many advantages but also its associated risks. It is important would-be buyers fully understand what this implies. Not long ago it was normal to obtain a significant discount (premium) on buying off-plan as you assumed a risk (mainly the uncertainty of the property ever being delivered and the time elapsed until completion) until the unit was ready to be delivered legally (with a Licence of First Occupation, in Spanish ‘Licencia de Primera Ocupacion’). Many took advantage in the boom years selling on these properties for a sizeable profit prior to completion (also known as ‘flipping’) as it was basically a leveraged investment which only required a fraction of the funds to be paid up front. That same off-plan dwelling was significantly more expensive (i.e. 30%) if you purchased it key-ready as once completed there was no inherent risk.

The whole purpose of bank guarantees is precisely to offset the ‘waiting risk’ until a property is completed. They are devised to mitigate, if not completely remove, the financial risk associated to a developer not completing a development and pocketing your deposits. In this manner they would act as safety nets and the buyer would be able to recover their deposits in full plus the legal interest. That’s the theory anyhow. In practice it is a tad more complex.

The off-plan meltdown gradually cooled off leading us onto today’s depressed market. Off-plan hazards nowadays frequently outweigh the rewards, making the prospect of buying resale property in Spain or let-to-buy in Spain look far more appealing; particularly in light of the large stock of readily available property. That is until the dust settles and the market picks up again kick-starting a new property boom.

Property cycles in Spain take, on average, 15 years from peak-to-trough. The last cycle has taken from 1993 to 2007. To be perfectly honest, this time recovery will foreseeably take ‘somewhat’ longer to materialise. Don’t hold your breath.

What is a Spanish Bank Guarantee?

A Spanish bank guarantee can be either an insurance policy or a guarantee issued respectively by an insurance company or a bank. In this article, for simplicity’s sake, I will group both types under the generic term ‘bank guarantee’. 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. Bank guarantees are mandatory and should be available to all buyers of new-build property.

A bank guarantee has high set-up costs. Law states this expense must be borne and maintained by the developer. If your developer wants to force you to pay for these costs you must report them to your local or regional consumer protection office who will fine them heavily. A bank guarantee is of critical importance acting as a safety net securing your full deposits should something go awry.

It goes without saying that a buyer must always keep careful record of all advanced payments. I mention this specifically when one uses the services of currency exchange companies (which have very competitive rates) as your money actually goes into one of their accounts, not the developers. On completion a notary will require prove of all payments made for money laundering purposes. You want a complete audit trail of all monies involved in the purchase.

How long does the Protection of a Bank Guarantee Last?

In strict accordance with article 4 of Law 57/68 bank guarantees have no expiration date. They should only expire upon the granting of the Licence of First Occupation by the town hall where the property is located. In practice this seldom happens and almost all bank guarantees are issued with an expiration date spanning typically 2 years. It is critical that your appointed conveyance lawyer renews them on time so your deposits are secured at all times.

A Bank Guarantee, Dissected and Demystified

A bank guarantee should be individualised for each particular purchaser. It should include the following:

1. Name & surname of purchaser/s.
2. Their nationality & passport number/s.
3. Their homeland address.
4. The exact amount in Euros which is being guaranteed.
5. Developer’s name.
6. The name and address of the development where they are purchasing.
7. The details of the residential unit they are purchasing i.e. Block 1, second floor, flat F.
8. Name & seal of the bank or insurance company guaranteeing underwriting the stage payments.

If it is a bank guarantee, the number of the ‘Registro Especial de Avales’ as well as the bank account details where the amounts secured will be lodged.

The Law’s Wording

Law 57/1968 rules the protection of stage payments in off-plan properties. This very short law of only seven articles was enacted to secure the stage payments of purchasers should, for example, a developer file for creditor protection or the build be cancelled for planning reasons and thus not delivered in the stipulated deadline. Bank guarantees are only applicable to off-plan properties, not to resale property.

Brief Overview of Law 57/1968

1. Article 1 rules that developers will have to provide free of charge to purchasers a bank guarantee or insurance policy (henceforth bank guarantee for either type) to guarantee the refund of their stage payments plus 6% interest in the event of the developer becoming insolvent. Spain’s Building Act (Law 38/99) actually amends this percentage in its first additional disposition and it will be the legal interest set in the Budget Law published annually by Spain’s Law Gazette (‘Boletín Oficial del Estado’). These legal interests are simple annual interests, not compounded. For 2013 the legal interest has been set at 4% by the Government. However if a developer expressly accepts the 6% interest set in Law 57/68 then said interest overrules the legal interest (which is currently lower).

2. Article 2 makes it imperative to include a clause in the Private Purchase Contract (PPC) whereby it is stipulated that all interim payments will be guaranteed by bank guarantees. You can claim on a bank guarantee on the following three cases:

– A development has not been started (after a prudential period of time has elapsed)
– The construction is not completed within the stipulated deadline in your Private Purchase Contract (PPC) *
– The developer has failed to attain a Licence of First Occupation (after a prudential period of time has elapsed)

* Small digression. Almost all developments in Spain are delivered late so this remark by the law is advised to be taken with a pinch – or two – of salt. Please read point one of my article: “10 Reasons why your case Against a Developer may be thrown out of Court in Spain”. I would say a reasonable delay spans six to twelve months. Some judges are of the opinion that six months is not enough time to consider it a contractual default. Moreover developers, assisted by very competent lawyers, can successfully argue that unforeseen events (force majeure as per art 1105 of the Spanish Civil Code, SCC), such as strikes, bad weather etc. may impact on delivery pushing it back. If they are able to justify the delay, this extra time will not count against them. That’s why caution is the key word here before getting trigger-happy on suing. Litigation is a double-edged sword that needs to be wielded both carefully and responsibly as it may backfire at your own expense. It should not be entered into light-heartedly. Be very wary of law firms pitching you have a ‘strong case’ and making far-fetched promises of 95% success rate claims. You may have a strong case, not.

Another fact worthy of highlight is that only because a PPC has a specific clause whereby it is mentioned that a buyer has a bank guarantee securing their funds this does not actually mean they have one. You have to be thorough and crosscheck with your lawyer that you do in fact have a bank guarantee issued under your name securing all your deposits including the initial reservation fee. In fact, ask to see it. Better safe than sorry. This may annoy your appointed lawyer (it would make me grumble!) but it is necessary – this is your money at stake, no one else’s. You have a right to ensure your stage payments are fully protected.

3. Article 3 stipulates that if the deadline to hand over the property is surpassed without the development being finished – or even started – the purchaser, at his own choice, may either rescind the contract executing the bank guarantee claiming a full return of the deposits plus legal interests accrued in the interim or else grant a developer an extension to complete the property. The latter must be expressly accepted, in writing, by the buyer with an addendum to the PPC reflecting this extension to the delivery date of the property signed by the developer and buyer (or else his appointed legal representative).

4. Article 4 is very important as many things hinge on its wording. In compliance with it, bank guarantees will only be cancelled upon the developer attaining, not applying for it, a Licence of First Occupation. This point is crucial. So much so I will repeat it and expand upon it. A bank guarantee does not expire until a developer has a LFO physically issued by a town hall. So any wording in a bank guarantee stating, for example, any of the following is null and void as per art 4 of Law 57/68:

– A bank guarantee has an expiry date on a given date
– A bank guarantee expires upon the developer attaining the Certificate of End of Construction (In Spanish, ‘Certificado Final de Obras’)
– A bank guarantee expires on the developer applying for a LFO

Following article 4 of Law 57/1968, bank guarantees only become null and void when two conditions are met:

1. As from the time a developer attains a Licence of First Occupation from the town hall’s planning department.

2. The developer makes the new-build property available to a buyer (as in physically handing it over to him).

Artículo cuarto

Expedida la cédula de habitabilidad por la Delegación Provincial del Ministerio de la Vivienda y acreditada por el promotor la entrega de la vivienda al comprador, se cancelarán las garantías otorgadas por la Entidad aseguradora o avalista.

At completion the purchaser’s conveyance lawyer will hand over all bank guarantees to the developer’s appointed legal representative.

5. Article 5 stipulates the obligation of the developer in the PPC, and all related publicity, to mention specifically the details of the financial services provider guaranteeing the payments and the special escrow account where your payments will be paid into (name of bank, account number).

6. Article 6 has been revoked.

7. Article 7 stipulates the Consumer’s Rights set forth in this law cannot be waived by the purchasing party even if they agree to it. The purchaser’s rights set forth in law 57/68 are inalienable under any circumstance.

Types of Bank Guarantees in Spain

As the Law 57/68 doesn’t specifically rule which type of bank guarantee should be issued by the developer there is freedom. Basically this allows for two types:

Standard Bank Guarantee

Bank guarantees ideally can be claimed upon immediately by the purchaser in case the developer defaults or the property not being delivered. However post credit crunch this is no longer the case as some banks are refusing to honour them. Prior to executing it, it actually requires a judge’s ruling stating that the bank ought to refund – or not – the off-plan purchaser. This means the purchaser will actually have to engage the services of a specialized litigation lawyer who will claim upon said bank guarantee in a special executive procedure. The litigation expenses are borne initially by the purchaser up front albeit may be claimed back from the bank together with the full refund of the stage payments and legal interests. This Executive procedure is much swifter than an ordinary court procedure spanning normally between 3 to 8 months. This is the most common type of bank guarantee which is set-up and one cannot argue that it is illegal or unlawful; it is only less practical if banks happen to refuse honouring them.

