Licence of First Occupation Explained

Raymundo Larraín Nesbitt, April, 8. 2013

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

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

 

Fact sheet from 2.005

Original article from 29th January 2.009

Abridged article here: Licence of First Occupation

 

Introduction

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

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

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

What is a Licence of First Occupation?

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

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

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

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

A Dissected and Demystified LFO

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

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

Capture

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

Why do you need a LFO?

The LFO is critical for two reasons:

1. Its granting means the developer has built the dwelling complying fully with the original town hall’s Building Licence (BL) as well as complying with all Planning laws. The inspection to grant this Licence is carried out by town hall’s chartered technicians who certify the dwelling is in full compliance of Health, Access, Security, Planning and Construction Laws and is deemed as apt for human habitation.

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

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

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

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

Is Every Off-plan Development Issued a LFO?

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

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

What are the Risks of not having a LFO Granted?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Should I Complete Without a Licence of First Occupation?

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

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

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

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

Can I be forced to complete without a LFO?

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

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

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

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

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

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

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

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

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

Specific focus on Andalucía

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

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

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

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

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

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

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

The issuance of the LFO by a town hall is the major milestone in the off-plan procedure. In fact, from a legal point of view, it marks the turning point whereby the property is now deemed to have been delivered legally to the purchaser. Once the LFO has been attained and the developer has sent you a registered letter compelling you to complete within a deadline before a notary public, you should no longer withdraw from the PPC and litigate (specifically read point three in the link supplied) for a refund as you are bound to lose at court. That is why it is known as a ‘forced completion.’

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

Conclusion

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

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

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

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

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

 

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

 

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

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

 

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

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Bank Guarantees in Spain Explained with an Example

Raymundo Larraín Nesbitt, April, 8. 2013

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

Original article from 12th November 2.008

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

 

Introduction

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

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

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

Bank Guarantees for Off-Plan Property in Spain

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

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

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

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

What is a Spanish Bank Guarantee?

A Spanish bank guarantee can be either an insurance policy or a guarantee issued respectively by an insurance company or a bank. In this article, for simplicity’s sake, I will group both types under the generic term ‘bank guarantee’. A bank guarantee’s purpose is to secure the full amount of deposits paid by off-plan purchasers. It secures the initial reservation deposit, which strikes the property off the market, the interim or stage payments as well as the applicable VAT paid on said amounts. On top of this you are also entitled to the legal interests on the amounts secured. Bank guarantees are mandatory and should be available to all buyers of new-build property.

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

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

How long does the Protection of a Bank Guarantee Last?

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

A Bank Guarantee, Dissected and Demystified

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

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

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

The Law’s Wording

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

 

Brief Overview of Law 57/1968

 

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

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

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

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

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

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

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

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

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

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

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

Artículo cuarto

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

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

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

6. Article 6 has been revoked.

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

 

Types of Bank Guarantees in Spain

 

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

Standard Bank Guarantee

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

‘Aval a primer requerimiento’

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

 

Obtaining a Bank Guarantee

 

Who requests a Bank Guarantee?

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

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

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

When are Bank Guarantees Issued?

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

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

Bank Guarantees on Self-Built Properties

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

 

Common Bank Guarantee Pitfalls

 

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

I will list the most common:

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

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

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

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

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

Bank Guarantees – Conclusion

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

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

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

 

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

 

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

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

Legal services Larraín Nesbitt Lawyers can offer you

 

Related articles

 

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

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Buying Resale Property in Spain

Raymundo Larraín Nesbitt, February, 21. 2013

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

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

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

Original article from 31st January 2.010

 

Introduction

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

1. Hire a Qualified Registered Lawyer

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2.Has the Property Been Registered Properly?

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

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

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

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

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

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

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

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

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

If you are buying a resale, make sure it is not within the protected area of Public Domain or else you may risk your house being pulled down, at your expense, by the local Authorities. Spain’s Coastal Law was passed in 1988 but it hasn’t been until recently that the Government decided to enforce it harshly.

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

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

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

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

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

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

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

6. Are There Tenants Living in The Property?

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

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

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

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

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

7. Know Your Owner’s Rights

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

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

8. You do have a NIE number, right?

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

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

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

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

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

Once you have acquired your new property, you will now have to face all the associated running expenses. Make sure you have budgeted this carefully so as to avoid unpleasant surprises! Some of the luxury gated communities with lush tropical gardens and beautiful infinity pools that dot the Spanish coastlines may have pretty steep maintenance expenses. Any unpaid community bills will result in the Community of Owners placing a charge against your property which may lead to auctioning it off publicly to recoup the debt! This legal procedure in Spain works fairly efficiently (as in twelve months on average).

