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

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

Introduction

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

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

Abusive Clause: Definition

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

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

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

Collar Clause: Definition

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

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

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

Insight into Collar Clauses

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

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

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

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

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

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

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

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

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

Collar Clauses: Jurisprudence

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

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

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

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

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

Are You a Victim of a Collar Clause?

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

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

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

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

Spanish Mortgage Collar Clauses – Conclusion

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

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

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

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

Philosopher, essayist, poet and novelist

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

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

Related articles

• SWAP Clauses: Have You Been a Victim? – March 2010
• Lifetime Loans or Reverse Mortgages in Spain Explained – 21st February 2011
• Advice to Struggling Mortgage Borrowers in Spain – 8th March 2011
• Spanish Mortgage Loans: Beware of Abusive Clauses – 8th January 2012
• Spanish Mortgage Loans: An Overview – 21st February 2012
• Mortgage Collar Clauses Revisited (‘Cláusulas Suelo’) – 8th December 2013
• Bank Repossessions in Spain– 21st February 2014
• Bad Debtor’s List (‘Fichero de Morosos’) – 8th April 2014
• Spanish Creditors Pursuing Debts Abroad – 8th May 2014
• Dación en Pago Explained or How to Hand Back the Keys – 8th December 2014

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.

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

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

Original article from 21st November 2.008

Introduction

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

Dación en Pago: Definition

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

Why hand back the keys?

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

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

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

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

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

Requirements

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

Procedure

The outline of how it works would be as follows:

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

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

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

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

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

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

Expenses Involved

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

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

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

Signing the Notary Deed

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

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

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

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

If a Bank refuses it – Can I Challenge it?

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

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

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

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

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

Dación en Pago – Conclusion

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

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

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

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

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

Legal services Larraín Nesbitt Lawyers can offer you

• Dación en Pago

Related articles

• Lifetime Loans or Reverse Mortgages in Spain Explained – 21st February 2011
• Advice to Struggling Mortgage Borrowers in Spain – 8th March 2011
• Spanish Mortgage Loans: Beware of Abusive Clauses – 8th January 2012
• Spanish Mortgage Loans: An Overview – 21st February 2012
• Mortgage Collar Clauses Revisited (‘Cláusulas Suelo’) – 8th December 2013
• Bank Repossessions in Spain – 21st February 2014
• Bad Debtor’s List (‘Fichero de Morosos’) – 8th April 2014
• Spanish Creditors Pursuing Debts Abroad – 8th May 2014
• Dación en Pago Explained or How to Hand Back the Keys – 8th December 2014

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

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

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

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

Introduction

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

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

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

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

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

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

Building Insurance in Spain (‘continente’)

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

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

Contents cover (‘contenido’)

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

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

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

Spanish Home Insurance FAQs

Is it mandatory?

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

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

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

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

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

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

What if I rent out my property?

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

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

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

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

Arranging home insurance

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

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

Home insurance in Spain – Conclusions

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

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

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

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

Legal services Larraín Nesbitt Lawyers can offer you

• Home Insurance

Related articles

• Off-Plan Construction Guarantees: Know Your Rights – 8th November 2011
• How to Cancel your Home Insurance Policy in Spain – 8th January 2013
• Community of Owners’ Insurance Policies – 8th August 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.

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

Article copyrighted © 2013. Plagiarism will be criminally prosecuted.

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

Spanish residency permits for property investors

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

A Law For Entrepreneur And Property Investors

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

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

Investors’ General Requirements

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

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

Distinction between Investor Residency Visas and Residency Permits

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

This law distinguishes two types of permits:

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

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

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

Investor Residency Visas

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

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

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

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

Investor Residency Permits

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

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

Spanish “Golden Visa” Residency / Visa Permit FAQs

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

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

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

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

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

Yes eventually, assisted by lawyers specialising in residency.

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

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

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

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

6. Are there any strings attached?

None, besides parting with your money.

7. Just the investor, or investor and family?

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

8. Are taxes included in the investment threshold?

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

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

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

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

Through us, just contact us.

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

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

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

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

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

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

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

Legal services Larraín Nesbitt Lawyers can offer you

• Golden Visa
• Conveyancing – Buying
• Fiscal Representation (Non-Resident Income Tax): Tax Model 210

 Golden Visa related articles

• Buying Distressed Property in Spain – 8th August 2011
• Buying Resale Property in Spain – 21st February 2013
• Buying Off-Plan Property in Spain – 8th of June 2013
• 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
• House Hunting in Spain – 17th June 2015. The New York Times
• Taxes on Buying Spanish Property – 8th July 2015
• Non-Resident Taxes in Spain – 8th December 2015
• Golden Visa Spain – 8th June 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.

2.013 © Raymundo Larraín Nesbitt. All rights reserved.

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

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

Is community of owners insurance mandatory in Spain?

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

How is it funded?

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

What does it normally cover?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

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

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

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

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

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

Legal services Larraín Nesbitt Lawyers can offer you

• Community of Owners

Related articles

• The Comunidad de Propietarios (Ley de Propiedad Horizontal/ Commonhold Law) – 8th July 2012
• Community of Owners in Spain: Challenging Assembly Resolutions – 10th October 2011
• How to Cancel your Home Insurance Policy in Spain – 8th January 2013
• 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.

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

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

Introduction

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

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

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

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

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

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

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

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

Major Highlights of Spain’s Amended Rental Law

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

Conclusion: more beating around the bush

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Legal services Larraín Nesbitt Lawyers can offer you

• Registration of Holiday Rental Homes
• Rentals
• Fiscal Representation (Non-Resident Income Tax)

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
• Resurgent Spain: Málaga Sees Strong Sales – Mansion Global (The Wall Street Journal). December 2015
• Non-Resident Taxes in Spain – 8th 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 Tax Relief – 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. No politician was harmed on writing this article. VOV.

2.013 © Raymundo Larraín Nesbitt. All rights reserved.

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

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

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

Original article from 18th April 2.010

Introduction to buying off-plan property in Spain

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

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

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

Your guess is as good as mine.

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

Tips on Buying Off-Plan Property in Spain

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

1. Hire a Qualified Registered Lawyer

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

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

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

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

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

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

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

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

3. Has the Developer Attained Planning Permission?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The LFO is important mainly for two reasons:

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

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

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

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

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

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

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

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

6. Ghost Developments

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

7. Coastal Laws

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

8. Buy-to-Let

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

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

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

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

9. You do have a NIE number, right?

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

10. Applying for a Mortgage Loan

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

11. Snagging List

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Buying Off-Plan Property in Spain – Conclusion

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

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

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

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

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

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

Must-reads on the subject:

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

Buying off plan. SPI article from 2010

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

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

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

Legal services Larraín Nesbitt Lawyers can offer you

• Conveyancing – Buying
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Related articles

• 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 (Dispelling Spanish Inheritance Tax Myths) – 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 – Interview with The New York Times. June 2015
  
• Taxes on Buying Spanish Property – 8th July 2015
• Non-Resident Taxes in Spain – 8th December 2015
• Resurgent Spain: Málaga Sees Strong Sales – Interview with 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
• How to inspect an off-plan property overseas – Interview with The Sunday Times. 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.

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

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

Related articles

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.