‘Aval a primer requerimiento’

This is just a standard bank guarantee which includes a special clause by which it can be claimed upon immediately by the conveyance lawyer without the need of a judge’s ruling. The bank cannot refuse to honour it. This is really the ideal bank guarantee to have because it saves the hassle, stress and additional expenses of having to go through a court procedure, even if it’s an Executive one. Sadly, it is very infrequent.

Obtaining a Bank Guarantee

Who requests a Bank Guarantee?

Ideally a developer should hand you over the bank guarantees without even having to request them, this seldom occurs of course. In practice it is the duty of the conveyance lawyer you appoint to follow this up and request it. If you have appointed no lawyer then it will be up to yourself to request it from the developer. The developer in turn will arrange with the bank or insurance company underwriting the whole development the set-up of bank guarantees.

After having paid the initial security deposit which strikes the property off the market, you are typically expected to make interim payments which amount, on average, to 30 or 40% of the property’s value. These payments are normally made in regular instalments (i.e. three or four quarterly payments). Your lawyer will then request from the developer one bank guarantee at a time to cover each and every instalment besides the initial security deposit. So normally your lawyer will have one bank guarantee for each of your stage payments securing the full amount.

As per this law a developer cannot charge to issue a mandatory bank guarantee. Issuing a bank guarantee has high set-up fees for the developer as they must allocate an amount of money in a special bank account besides being an opportunity cost for them as they could put to work these funds elsewhere. This may help to explain why some developers are reluctant to hand them out unless the purchaser’s lawyer has requested them previously.

When are Bank Guarantees Issued?

Bank guarantees are issued normally 30 to 40 days after you make a down payment. Naturally a bank or insurance company cannot issue a bank guarantee if you have not paid the stage payment. In other words, a bank guarantee cannot be issued prior to handing over the stage payment to a developer as some people are advocating publicly. This just shows a lack of understanding, however wishful, on how the system works in practice.

Advice such as: “do not make any payments to the developer without a bank guarantee” are flawed. First you pay, only then will you be issued a bank guarantee. Obviously if you’ve already made one payment and several months have elapsed and there is no bank guarantee forthcoming and you are shortly expected, under binding contractual terms of the PPC, to make further payments you should be wary and seek legal advice. It is risky to keep handing money over if your first stage payments have not been guaranteed yet.

Bank Guarantees on Self-Built Properties

I am building my own dream-villa, should the constructor hand me a bank guarantee? The simple answer is no. In this particular case in which a person has bought a plot of land and they are building their own detached villa the Building Act regards them as self-developers. The constructor is hired by them and is acting on their behalf. In this particular case bank guarantees are not applicable as the purchaser is the developer. However, Law requires the self-developer to arrange the mandatory Ten-Year Insurance (Seguro Decenal). A lack of compliance attaining this mandatory insurance will result in this self-developer being forbidden to sell their house within the next ten years whilst alive unless expressly waived by a purchaser. This leaves the door ajar to problems which are best examined in another article.

Common Bank Guarantee Pitfalls

There are far too many pitfalls to be included as a comprehensive list in my brief bank guarantee overview. Please take professional advice from your appointed lawyer on this matter.

I will list the most common:

1. The bank guarantee’s expiration is conditioned to attaining the Certificate of End of Construction (CEC) instead of the Licence of First Occupation. Law 57/68 sets forth in article 4 that the bank guarantee should be valid until attaining the Licence of First Occupation. The problem is that a CEC, which is the prerequisite prior to the granting of a LFO, doesn’t mean the development is regarded as legal. In fact the CEC is issued by the architect in charge of the development who is actually on the developer’s payroll. Besides contradicting the specific wording of said law this clause should not be accepted as a development, despite having a Certificate of End of Construction, may not be legal. The CEC bears no relevance whatsoever on whether a development is legal or not. Moreover, for a Certificate of End of Construction to be valid it must be signed by the architect, technical architect (‘aparejador’) and must be approved and countersigned with the official seals of both the architect’s regional college and technical architect’s regional college. So a Certificate of End of Construction signed by only one of them would not be deemed valid and bears no significance on the legality of a development. Only the Licence of First Occupation does. For more details on this, please read my article on Licence of First Occupation.

2. The bank guarantee is conditioned to an expiry date. This is fairly common and contradicts blatantly both the spirit and wording of the law. The problem with expiry dates is that almost all developments are handed late for one reason or another. The danger in including expiry dates is that if the development isn’t finished on time as per the clauses in the Private Purchase Contract and the deadline is overrun the bank guarantee will cease to be valid. However this is a subject of hot controversy between lawyers and judges as there are many who believe that the inclusion of expiry dates is null and void as it goes against the Law (article 4 of law 57/68). This will remain contentious until there is a string of likeminded rulings from the Higher Courts. In the meantime being practical, I would advise to renew a bank guarantee to ensure your financial interests are secured at all times should the worst come to the worst.

3. Cowboy Insurance Companies. On the wake of the long-lasting property boom many such cases have been reported in the media. Invariably these rogue insurance companies are incorporated abroad specifically to be outside the reach of the Spanish jurisdiction. On doing this they waive Spain’s requirements and should the developer default, they are purposely unable to back up the bank guarantees or insurance policies they have undersigned. The process to make them accountable for is long, winding, expensive and often fruitless. That is why I strongly advise that whichever bank or insurance company which issues a bank guarantees is located within Spanish territory as a precaution, to be under the supervision of the Spanish authorities. The DGSFP’s website (Spain’s official body responsible for the supervision of insurance companies) has a list of unauthorised insurance companies which are neither registered nor authorised to trade in Spain. Under no circumstances should you enter into a contract with the above listed companies. This list is updated, from time to time.

4. Group or collective bank guarantee whose beneficiary is not the purchaser. This happens typically when investors buy from the developer, at a discounted price, a whole development or a large number of units to resell it abroad in the UK or in Ireland at a higher price. The bank guarantee will be under the name of the investors and not under the name of the end-buyer as it should legally. These bank guarantees are normally for a very high amount of money (millions of euros) as they group various residential units. They are extremely difficult to claim upon legally making them in practice worthless.

5. My bank, or insurance company, does not honour my bank guarantee. Post credit crunch it is renowned that some banks and insurance companies are refusing to honour them as has been highlighted by the Bank of Spain itself in 2008. In this case a specific executive procedure may be followed by your lawyer as a bank guarantee is regarded as an Executive Title. However, not in all cases is it recommendable to follow this executive procedure and your litigation lawyer will advise accordingly on a case-by-case. Consider it as a tactic devised to wear you out as litigation is daunting for many and requires liquidity as it must be paid up front. The expenses may be recouped from the other party later on.

Bank Guarantees – Conclusion

A bank guarantee is a document of paramount importance for off-plan purchasers as it secures their stage payments. I cannot stress enough the importance of attaining a bank guarantee. So even if you are requested to pay a bank guarantee – which is unlawful – I would advise you doing so because it will act as a safety net securing your financial interests in the event of a developer going into receivership or if the development is stalled and overdue i.e. for lack of liquidity

I am very critical of how the whole affair on bank guarantees has been grossly mishandled by those tasked to oversee it. There has been far too much complacency involved which has resulted in the abuse of the good faith of thousands of foreign buyers. This should be addressed urgently so this does not repeat itself again and assist, as much as possible, those who are already caught in its web.

In my personal opinion, this 45-year-old law, hearkening back to the pre-constitutional Franco regime, needs some serious reworking as it allows many loopholes because of its poor wording. The Spanish Government would do well to understand that foreign off-plan buyers rely heavily on bank guarantees to invest in new builds. If the Government wants to kickstart Spain’s real estate sector it should address as a priority sensitive issues such as law 57/68 in advance of a new property cycle. Only then will foreign investors have renewed faith in our legal system to buy again off-plan with trust.

“Trust, like reputation, is hard to earn, but easy to lose.”