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

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

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

 

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

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

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

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

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

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

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

Buying Resale Property in Spain – Conclusion

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

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

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

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

 

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

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

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

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

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

Legal services Larraín Nesbitt Lawyers can offer you

 

Related articles

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

 

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

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

 

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How to Cancel Your Home Insurance Policy in Spain

Raymundo Larraín Nesbitt, January, 8. 2013

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

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

 

Introduction

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

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

 

Applicable Legislation

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

The Two-Month Notice Rule

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

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

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

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

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

How to Notify: by recorded delivery

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

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

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

 

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

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

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

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

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

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

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

 

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

 

Spanish home insurance cancellation FAQs

 

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

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

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

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

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

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

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

And in the event of death?

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

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

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

In Conclusion

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

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

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

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

 

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 Related article

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.

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Fiscal Novelties Affecting Spanish Property Owners

Raymundo Larraín Nesbitt, December, 8. 2012

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

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

 

 

 

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

 

Introduction

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

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

 

Batch of Changes

 

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

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

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

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

+ Residency in Spain for property investors

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

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

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

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

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

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

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

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

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

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

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

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

Legal services Larraín Nesbitt Lawyers can offer you

 

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

2.012 © Raymundo Larraín Nesbitt. All rights reserved.

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Proposed Amendments to Spain’s Coastal Law – Amnesty

Raymundo Larraín Nesbitt, November, 8. 2012

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

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

 

Introduction

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

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

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

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

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

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

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

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

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

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

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

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

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

The Key Legal Misunderstanding

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

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

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

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

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

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

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

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

 

Highlights of the Proposed Amendment

 

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

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

In Conclusion

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

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

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

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

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

 

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

2.012 © Raymundo Larraín Nesbitt. All rights reserved.

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Letting in Spain: The Safe Way

Raymundo Larraín Nesbitt, October, 10. 2012

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

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

 

 

Original article from 31st January 2.008

 

Introduction

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

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

1. Tenant Screening.

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

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

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

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

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

2. Arbitrage Clause

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

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

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

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

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

3. Rental Insurance

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

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

4. Rental Bank Guarantee

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

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

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

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

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

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

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

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

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

In Conclusion 

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

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

 

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

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10 reasons why your case against a developer may be thrown out of court in Spain

Raymundo Larraín Nesbitt, September, 8. 2012

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

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

 

Original article from 30th September 2.008

 

Introduction

This article should not be construed as a defence of developer’s interests, but rather as a cautionary tale to dissuade potential plaintiffs from engaging reckless litigation which may leave them seriously out-of-pocket.

The following points are by no means to be taken in any particular order or even as a closed list.

1. Suing close to the scheduled delivery date of an off-plan property

If you sue too close to the scheduled delivery date of the property your case may be dismissed. Some people mistakenly think that they can sue a developer as soon as he fails to comply with the obligation of delivering a property within a certain stipulated deadline worded in their Private Purchase Contracts (henceforth PPC). A reasonable timeline for litigation, as a general rule, would be 6 months after the deadline set in the PPC to deliver the property but cases differ depending upon different circumstances. There may be automatic extensions in the PPC granting a developer a grace period of, for example, three months. These must be expressly accepted by the purchaser. If you do accept them then the delivery date is pulled back accordingly so they must be taken on board on calculating the amended delivery date. It does not suffice that you receive a letter informing you of the grace period – you must accept it.

EDIT May 2015: Spain’s Supreme Court has changed this and allows it on suing on off-plan properties relating to bank guarantees. Please read my article (Spain’s) Supreme Court Rulings on Bank Guarantees for more details.

2. Suing when a Force Majeure has taken place

This second point is related to the above. If you happen to sue a developer who can allege a cause of Force Majeure such as hard rain, general strikes, adverse or extreme meteorological conditions etc. If the developer can successfully prove in court that a Force Majeure took place during the construction period then he will be allowed legally to offset the lost days on calculating the delivery date which will be pulled backward.

3. Suing when a LFO has already been granted

A First Occupancy Licence (LFO) is a licence which is issued by the town hall where the property is located and which verifies the development fully complies with the original Building Licence (BL) granted by said town hall as well as complying fully with all Planning laws. Upon the granting of a LFO by the town hall the dwelling is regarded as legal and fully fit for human dwelling. It is considered as already too late to pull out and litigate once the LFO has been granted as under law the developer is regarded as having complied fully with his main obligation of handing over the property. Additionally if a judge considers that a development has been granted validly the administrative Licence of First Occupancy by means of a special administrative procedure known as Administrative Silence Rule (ASR) from the town hall or there is a general consensus on this point then it is not wise to sue. If a LFO is obtained through the ASR it is just as valid as a normal one obtained expressly through a town hall under Spanish Administrative Law. It is pointless to challenge an ASR licence as it is perfectly legal in our legal system, providing it wasn’t obtained breaching any planning laws.