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

• Conveyancing – Buying
• Conveyancing – Selling
• Rentals
• Fiscal Representation (Non-Resident Income Tax)
• NIE Number (Tax Identification Number)
• Will Service

Related articles

• How to Buy Property in Spain – Advice by the Foreign & Commonwealth Office
• Buying Distressed Property in Spain – 8th August 2011
• Community of Owners in Spain: Challenging Assembly Resolutions – 10th October 2011
• Off-Plan Construction Guarantees – 8th November 2011
• Rent-to-Buy in Spain: The Smart Choice – 8th April 2012
• Non-residents: Six Advantages of Making a Spanish Will – 8th August 2012
• Community of Owners, or Comunidad de Propietarios – 8th July 2012
• Buying Resale Property in Spain – 21st February 2013
• Title Deed Explained – 8th April 2013
• Nota Simple Explained – 8th April 2013
• Licence of First Occupation – 8th April 2013
• Bank Guarantees in Spain – 8th April 2013
• Buying Off-Plan Property in Spain – 8th of June 2013
• Investor Guide to Spain’s Golden Visa Law – 8th November 2013
• Bank Repossessions in Spain – 21st February 2014
• Buying and Owning Spanish Property through Companies: Pros and Cons – 7th March 2014
• How to Buy Commercial Property in Spain – 4th July 2014
• How to Buy Rural Property in Spain – 8th August 2014
• How to Buy Property in Spain Safely – 10th October 2014
• Taxes on Selling Spanish Property – 8th December 2014
• Spanish Wills and Probate Law In Light Of European Regulation – 8th January 2015
• Changes to Spain’s Inheritance and Gift Tax Law – 21st February 2015
• Spain’s Holiday Rental Laws – Explaining the Latest Changes – 8th March 2015
• Supreme Court Rulings on Bank Guarantees – 8th April 2015
• La Complementaria or Bargain Hunter Tax – 8th May 2015
• House Hunting in Spain – 17th June 2015. The New York Times
• Dispelling Spanish Inheritance Tax Myths – 8th August 2015
• Resurgent Spain: Málaga Sees Strong Sales – Mansion Global (The Wall Street Journal). December 2015
• Snagging List Explained – 28th October 2016

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.

2.008 and 2.013 © Raymundo Larraín Nesbitt, All rights reserved.

An up-to-date legal guide to buying resale property in Spain by Raymundo Larraín Nesbitt, a Spanish qualified lawyer (abogado).

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

By Raymundo Larraín Nesbitt
Lawyer – Abogado
21^st of February 2013

Original article from 31st January 2.010

Introduction

The following eleven useful tips will help would-be buyers avoid the majority of buying resale property associated pitfalls. I won’t mention the so-called Valencian Land Grab Law as this is a localised problem affecting only Valencia that bears no impact whatsoever on the remainder of Spain’s seventeen Autonomous Communities.

1. Hire a Qualified Registered Lawyer

This is the single most important advice you can be given. If you only happen to follow this first tip the rest of the points mentioned in this article become redundant. The advantages are summed up in my article Buying Property in Spain – 10 Reasons to Hire a Lawyer.

Hiring a lawyer is by no means mandatory on conveyance procedures. But I cannot stress enough the importance of retaining a Spanish lawyer, if you are a foreigner, to act on your behalf in a conveyance procedure, both on buying and selling property.

It is often that I hear that those with vested interests in there being no lawyers involved – I wonder why – are often the most outspoken on advocating that retaining a lawyer is an unnecessary expense and always put as an example that Spaniards don’t hire them on buying property.

Whilst it may be true that Spaniards, in most cases, do not retain a lawyer to act on their behalf in a conveyance this can be explained for a number of reasons. Almost every Spaniard has a relative or a friend who happens to be a lawyer and advises them free of charge. Besides they are fluent in their own language (!) and have ready access to a myriad of legal articles which are regularly published in the press. Despite this Spaniards still end up having all sorts of problems on buying or selling property because they did not want to incur in additional expenses hiring a lawyer. Quite often their blunder far exceeds what a lawyer would have charged for his service (typically 1% of the property’s value plus VAT).

To identify oneself as an ‘abogado/lawyer’ one must be both qualified and registered in Spain:

i) Qualified: having passed and attained a Spanish Law degree or else by having homologated it
ii) Registered: being admitted to practice Law at one of Spain’s regional Bar Associations

The second point is already inclusive of the first one, as on applying to practice Law before a Bar Association one must submit both his Law degree and his full academic record. Additionally, someone with a criminal record may not join the Law Society. One should exercise extreme caution on those claiming to be an ‘abogado’ and yet are unregistered to practice. Ask yourself why? Quite a few of the notorious mishaps featured in the press relate to non-qualified intruders dealing in conveyance matters.

Someone who is not registered in a Bar Association cannot entertain to address themselves as a ‘lawyer’ nor legally perform the duties and roles of one.

Registered lawyers need to abide by the Code of Ethics of the regional Law Society to which they belong. In serious cases a lawyer can be struck off the Bar and barred to practice law.

I write the above because I have been alarmed over the last years, since Spain’s economic depression began in 2007, by the increasing number of Spanish bogus law firms which have been set up by unscrupulous people who are neither registered to practice as lawyers nor qualified (no legal background whatsoever or even holding a completely unrelated professional background i.e. Advertising Executive!).

Only registered lawyers have Professional Indemnity Insurance which may protect you in the event of malpractice or negligence. You can claim against said insurance in such a case. All registered lawyers are assigned a practising number by their Law Society i.e. number 6072 of Malaga’s Law Society. You can easily check if your lawyer is registered to practice law on this Registered Lawyer’s Database.

Bottom line; make sure your lawyer is registered to practice, for your own sake. Be wary of cold-calling from legal advisors, senior legal advisors, legal executives, legal assistants, paralegals and in general anyone who does not clearly identify himself/herself as a lawyer/abogado (and is therefore registered). Unlike other countries such as the United Kingdom these fancy titles don’t mean anything in Spain – we have no paralegals. Or you are either a registered Spanish lawyer or you are not – period. It’s that simple. Someone who is not a trained registered lawyer is not qualified to give legal advice in any shape or form, cannot entertain to address himself/herself as a ‘lawyer’, cannot solicit clients for legal services – even if outsourced – nor practice law in Spain.

If the property you wish to buy is of a high value you may want to seek advice beforehand so as to mitigate tax exposure, namely to Spanish Inheritance Tax. Often the best tax planning results are achieved prior to acquiring a property as they may require the incorporation of a string of holding companies to lock up the asset.

Bottom line it is advisable to retain an independent lawyer in Spain.

You can check this list of recommended English-speaking lawyers or request one from your home country’s local consulate in Spain.

2.Has the Property Been Registered Properly?

It is commonplace that extensions on properties are unregistered at the Land Registry. You will only find out on requesting a mortgage loan when a lender either turns you down or else offers significantly less money than what you anticipated because the extensions remain unregistered i.e. a four bedroom villa is registered only as a two bedroom property. Following this example, a lender will only value the property as a two-bedroom as the remaining two bedrooms do not exist from a legal point of view and therefore cannot be mortgaged thus reducing the overall value of the property.

This problem can be easily overcome by signing a new build deed at a Notary and paying the associated local tax levied by the town hall for the extension. This deed is then registered and the property description is amended accordingly adapting it to reality. This ought to be done by the vendor prior to the sale, unless specifically agreed otherwise. Such a case is rife in rural properties.

Other cases, such as illegal rural properties, may be fraught with legal problems i.e. a rural property was given a licence to build a small tool hut (‘casa de aperos’) of 3*3 m² to store the tools to plough the fields. Yet using this legal ‘loophole’ planning rules are easily circumvented and a villa may be built instead – which may be lead local authorities to threat with demolition at the owner’s expense besides imposing fines and even criminal action being taken in the most serious cases. Rural properties can be a legal quagmire and it is essential you retain a lawyer to act on your behalf and best advice you on the matter, from the very beginning.

In other cases, for perfectly legitimate reasons, properties remain unregistered or they lack a title deed (‘escritura’) i.e. property inherited from one generation to another in rural areas. There are several legal ways to overcome this minor setback: ‘Acta de Notoriedad’ or else following an ‘Expediente de Dominio’.

3. Is the Property Registered under the Vendor’s Name?

This may sound as a fairly obvious point but quite often than not I’ve found out the person who had the property listed at the estate agency was not the registered owner. This can be explained for a number of legitimate reasons i.e. the registered owner has passed away recently and the inheritance tax liability has not been sorted out yet. Until the Spanish IHT is not settled, the property cannot be registered, mortgaged or sold by his beneficiaries.

This will be one of the first checks your appointed lawyer will carry out. You can actually do it yourself requesting what is known as a nota simple at the Land Registry where the property is located either physically or online (you have to be a registered user for the latter).

Only the owner or someone else appointed by him acting as proxy (empowered with a Power of Attorney) can sell a property.

4. Ensure the Property Complies with Spain’s Coastal Law

If you are buying a resale, 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 decided to enforce it harshly.

The Government has however recently proposed introducing an amendment to the costal law which in practice will amount – to all intents and purposes – to a generalised amnesty. Thousands of properties which were assailed over looming demolition will now be safe to buy and sell as a result. A very smart move by the Government that has successfully averted what would otherwise have been a death knell for Spain’s real estate sector.

5. Are There Charges, Encumbrances or Debts Against the Property?

Additionally the above land registry information will describe the property (size, bedrooms, boundaries etc.) and reveal if there are any charges or liens against it i.e. a mortgage, a right-of-way or even an embargo.

However you should know that not all debts against a property are lodged at the Land Registry. This is yet another angle which your conveyance lawyer will cover. For example, on buying a resale in a Community of Owners in Spain outstanding debts go against the property itself not against the former owner. On buying a resale you are liable for all the debts of the previous owner in the current year in which you are buying as well as the previous two years; in other words, dating back three years. Your lawyer should request a certificate from the Community of Owners stating the property is up-to-date with the community payments and will include it in the Notary’s deed at completion. This certificate will act as your safeguard against any community claim on bad debts from the previous homeowner.

The new owner will also be held liable for unpaid utility services and local taxes. This is because these debts go against the property itself, not against the previous owner. So whoever owns the property will be held liable. Your lawyer will likewise also ensure prior to buying a resale there are none outstanding.

Other local taxes levied by the town hall where the property is located may be left outstanding by the previous owner (i.e. IBI tax and Garbage collection). These will not be lodged either at the Land Registry.

It may be a good idea to hire Title Insurance just to play it safe. There are companies offering a twenty year legal protection at very competitive prices. It’s well worth looking into.

6. Are There Tenants Living in The Property?

You should be keenly aware that in Spain laws are biased towards tenants for historical reasons. If you happen to buy a resale which, unbeknownst to you, is being let by means of a Tenancy agreement signed after the 1st of January 1995, you will be forced to respect their tenancy until it elapses to take possession of the property. In Spain long- terms are for five years although this has been slightly amended by the ‘Express Eviction Law’ which was passed recently. You can however reach an agreement with the tenant to leave the property beforehand in exchange of a suitable settlement. Additionally recent laws have introduced a limited number of scenarios where this mandatory five-year rule may be overridden by the landlord if required. But you cannot force them on this point.

On buying bank repossessions in Spain you may find a tenant living inside with a long-term contract. Even lenders on repossessing properties have to respect long-term tenants, unless they reach a settlement with them.

Moreover, these long-term tenants may be legally entitled to exercise their pre-emption and buyout rights (‘derecho de tanteo y retracto’) in a resale as enshrined in section 25 of Spain’s Tenancy Act. Landlords must notify their long term tenants, prior to the sale of the property, their intention in doing so as well as the sale conditions so that tenants may exercise their right of first refusal within the next 30 days. Failure to communicate it or doing it in a flawed manner (i.e. the mentioned sales price is in fact higher) will trigger their buyout right. It will then be up to the tenant on whether to exercise it or not.

One of the main problems on buying in Spain is that unfortunately there is no tenant’s public registry that you can check previously; so on buying a resale you are really taking a gamble as you just don’t know for sure if there are long-term tenants living in the property. Seldom are long-term tenancies registered at the Land Registry.

A lawyer can of course draft specific clauses both in a Private Purchase Contract (PPC), as well as in the title deed, to protect you against the above as well as other unforeseen events i.e. squatters in Spain.

7. Know Your Owner’s Rights

If you are buying in a Spanish Community of Owners (‘Comunidad de Propietarios’) it is advisable you request beforehand both the Community Statutes and the Internal Community Rules (the latter being optional, do not always exist) to avoid future problems with your neighbours i.e. an internal rule which bans tenants from using communal installations such as a swimming pool or a gymnasium (both are real life examples). Such limitations can be particularly troublesome for landlords who bought property on a Spanish buy-to-let premise not to mention that it can be challenged. Assembly resolutions may be challenged (both AGMs and EGMs) if necessary.

Additionally, depending on which of Spain’s 17 regions the property you are buying is located in, besides being protected by the Consumer Protection Act which rules nationwide, you are also protected by specific regional consumer laws. An example of the latter would be Decree 218/2005 which rules on consumer rights on buying and renting property exclusively for the autonomous region of Andalucía. These regional laws compliment and bolster national laws adding security and rights to consumers at large.

8. You do have a NIE number, right?

A Spanish NIE number is a Tax Identification Number for foreigners enabling you to file and pay taxes into the Spanish Tax office. It will be required, for example, on buying and selling property, on inheriting assets in Spain, on opening a bank account, on buying a car, etc. More details in my article: NIE Number Explained.

You cannot complete on a property in Spain without one, either on buying or selling, as the Notary will disallow it.

9. Post-Completion: Make Sure the Property is now Registered Under Your Name

Once you’ve completed (or closed) on the property you should ensure it has been registered properly under your name. This process takes on average 30-60 days after completion. If you applied for a Spanish mortgage loan and your lender is the one dealing with registering the property, expect at least a delay of six months – if not more – until you are returned the original title deed. Banks always withhold the original Mortgage deed for their records and will give you only an authorised copy. Once the property has been duly registered you can request the original title deed for your safekeeping. Losing the original title deed or escritura is only a minor setback as you can easily request copies from the Notary where it was signed.

10. 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).

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.

More on these taxes in my article Non-Resident Property Taxes in Spain.

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

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.

11. 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 (BMV or Below Market Value) 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 Resale Property in Spain – Conclusion

Despite the negative press the Spanish property market has endured abroad over the last years, specifically off-plan, the fact is that the vast majority of dozens of thousands of buyers who purchase property in Spain every year experience no problems and enjoy a straightforward transaction. In any case, if unsure, you can always sign a rent-to-buy contract to test the waters.

That is not to say there are no problems, far from it. There’s a lot of room left for improvements enforcing existing laws (i.e. Law 57/68 regarding bank guarantees in Spain comes strongly to mind). Moreover, both the Spanish Government and the Regional Authorities are continuously working hard to pass on new laws that will address the system’s flaws (i.e. Law 13/2009) and better protect Consumer’s Rights enabling smoother conveyance procedures in a safe buying environment.

After my shameless optimistic plug, one last word of caution specific to Spain’s troubled times. While it’s true there are exceptional opportunities to be made in today’s property market, would-be buyers should carefully ponder in their decision-making serious ongoing risks (caveat emptor):

• Currency fluctuation (i.e. plummeting sterling against euro) which may bring losses in the long run when sterling recovers against the euro if you buy now.
• Creeping interest rates in the Eurozone which may affect your loan repayment ability (particularly if you earn in sterling but your Spanish mortgage payments are in euros).
• Generalized real estate asset depreciation.
• Mounting political, institutional and social unrest.
• Severe credit shortage (the lowest on record on a fifty-year period) aggravated by rising interest rates and Spain’s uncertain financial health.
• And last but not least, is Spain’s noteworthy ongoing mounting sovereign debt problem which consequences still remain to be seen…bailout or no bailout – take your pick.

But ironically, it is precisely because of all the aforementioned market uncertainties that unique bargains are to be found in today’s market, a buyers’ market, not apt for the faint of heart.

“Todo necio confunde valor y precio” – Antonio Machado (Only fools confuse value and price). Proverbios y Cantares, LXVIII.

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

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

• Conveyancing – Buying
• Conveyancing – Selling
• Rentals
• Fiscal Representation (Non-Resident Income Tax)
• NIE Number (Tax Identification Number)
• Will Service

Related articles

Advice on buying property in Spain from the U.K.’s Foreign & Commonwealth Department
Advice on buying property in Spain from the R.O.I.’s Foreign Affair’s Department
How to Buy a Home in Spain – Spain’s Land Registry Organisation (pdf in English)

• How to Buy Property in Spain – Advice by the Foreign & Commonwealth Office
• Buying Distressed Property in Spain – 8th August 2011
• Community of Owners in Spain: Challenging Assembly Resolutions – 10th October 2011
• Off-Plan Construction Guarantees – 8th November 2011
• Rent-to-Buy in Spain: The Smart Choice – 8th April 2012
• Non-residents: Six Advantages of Making a Spanish Will – 8th August 2012
• Community of Owners, or Comunidad de Propietarios – 8th July 2012
• Buying Resale Property in Spain – 21st February 2013
• Title Deed Explained – 8th April 2013
• Nota Simple Explained – 8th April 2013
• Licence of First Occupation – 8th April 2013
• Bank Guarantees in Spain – 8th April 2013
• Buying Off-Plan Property in Spain – 8th of June 2013
• Investor Guide to Spain’s Golden Visa Law – 8th November 2013
• Bank Repossessions in Spain – 21st February 2014
• Buying and Owning Spanish Property through Companies: Pros and Cons – 7th March 2014
• How to Buy Commercial Property in Spain – 4th July 2014
• How to Buy Rural Property in Spain – 8th August 2014
• How to Buy Property in Spain Safely – 10th October 2014
• Taxes on Selling Spanish Property – 8th December 2014
• Spanish Wills and Probate Law In Light Of European Regulation – 8th January 2015
• Changes to Spain’s Inheritance and Gift Tax Law – 21st February 2015
• Spain’s Holiday Rental Laws – Explaining the Latest Changes – 8th March 2015
• Supreme Court Rulings on Bank Guarantees – 8th April 2015
• La Complementaria or Bargain-Hunter Tax – 8th May 2015
• House Hunting in Spain – The New York Times. June 2015
• Taxes on Buying Spanish Property – 8th July 2015
• Dispelling Spanish Inheritance Tax Myths – 8th August 2015
• Non-Resident Taxes in Spain – 8th December 2015
• Resurgent Spain: Málaga Sees Strong Sales – Mansion Global (The Wall Street Journal). December 2015
• Snagging List Explained – 28th October 2016
• Buying Property in Spain – 10 Reasons to Hire a Lawyer – 8th November 2016
• Buying Property in Spain from a Private Seller (Resale Property) – 21st of February 2017
• Buying Property in Spain from a Developer (Off-Plan Property) – 8^th March 2017
• NIE Number Explained – 8th May 2017

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.