4. Suing for breach of contract when you are likewise at fault

If you sue a developer for breach of contract when you in turn have not been complying with the fundamental obligation of paying him regular instalments or stage payments as set forth in the PPC. The judge will consider that you cannot allege the developer being in a breach of contract when you have previously breached the PPC yourself. In fact, you are the one at fault as your main obligation as a purchaser is to always pay in time according to the contracts’ clauses.

5. Suing on non-essential grounds

If the reason why you file a law suit is not deemed as ‘essential’ by a judge i.e.

– You sue a developer because on doing the snagging list you realise that the promised ‘commanding view over the sea’ is not so and all you have from your terrace is a flimsy view of your neighbour’s back garden brick wall.

-The infinity swimming pool and state-of-the-art sport facilities have not been built to the promised standards – or even worse, not built at all.

This lawsuit will most likely fail if you are trying to pull out and claim back on your full stage payments only because of this. Only if the PPC included a specific clause by which the sea views were regarded as essential to you would you be allowed to pull out and claim for a full refund successfully without being penalised. A different matter altogether would be if you sue post completion seeking compensation on the lost view. The question would be really if it’s worthwhile to pursue litigation in such a case. Perhaps it would be wiser to negotiate and agree on a suitable compensation such as free installation of a/c or even negotiate a reasonable price reduction upon completion.

6. Suing on grounds of a lack of a Bank Guarantee

If you feel tempted to sue a developer because he has not provided you with the mandatory Bank Guarantee on buying an off-plan you will most likely lose. One cannot cancel a contract and demand full payment of your stage payments on such grounds.

EDIT May 2015: Spain’s Supreme Court has changed this and allows it on suing on off-plan properties relating to bank guarantees. Please read my article (Spain’s) Supreme Court Rulings on Bank Guarantees for more details.

7. Suing without being regarded as a consumer

It is important to take notice than when you buy a significant amount of off-plan properties, i.e. three, you may no longer be regarded by the judge as a consumer but rather as a shrewd professional businessman or businesswoman. This is important because it will mean you will no longer be under the protection of Spain’s’ favourable Consumer laws. Consumer laws are an effective tool at times to mount pressure on developers.

8. Suing on excessive compensation grounds

On suing in Spain one must bear in mind that the legal system is very different from that of Case Law which exists in English-speaking countries. One of the major differences regards claiming on compensation. Unlike the United Kingdom or the U.S. whereby a judge may award you a huge compensation, this is very unlikely in Spain. A lawyer ought to be cautious on suing as being overambitious may be counterproductive. This may imply that for example if the lawyer over requests compensation the judge can actually sentence that the plaintiff has to share in the legal expenses of the court procedure despite having won the hearing. Whereas if the plaintiff had in fact been less ambitious it would have not backfired on him and the judge may have sentenced that it is the defendant who actually has to pay for all the plaintiff’s legal expenses (both lawyer and procurador). Spanish judges have a wide margin of subjectivity to construe when it comes to establishing capital appreciation or depreciation of a dwelling or on claiming moral damages or damages in a broad sense.

9. Suing lacking the necessary documents to prove your petition

It is necessary the plaintiff gathers a sufficient amount of documents prior to litigating. The documents which the plaintiff should have available are namely a copy of the original Private Purchase Contract and all original invoices of the stage payments or bank statements including the initial reservation fee. The invoices of bank statements proving the transfer of funds are of paramount importance as in fact the whole law suit will hinge on them.

10. Suing using the wrong legal procedure

This occurs when you sue a developer following a Criminal procedure when you should have followed instead a Civil on. In this case you will have wasted considerable time and money following a wrong venue.

In Conclusion

As a drawing conclusion, it is not advisable in general to sue a developer which has no assets under his name as the funds spent in a lawsuit would be a complete waste of both money & time. In short it would be putting good money after bad. That is why on suing it is the advisable your litigation lawyer locates and secures assets lodged under the developers’ name and requests from a judge, if needed be, to place a provisional charge on them (embargo) on suing. This will effectively avoid the developer selling off these assets as they now have a legal hold placed on them. This encumbrance will ensure your financial interests depending on the ruling’s outcome.

Litigation should never be taken light-heartedly and it is necessary that a lawyer expert in litigation analyses your legal situation to determine if litigation is really a worthwhile option for you. Professional lawyers will always layout clearly your legal options and let you decide which one to take.

“Pleitos tengas y los ganes” – Gipsy curse.

Loosely translated as “May you find yourself in many (legal) problems and win (but at a great cost to you)”.

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

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

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

2.008 and 2.012 © Raymundo Larraín Nesbitt. All rights reserved.