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

Some policyholders are unpleasantly surprised when they attempt to cancel an insurance policy in Spain. This article shows the pitfalls, explaining how to successfully overcome them without incurring in extra expenses or even being denied its cancellation!

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8^th of January 2013

Introduction

It is always an unpleasant surprise to find out that you are unable to cancel a policy – the company turn you down – because you failed to notify your insurance company in the due manner within the contractually pre-agreed timescale.

This article focuses exclusively on how – and when – to terminate your insurance policy without attracting surcharges.

Applicable Legislation

Spain’s Insurance Contract Act (Law 50/1980, of 8th of October) rules in general on all insurance policies. This law has seen numerous amendments over the years. Your contract (general and particular clauses) and this law are the legal framework.

The Two-Month Notice Rule

Art 22 specifically rules on when to cancel a policy. A policyholder must notify their insurer with at least two months’ notice before the end of their contract.

Don’t think for one moment that only because you give your bank an order to stop paying your monthly premium that implies you are cancelling the insurance – it is not the case and you are only in for legal problems.

Your insurance contract will have a date on which the cover starts i.e. 1st of January 2013. That is the date that you must keep track of when you intend to cancel. Your contract will run its course normally on the 31st of December of 2013. Following this example, you would have to notify your company, at the latest, in October 2013. Always well-ahead of the two-month deadline. They must receive your letter ahead of the two months, not after. Most insurance contracts are valid for one year and are automatically renewed unless stated otherwise by either party.

Insurance policies are automatically renewed year on year without your input! So if you fail to notify them within the pre-agreed timescale they will take for granted you wish to continue your policy and will continue with the direct debit as normal as from January 2014 and onwards.

Bottom line, you actually have a narrow window of opportunity in which to cancel an insurance policy successfully. Failure to comply with it will attract extra expenses and surcharges; namely you still have to pay for the remaining of the contract’s duration.

How to Notify: by recorded delivery

You can do it in a number of ways really, but I would always recommend that you draft a letter and send it to your insurance company by recorded delivery (registered communication) with both acknowledgement of content and receipt (‘Acuse de Recibo y certificación de texto/copia certificada’). A lawyer can assist you drafting this legal communication – it goes without saying that it must be in Spanish. If you write it in English, or in any other language for that matter, it will be ignored and binned.

By requesting at your local post office acknowledgement of both content and receipt, it ensures the following:

• The content of what has actually been written (a copy with a seal and date is handed over to you for evidence purposes) which may valuable evidence should there be a court case
• Additionally, you are also notified days, or even weeks, later of when and who receives the burofax you’ve sent. Keep the notification safely along with the copy of the burofax you sent stapling both together for safekeeping – you may be needing them if your cancellation is legally challenged by the insurance company.

Yes, it is more onerous than simply sending them an email, letter or fax but unlike the former, a burofax can be used as irrefutable legal evidence – if necessary – before a law court should problems arise such as the contract cancellation being contested. Companies continually change fax numbers or social addresses; employees are made redundant day in, day out – your letter, fax or email may get ‘lost’ .

By sending them notice with recorded delivery with an acknowledgement of receipt, for which they have to sign for upon receipt, you are taking excuses away from them. They won’t know what the letter is about or what it says until they have first signed for it. As legal communications in Spain are frequently sent like this, they will not chance it and be forced to sign it because they simply ignore who’s sending the letter and what its content is.

Insurance companies are notorious for their lack of support on cancelling a contract. They do not make it easy at all for their customers – I’m talking out of my own personal experience here, not a client’s. If you add to that the problem of notifying them within the legally stipulated timescales it only compounds the problem furthermore. Insurance policies are very easy to sign up for but difficult to withdraw from, at least scot-free.

The whole idea behind a recorded delivery is to be proactive and pre-empt any challenges by self-creating legal evidence that may be upheld before a law court – only if necessary – should your company contest you terminating your contract.

With the ongoing ‘recession’ companies are highly reluctant to lose customers and at times may try to thwart any attempts of pulling out. Notifying them by burofax is simply playing it safe and covering yourself against any eventuality.

Completely ignore the following flawed advices which sadly are still commonplace:

• You do not have to notify an insurance company of the termination; just instruct your bank to stop paying the direct debit – False
• It’s more than enough letting your company know one week ahead of the contract’s termination that you are not planning to renew it – False
• You don’t have to follow the two-month rule until you are sent the new bill – False
• It suffices to simply send an email or buzz your charming local insurance contact with whom you get along so well of your will to terminate the contract – you’re best buddies and have known each other for years (they even remember your children’s and ex-wife’s names!) – False. You are chancing it and normally it’s false. Their supervisor may override them and decline your contract termination because you did not play by the book giving the two-month notice in writing.

The address to which it must be sent is normally the one included within the insurance contract, the companies’ registered address for all legal intents and purposes. Always make sure the address is the current one, specifically if your contract was signed for years ago. Don’t send this communication to your insurance broker – he’s not a party to the contract, unless specified otherwise.

Spanish home insurance cancellation FAQs

What happens if I notify my insurance company after the two-month period is up or even at any another time?

A common occurrence nowadays is for expats to move back into the UK because of Spain’s grim job market outlook. Few people actually plan ahead with so much foresight. Fact is that if you wait until the last minute to cancel your insurance you may find the nasty surprise that you are still liable to pay for the remaining months of the contracts duration. No-one wants to start receiving threatening lawyer’s letters chasing you up for the outstanding monies owed to the insurer.

If you already know that you are likely to be moving abroad within the next year or so you can plan ahead for this moment and save yourself considerable aggravation and expenses by simply following my above advise. If you cancel your policy as I’ve outlined you won’t be troubled by them.

If you fail to comply within the stipulated notification period you are liable to pay for the full remaining duration of the contract! So bottom line, you can pull out of the contract at any time – but you will be held liable to pay for the remaining months. This is simply another fancy way of writing that the insurance company simply denied your request to terminate the policy ahead of time and is making you pay for the full remaining duration of the contract. They will pursue you legally for the shortfall.

If you really want to terminate it scot-free, follow my above advice on the two-month notification period and send it by burofax.

Can I still cancel if the insurance company increases the costs after the two-month notification period is over?

Not without being held liable for the remaining duration of the contract. So the short answer is a nay. Some insurance companies will sneakily introduce amendments to the contract after the two-month period has elapsed. They do this so you are stuck with them until the following year if you wish to cancel. On the following year you will have to notify them two months ahead of your intention to terminate the contract.

And in the event of death?

Yes, this is one of the few cases in which the two-month rule can be legally overridden. You will be asked to provide a copy of the policyholder’s death certificate to support the cancellation request.

And if my insurance was linked to my mortgage application? Can I still cancel it?

It depends. Read carefully the stipulations (specifically the particular ones tailored for you; as well as the general clauses). Normally they cannot be unilaterally terminated by the holder because they are part of a broader contract which is the mortgage loan. You have been given a lower mortgage quote precisely because you also hired linked financial products such as a home insurance. Pulling out may impact how much you are being charged for your mortgage and you will normally be forced to hire an alternative one. Read my article on the matter: Spanish Mortgage Loans: Beware of Abusive Clauses.

In Conclusion

An insurance policy is like any other legal contract – you must abide by its rules. Spain’s Insurance Contract Act requires policyholders to give their companies, as general rule, a two-month notice period to terminate a policy (individual cases may differ however). These two months are counted as from the time of the contract’s expiration so there is actually a narrow window of opportunity in which to cancel it successfully.

A lawyer can greatly assist you cancelling a policy, carefully planning ahead to terminate it within the legal timescales without attracting surcharges. Mitigating expenses and successfully terminating it in a legally accepted manner that will not be challenged.

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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Home Insurance in Spain – 8th November 2013

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.

Spain’s Government continues to introduce fiscal changes that could have a big impact on you and your business if you live in or own property in Spain.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of December 2012

Photo: Red Squirrel taken at Montreathmont Forest, Angus, Scotland.

Introduction

Spain’s continued challenging financial situation has shifted the Government into overdrive mode whereby fiscal novelties are introduced almost on a daily basis in an attempt to shore up its beleaguered economy. It is beginning to be somewhat of a chore to keep up with the sheer amount of legislation being enacted.

For year’s end I have written an article to compile the most significant fiscal changes that have taken place over the last two months in bullet points.

Batch of Changes

The approval of Spain’s Antifraud law (Ley 7/2012, of 29th October) introduced the majority of the most significant changes over the last months. Other laws have also contributed to this. I will review only the main ones with special emphasis on non-resident taxation.

– Cash payment restrictions. Art 7 has capped the amount one can pay in cash to €2,500 (or its equivalent in foreign currency) when one of the two parties is a professional businessman i.e. car dealer selling you a car. This threshold includes VAT. For non-residents this has been increased to €15,000 (you need to demonstrate you hold a domicile abroad) so as not to curtail tourism. Applicable sanctions will be 25% over the allowed caps both to payer and recipient. Spain’s tax office is fostering through its website whistle-blowers. Those who first denounce the other party within the next 3 months will be sanction-free. But only if you are the first to denounce it; first come, first served. If the other party has already denounced you, you will be sanctioned regardless if you denounce it afterwards.

– Lottery winnings no longer tax-free. Previously accrued winnings were tax-free, only interests were taxed. Now all amounts over €2,500 will have a flat tax of 20% as from next year. This 20% will automatically be deducted on cashing in the winning ticket. This includes National state lotteries (such as el Gordo, la Primitiva) and from private institutions such as ONCE, Cruz Roja etc.

– Residence permits for houses. Popularly known as “investor visas”. Non-residents on spending €160,000 or more on a Spanish property will automatically qualify for residency in Spain. This will allow them unrestricted access throughout the European Union bypassing restrictive visa applications. This measure was specifically tailored to attract Chinese and Russian nationals but it has generated the most interest in other countries, such as Morocco. Other European countries have similar investor visas schemes in place, albeit with much higher caps: France requires ten million euros, UK has a one million pound threshold, the Republic of Ireland requires one million euros and Portugal requires half a million euros. You can read further in my article Investor Guide to Spain’s Golden Visa Law.

+ Residency in Spain for property investors

– Tax amnesty. This will be the third wave in Spain’s young Democracy. The PSOE put in place 1984’s and 1992’s and also proposed the third one in 2010 (Zapatero). It has finally been the PP – Spain’s ruling party – which has implemented it under great criticism by the PSOE (!). Tax evaders had until the 30/11/12 to regularise their financial position with the tax agency (AEAT). The measure was a moderate success and has helped to bring in 1,5 billion in tax revenues which would otherwise have gone untaxed out of a self-declared goal of 2,5 billion. Also a further 20 billion in assets have come to light which will be taxable in future fiscal periods. This measure mirrors fellow European countries recent proposals i.e. France, UK, Italy and Germany.

– Abolishment of statutory periods for undeclared assets. Spain had a statutory administrative period of 4 years on all undeclared income after which no taxes could be pursued by the tax office. After this significant change, any undeclared assets held by residents will no longer benefit from the statutory period, meaning they will permanently be fraudulent regardless of how much time has elapsed. This is highly questionable from a legal point of view. In any case this was approved to create an ‘incentive’ for tax evaders to come forth and benefit from last month’s third tax amnesty.

– ‘New’ punitive measures introduced on all undeclared assets held abroad. It has always been an obligation for tax residents to declare all their worldwide income and assets to Spain’s AEAT on filing their annual returns. The reason on why this measure is being labelled as something ‘new’ is because it is being specifically levelled towards the hundreds of thousands of Spaniards who have recently emptied their Spanish bank accounts and transferred all their savings abroad. As a result this has led, amongst other reasons, to the biggest credit crunch Spain has witnessed over the last 50 years following the Bank of Spain’s statistics (since 1962).

The Government has now increased penalties on all those who – being resident in Spain – fail to declare foreign-held assets with a value of more than €50,000. This applies to titleholders, beneficiaries, or even just authorised signatories. You will be fined a minimum of €10,000 on being discovered as well as €5,000 for every undisclosed financial detail recovered E.g. residents holding undeclared offshore accounts with €50,000 or more, or even accounts in other European member countries such as the UK.

– Bolstering Spain’s Criminal Code. These changes have been brought about to punish furthermore tax evaders. Spain had a statutory period of 5 years on committing a fiscal crime (defined as defrauding amounts equal to €120,000 or more). This has now been doubled to 10 years. Additionally one could be jailed one to five years for a fiscal crime. This has now been raised over to two to six years serving a prison sentence. This has been introduced in cases in which the amounts defrauded are in excess of €600,000 and/or the offender has set up specific tax avoidance structures such as offshore trusts, using ‘sham’ company directors (known as ‘Sark Larks’). Traditionally these types of white-collar crimes were difficult to detect because of the lack of resources and manpower. However the culture is now shifting to simply handsomely ‘pay-off’ disgruntled bank employees to gain access to these files as well as having Spain sign agreements with tax havens to tap into the interests of undeclared amounts held abroad. Tax offenders who denounce associates will now see the charges against them significantly reduced on collaborating with tax officers. The tax office is also fostering the public to anonymously denounce each other.

– Taxes may no longer be deferred in cases of insolvency. Companies and businessman which had filed for bankruptcy could previously benefit of a tax deferment of their obligations. This will no longer be the case.

– Preventive embargoes. The tax office may now pre-empt embargoes to secure its interests if it believes there is an insolvency risk.

– Modules declaration. For those self-employed (‘autónomos’) who declare under the fiscal figure of ‘módulos’ and invoice more than 50 pc of their income to other businessmen will no longer be able to benefit from this special favourable fiscal regime. They need a turnover in excess of €50,000.

– Reduced VAT on off-plan properties scratched. Currently set at 4% this will be increased to 10% as from 2013.

– Publish a list of tax dodgers. The Government is mulling the idea of publishing a name and shame list with the largest tax debtors (still hasn’t defined the threshold); much as other countries have already done such as Greece which published a list of the 4,000 tax payers who owed more than €150,000 in taxes. From a legal standpoint this is highly questionable, unless current laws are amended to allow it.

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.

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• Fiscal Representation (Non-Resident Income Tax)
• Inheritance Tax
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• Tax model 720

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.

2.012 © Raymundo Larraín Nesbitt. All rights reserved.

The Spanish Government has proposed changes to the much berated Ley de Costas, or Coastal Law, including much longer concessions of use. In practice, the Government of 2093 will probably offer a new administrative concession – for a price. It’s like when you buy an expensive property in London that actually belongs to the Duke of Westminster, you are really only leasing it for a period, a very long one. In any case, I wouldn’t lose sleep over it; I won’t be alive to see it and neither will you.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8^th of November 2012

Introduction

Normally I would not write a legal article on legislation which still has to be enacted. I’m doing an exception only because I find the subject highly relevant and, in all likelihood, it will be approved with few amendments.

Spain’s ruling Coastal Law (Ley 22/1988, de 28 de julio, de Costas) establishes a zone of protection from the shoreline in which nothing can be built unless expressly authorised (by what is known as administrative concession). This law has gone largely ignored over the last decades mainly because administrative authorities have done little no nothing to enforce its own stipulations. The law in itself, as usual, is excellently drafted but there was no political will to back it. As it stands to logic, there is little point in drafting laws and enacting them if there is a lack of political willpower to enforce them. After all, a law is only effective in the manner that its coercive threat remains credible. Otherwise it’s all barking and no fangs.

From a personal point of view, the intent of this PSOE law was very good as it devised a cohesive sustainable development model that attempted to balance a respect of Nature and the legal right of landowners to develop land. It is a social responsibility of our generation to preserve natural habitats for the enjoyment of future generations. It’s almost an intergenerational solidarity and it is even key for our own survival as a species to respect and protect Mother Nature.

I was lucky to be born and raised in the privileged Marbella of the 70s. Marbella was once renowned for its sand dunes, believe it or not! When I was a child some of my fondest memories were to be taken by my parents – or school – to wild sand dune beaches, free of construction sites. Three decades later the only area I can think of in Marbella which still remains untouched is the ‘protected’ las Dunas de Artola nudist beach (in Cabopino); the last stand of Nature. Not for long, as there are already talks underway to develop this unblemished green area as well.

Now all this is but a faint memory buried in sepia-coloured photographic archives. The last standing genuine sand dune beach in Marbella is Playa de Artola, in Cabopino. I have to drive for almost an hour’s time to Tarifa’s beaches (Cadiz) to offer my children a similar experience to the one I had when I was their own age – we take for granted far too many things in life and only fully appreciate them on losing them. And even now Tarifa’s pristine beaches, a natural treasure, are under threat of looming development with several hundred beachfront properties under planning. But enough digression.

As a result of a notorious lack of political will to enforce its own laws (as featured in detail in Auken’s report), landowners and property developers at large jumped at the chance and started building on the designated zone of protection which is prime building land highly sought-after by foreign property investors. After all, who hasn’t dreamt in their life of owning a front line beach pad?

After decades of leniency, by both PSOE and PP authorities, the former PSOE presidency took a bold stance taking the bull by its horns and started to enforce its own law – rather abruptly and harshly – some four years ago. This sent ripples of alarm through landlords owning coastal properties as the long-standing status quo had effectively been unilaterally broken. The existing law stipulates a grace period of 30 years (ending in 2018) after which all ‘illegal’ properties were to be demolished.

Official figures vary widely, but a conservative estimation puts it at over 10,000 properties nationwide (ranging from beachfront luxurious villas, to hotels and even including industrial sites) that would need to be demolished as a result of falling foul of the law’s stringent requirements. The most notorious example of this is the hotel El Algarrobico, an architectural monstrosity located in Almería, which has been built over earmarked green belt land (Cabo de Gata-Níjar national park no less!) and now has a ruling to demolish it with an estimated price tag of six million pounds – don’t hold your breath.

This has sparked an enormous sense of legal insecurity to foreign property investors looking to buy property in Spain’s privileged coastal areas. A fear widely echoed by the media abroad. If there is something investors dislike is when the rules of play are blurry at best. A transparent nationwide legal framework is mandatory to reassure them and foster investment – far too many administrations involved, regional and local, with overlapping competencies and more often than not contradictory rulings adding to the planning mayhem. There are countless cases of foreigners buying beachfront property only to learn with horror that their expensive properties are under threat of being bulldozed – despite having acquired them through a Notary in a perfect legal manner. The last thing our property industry needs right now are yet more scandals of good faith foreigners whose properties have been flattened out. I just cannot understate enough how damaging it was for Spain’s interests the media coverage of the Prior’s case – unrelated to the coastal law. Such cases need to be stamped out by the authorities well before they even take place if we are to rebuild trust in foreign investors. Trust is hard to attain and it only takes a couple of bad calls to lose it.

With the above in mind, the Government has approved a project of law to significantly amend Spain’s coastal law. Despite vehemently denying it is proposing an amnesty, to all intents and purposes it is an amnesty in all but name. The official line is that this amnesty will help to avoid a sense of planning insecurity in Spain encouraging foreigners to invest in Spain safely. Spain, with successive administrations organising continued road shows abroad in an attempt to restore confidence and bring back much-needed foreign investments, can ill afford to have its image tarred – once more – with thousands of foreign-owned properties demolished in five years’ time. Kudos to the Government for getting its act together, at least for once.

The cynic in me however raises the question on who would foot the enormous bill (billions of euros) to demolish said properties, tallying in the thousands, in 2018. Normally judicial rulings sentence the offender to demolish them – at their own cost. Problem is many of these landowners cannot currently afford this so it would ultimately fall to the state/local authorities to pick up the incommensurable tab. With a severe ‘recession’ this seems unlikely. I blush calling this a ‘recession’, honestly, and beg forgiveness and understanding from the gentle reader for not using the appropriate word for a social tragedy with over 25% unemployment rate. But this only underscores the fact it is a buyer’s market.

The Government has opted to duck its head in the sand pushing the problem ahead for the next 75 years. For this is the new proposed timeline for the new grace period. For the next three generations troubled landowners will be able to sell on and rent their properties – legally – without qualms deferring to future generations irksome planning issues.

Ah, life is so much easier when you are a politician – pushing problems under the rug for future generations to contend with; classic.

The Key Legal Misunderstanding

From my professional experience most misunderstandings related to our Coastal Law stem from people ignoring the particularities that are being dealt with in the zone of protection. As its name implies, developing land within its boundaries is forbidden.

Properties (in an ample sense) located within the zone of protection in Spain's Coastal Law are not freehold property, they are in fact leasehold property granted by the State (known in Spanish as a ‘concesión administrativa’ or Administrative concession). This is a fairly important point that surprisingly few people take notice of. This means that the land within this earmarked area actually belongs to the State. You are actually leasing the land (and anything built on it) for a pre-agreed timeline. After said timeframe has elapsed, the property will revert back to the State.

This zone of protection is devised to exclude developing within its boundaries (i.e. restaurants, hotels, villas, industries etc.) leaving it pristine. However, as the Coastal Law of 1969 was by and large ignored the new law from 1988 stipulated a grace period of 30 years (ending in 2018) to landlords owning property within the designated legal protection zone after which they would mostly be demolished. This was likewise ignored by subsequent administrations up until recently when the PSOE government started to enforce its own law proactively. I refuse to delve on the intricacies of the tiers of protection (‘servidumbres’) which merit their own article and would likely bore my readers to death.

This implies, for example, that on buying a beachfront property built within the zone of protection you know that it is in fact subject to a grace period ending in 2018. This administrative concession is now proposed to be extended to the year 2093, providing the reform is passed. This is a fairly important point – at least theoretically. Normal freehold property experiences capital appreciation over time (disclaimer: unless it was overvalued in the first place and you are in the middle of a severe global meltdown – such as now!). However these properties are more akin to leases than freehold properties. The value of a property is actually ‘reduced’ over time as the deadline draws nearer because the time remaining to enjoy it is likewise reduced.

I’ll put an example to explain the concept. Take two identical beachfront villas (built on the zone of protection) with different administrative concessions. You would expect the price tag of both to be identical – you would be wrong. Say the first one has a 75-year period and the second one only has a ten-year period. The former will reach a much higher price tag than the second because it still has 75 years to run its course, whereas as the ‘ownership’ of the second one will revert back to the State after a decade is over. That’s right, this land and anything built on it, is ultimately owned by the State – not by the owner.

You are de facto leasing it from the Authorities. When the time is up, ownership reverts to the State. Actually let me rephrase that; the ownership was always the State’s; it’s really the use that reverts back.

Just to clarify, unlike my above example, all property built within the zone of protection will all have an identical administrative concession lasting 75 years; I have taken the liberty in my above example to imagine different deadlines for the sake of explaining the concept on how the time elapsed impacts on the underlying value of the leasehold. That’s the theory anyhow.

In practice, the Government of 2093 will probably offer a new administrative concession – for a price. It’s like when you buy an expensive property in London that actually belongs to the Duke of Westminster, you are really only leasing it for a period, albeit a very long one. In any case, I wouldn’t lose sleep over it; I won’t be alive to see it and neither will you.

Highlights of the Proposed Amendment

I stress that the following bullet points may be subject to change as at the moment of writing this article the reform has not yet been enacted – it is only a proposal. This is only a summary of the main points currently being put forward for discussion that will probably make their way – or not – to the approved law:

• The main highlight is that the grace period to bulldoze thousands of coastal properties in 2018 is postponed by 75 years. The term ‘properties’ includes dwellings, restaurants, hotels, industries etc. In the interim owners may take advantage of this new grace period to sell on or let their existing properties legally. The looming demolition threat pending on thousands of properties in 2018 is now removed. This will be a most welcome respite for many.
• The Government can now override local planning authority decisions. This is introduced to avoid ‘El Algarrobico’ scenarios whereby local planning authorities, in full disregard of national and regional laws, approve planning breaching law.
• The proposal distinguishes between urban and natural beaches, increasing the protection of the latter.
• Beach restaurants, popularly known as ‘chiringuitos’, will have their administrative concession increased from one year to four years.
• Existing industrial sites (over 1,800) will now need to pass an Environmental report to have their administrative concession extended.
• Mandatory obligation to earmark all property located within the zone of protection and to have it lodged at the Land registry. Buyers will no longer be able to allege ‘good faith’ on buying them claiming they were unaware of their particular legal status: leasehold as opposed to a freehold property.

In Conclusion

It is a very tricky subject with no easy solution. Personally I feel torn between both sides. Balancing opposing needs is always a hard task; you have to determine what the greater good is, and that may be subjective. On the one hand you have a law which upholds social interests and protects coastal areas, on the other hand you have the legitimate interests of those owners who bought and developed land – mostly – in good faith. How can you lay the blame – and ultimately the consequences – on thousands of innocent bystanders for the government’s own reckless bipolar attitude who fails to uphold its own laws? You simply cannot. There are far too many interests at play in the big picture that amply justify overriding what was devised as a well-meaning law.

The immediate winners of this legal proposal are developers, lenders (many of which have repossessed these properties) and in general private individuals owning properties on the designated zone of protection (many of which are foreigners) which were facing the grim prospect of looming demolition in 2018. This amendment will greatly contribute to bolster the legal security over the next century hopefully attracting in its wake foreign investment. This reform aims to iron out legal uncertainties which were holding back much-needed investments.

On a wider angle, the image of Spain as a whole will benefit from this proposed amendment as it will successfully avert what would have been a most ugly PR affair in 2018 which would have tarnished the image of Spain to no end. It would have single-handedly pushed back recovery several years – such is its impact. The Government should be heartily congratulated on adopting a pragmatic approach; regardless of its unpopularity with opposing political parties – they would have done exactly the same thing if they were ruling, truth be said. Worth mentioning is the considerable money that will be saved from not having to demolish thousands of properties at a time where Spain sorely needs to keep a tight rein on public spending.

The loser, in a manner of speaking, is society as a whole. For this reform will only assert furthermore the sense of widespread impunity on building on land earmarked for special protection – it will consolidate a de facto situation, the triumph of illegality. I can only hope that the last few unblemished green remnants still standing on our coastline are in fact protected by this law. Without a resolute political willpower to back it, my faith remains low.

A lawyer can assist you ensuring your property is fully compliant of the coastal law requirements. Such properties will need to be registered under a special status following the approval of the project to amend Spain’s Coastal Law.

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.

2.012 © Raymundo Larraín Nesbitt. All rights reserved.

Quo Vadis Hispania? At a time of widespread financial uncertainty and even political instability, you may want to read a few tips that will help you stay ahead in the letting game as a landlord in Spain.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
10^th of October 2012

Original article from 31st January 2.008

Introduction

Landlords in Spain are all too familiar on having been stung by troublesome tenants that made them wish they had never let their properties in the first place.

The aim of this article is to provide some tips on the pre-emptive measures and safeguards that ought to be put in place in advance of renting to achieve a hassle-free let.

1. Tenant Screening.

One of the major problems landlords face post credit crunch is the increasing number of non-paying tenants. Many ex-pat landlords rely on a let partially or wholly to offset mortgage repayments. No one wants to be tangled in a long protracted eviction procedure which may lead a landlord into arrears or even end with his property being repossessed. Spanish lenders pursue borrowers for negative equity even in their home countries as explained in my article Spanish Creditors Pursuing Debts Abroad (Recognition and Execution of EU Member State Rulings).

One of the best ways to avoid non-paying tenants is to take pre-emptive measures such as carefully screening candidates, weeding out those with unsuitable profiles. Haphazard screening can only lead you into trouble.

There is now a helpful website available that lists non-paying tenants in Spain: ‘Fichero de Inquilinos Morosos’ (FIM). For a reasonable small fee you will be able to search – in English – if your prospective tenant has actually defaulted previously on a Tenancy Agreement. There are professional defaulting tenants that roam the country in search of their next victim, preying preferably on trustful non-residents. In hard times such as these, many struggling landlords cannot endure the hardship of a financial leach that eagerly exploits Spain’s Tenancy laws’ shortcomings.

This website’s database is continuously updated with the input provided by both eviction rulings as well as by other users’ feedback. You can additionally include your own non-paying tenants in their list providing you comply and follow the online form’s instructions. Professional non-payers – who’ve made a lifestyle out of it – will already be included in this black list.

I would advise using this website only for those candidates who’ve been shortlisted in your screening process. You might as well spend a few dozen Euros now rather than having to fork out thousands at a later date in an eviction. Better safe than sorry.

2. Arbitrage Clause

Adding this clause to a tenancy agreement allows eviction associated disbursements to be curbed down significantly as well as saving considerable time.

This system was created back in 2004 and allows to significantly reduce both the associated expenses as well as the necessary eviction time compared to a normal court procedure (which spans normally ten months). However, this system only works if both parties, tenant and landlord, abide the mandatory Arbitral Award something which does not always happen as non-paying tenants may only be buying time with no real intention of paying the arrears. On which case the matter is passed on to a judge. On average it is estimated that 30 to 40 per cent of arbitrage cases are settled out-of-court. So it is not all that is cracked up to be to be honest.

The main advantage would be the swiftness in which the arbitral award is obtained. The Arbitral Court guarantees that a case will be examined within 30 days, often even less. This is particularly important in cases in which the landlord offsets the rent against his mortgage repayments and risks slipping into arrears which may lead to a bank repossession.

The second advantage would be the considerable amount of money it saves the landlord. It only costs €40 plus a further €300 in case of a protracted conflict (£240). A normal court procedure would have an average cost of at least €2,000 (£1,600).

It is only necessary to request it in a real estate agencies of your region homologated by the Arbitral Court or simply including it as a clause in a Tenancy Agreement waiving an ordinary court procedure – at least initially.

3. Rental Insurance

Increasingly you will find more and more insurance companies offering relatively inexpensive tenancy insurance charging typically a one-time annual fee equivalent to 60% to 100% of a monthly rental. This insures the landlord against the tenant defaulting, and covers lawyers’ fees during the eviction process (up to around €2,000). They also insure different scenarios i.e. a disgruntled tenant destroying the home furniture during an eviction procedure up to a pre-agreed capped amount. Normally this amount is in the region of €3,000.

These insurance companies evaluate the credit risk of a prospective tenant unlike banks with rental bank guarantees. So basically they already do a tenant screening on your behalf as its their own money that’s at stake. However the catch is that these companies picky and may be only interested in insuring tenants which are regarded as ‘very safe’ from a financial point of view. They would be looking for a would-be tenant matching the following profile: long term job contracts (“indefinido” in Spanish) and are earning above €1,200 gross pm. Nowadays it is no small feat post Labour reform (implemented early on this year) to find such tenants. The significant change in Labour laws has translated into widespread reductions of 30 pc in Spanish wages. Not long ago a ‘mileurista’ (someone who barely earns one thousand euros a month and has attained a university degree) was socially derided; now it is the aspiration of the better part of today’s soaring unemployed youth.

4. Rental Bank Guarantee

My advice for landlords is to request from a prospective tenant what is known as a ‘rental bank guarantee’ (“aval bancario”). Commercial leaseholds are the natural niche that requires bank guarantees as these types of lets are fairly steep. But the benefits can also be extended to home rentals.

This would ensure the landlord against a tenant defaulting. The landlord may execute said guarantee and the bank would be obliged to pay them immediately. The bank in turn would claim this amount from the tenant. This bank guarantee should ideally be made to secure the following 5 years even if the tenancy agreement is only for short term.

However there is a catch, claiming on this rental bank guarantee is no substitution for an eviction procedure, rather a compliment to it. For example, a tenant may default on the second month, the landlord after having sent letters claiming the owed rental to no avail, executes the bank guarantee (which secures for example six months’ rental). But the non-paying tenant will still be living inside the property.

Ideally rental bank guarantees should be exercised after an eviction ruling, not before. It is common place that tenants on Spanish coastal areas have, naturally, no assets of their own so after an eviction process the landlord is still owed the lost rental income. The bank guarantee could then be claimed on to offset this rental loss. The tenancy contract would also have to be terminated of course for breach of contract according to art. 1124 of the Spanish Civil Code. I advise you to hire a lawyer on doing this.

In the current bleak financial context in which non-paying tenants – particularly awash in coastal areas – are defaulting, this bank guarantee would act as a heaven-sent safety net for landlords ensuring payment once the eviction process is over helping to remove most of the associated stress – because the money is already there, locked up in a bank account.

A rental bank guarantee are ideally suitable for long term tenancy’s (eleven months renewable) not for short periods such as summer lets (one month or a couple of weeks). Luxury summer lets, particularly mansions and villas, would be the exception, warranting making good use of rental guarantees because of the amounts involved.

The drawback is that a bank guarantee is expensive and requires a tenant to deposit lump sum an amount of money at their own bank, typically 12 months rental, which is left in custody. On top of this, banks normally charge 1% of the amount, notary fees, opening interest and a quarterly interest. Not all tenants find themselves in a comfortable financial position to provide this bank guarantee upfront either because they lack the funds or, even if they do, are unwilling to have it tied-up until the guarantee elapses which could be anything as long as five years.

A bank guarantee does not ensure in any manner a tenant is financially sound – you have been warned. Unlike insurance companies offering rental insurance (see point three above), banks at no time carry out a due diligence on the tenant’s assets and financial ability. It merely guarantees that a tenant deposited an amount of funds equivalent to say twelve months rental which the landlord can claim upon default. The tenant cannot dispose of said funds until the bank guarantee elapses. Notwithstanding banks may include clauses that hinder the execution of the guarantee which is why I recommend you to hire a lawyer to help arrange these guarantees and avoid abusive clauses.

This guarantee is handed over by a tenant at the time of signing a rental agreement, never after. The landlord will hold it and deliver it back once the tenancy is terminated satisfactorily with no pending amounts owed.

In Conclusion 

Careful screening and weeding of prospective tenants as well as implementing rental insurance, a rental bank guarantee and finally but not least an arbitrage clause will vastly increase your chances of successfully letting property in Spain.

Landlords that risk overlooking the above listed time-proved tips will do so at their own chagrin.

Legal services Larraín Nesbitt Lawyers can offer you

• Rentals
• Registration of Holiday Rental Homes
• Fiscal Representation (Non-Resident Income Tax)
• NIE Number (Tax Identification Number)
• Tenant Eviction Service

Related articles

• Renting in Spain: Top Ten Mistakes – 8th of June 2011
• Let-to-Buy in Spain: The Smart Choice – 8th of April 2012
• Letting in Spain: The Safe Way – 10th of October 2012
• New Measures to Bolster Spain’s Ailing Rental Market – 8th of July 2013
• Tenant Eviction in Spain – 8th of June 2014
• Holiday Rental Laws in Spain – 8th of March 2015
• House Hunting in Spain – The New York Times. June 2015
• Non-Resident Taxes in Spain – 8th December 2015
• Resurgent Spain: Málaga Sees Strong Sales – Mansion Global (The Wall Street Journal). December 2015
• Holiday Rental Laws in Andalusia (Decree 28/2016) – 8th of February 2016
• Decree 20/2002: Andalusia’s Holiday Rural Rental Decree – 8th of April 2016
• Urban Rental Law in Spain – Spain's Tenancy Act – 8th May 2016
• Renting in Spain - Landlord´s Taxation – 8th of January 2017
• Renting in Spain: Non-Resident Landlord's Rental Reliefs – 14th of January 2017
• Holiday Rental Home Taxation in Spain – 8th of July 2017

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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