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Non-Residents: Six Advantages of Making a Spanish Will

Raymundo Larraín Nesbitt, August, 8. 2012

Solicitor Raymundo Larraín Nesbitt explains why it is almost essential, for non-residents owning property, to make a will in Spain in lieu of drawing up a national one to dispose of their Spanish estate. He also sheds some light onto Spain’s Inheritance Taxation system so as to cast aside some increasingly widespread misconceptions.

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

 

 

Original article from 3rd September 2.009

 

Spanish Inheritance Tax Overview

 

The topic of Inheritance in Spain is a fairly complex and technical one, allowing for multiple articles on the matter.

Besides a general legal framework which is applied nationwide (Law 29/87 andOrdinance 1629/1991), each of the 17 existing autonomous regions that make Spain are additionally empowered to rule on some aspects enacting their own laws i.e. on applying their own tax allowances.

There’s an ongoing trend to abolish Spanish Inheritance Tax fostered by Spain’s conservative party. These trends are always very popular amongst voters. Many Autonomous Regions have jumped onto the band wagon and are now applying reductions on IHT to such an extent which in practice translates to almost suppressing it i.e. Madrid, Basque Country, Navarre, Valencia, Balearic and Canary Islands.

Other regional communities, despite not having suppressed IHT, apply their own tax allowances in addition to those set by the Government in the above laws. Such would be the case of Andalusia in which beneficiaries, resulting from a death occurred after the 7th of June 2008, may benefit from the following regional tax allowances:

– Reduction of 99.99% in the IHT taxable base on inheriting the family home (deaths occurred since the 1st January 2003). This requires the beneficiaries to be resident in Spain.
– Reduction of 99% in the IHT taxable base on those inheriting a business – providing certain criteria is met.
– No IHT paid on the Estate itself on compliance with certain requirements (i.e. inheritance taxable base < €175,000 heirs are next of kin or spouse, heirs pre-existing net wealth < €402,678 ).
– No IHT paid by physically handicapped (disability above 33%) with a taxable base < €250,000.

For more detailed information on Spain's Inheritance Tax, I advise you read my two in-depth articles on the matter:

 

Is the Dread on Spanish IHT Justified? Not so.

Spanish Inheritance Tax has been grossly overblown over the last years by a minority with a vested interest in peddling doubtful financial products or else complex holding structures to non-residents at large who, in most cases, are in no real need of them.

These ‘creative’ solutions often involve high setting up fees as well as high annual costs that can altogether negate the sought tax mitigation. Besides, you run the risk that if you decide to sell the property later on in life, for whatever reason i.e. health issues, some purchasers’ lawyers may turn down deals when the property is locked up within a string of holding companies because of the associated legal risks. Naturally these companies can always be wound up – at a prohibitive expense – to sell on the underlying property although it may take some time. And last, albeit not least is the point on who’s really in control of such corporate structures.

I just have to make a special mention of equity release schemes that were sold by unlicensed agents in Spain to senior affluent foreigners. These schemes were supposedly devised to avoid or greatly reduce Spain’s IHT. The way they worked is that you borrowed money against your villa by placing a mortgage against it. The borrowed funds were put to work in some ‘safe’ offshore fund which gave a ‘guaranteed’ yield of 5% p.a. The theory was that the yield would pay off for the high setting up fees and ongoing expenses, almost self-financing itself – too good to be true. In this manner, on passing away, the estate went untaxed as it already had a lien against it – that’s the theory or sales pitch.

In practice things panned out very differently for these would-be-investors who ended losing both their homes and the borrowed money – which they never saw by the way –to these unscrupulous lenders as the property market took a nosedive. There were clauses ‘hidden’ within them that triggered repayment – in full – to lenders if the value of the collateral fell by more than 20 pc. By then your ‘safe’ yield was making a massive loss and as most of these borrowers were asset rich but cash poor they were forced to surrender the property – which acted as collateral – to these lenders.

Basically what these lenders were really doing was to buy trophy homes for a fraction of its market price. They knew very well that the invested funds would soon be in the red. And they let the magic of compound interest do the rest with owed funds increasing exponentially over time as losses continued to mount. It was only a matter of time until you were notified to either provide additional security or else surrender the collateral. It was pay up or put up.

It was always apparent to me – I am slightly pessimistic – that property prices were going to nosedive significantly post boom. You just cannot seriously expect real estate to appreciate by over 300pc over an eight-year period in Spain not to fall significantly over the following years – not to mention how very overvalued these properties were to start with by surveyors for the purpose of applying for a mortgage loan. Surveyors who were strongly ‘recommended’ by lenders but who oddly enough were paid for the borrower himself.

The more the property was worth, the more the borrower could borrow tightening the noose around their neck even further should the market turn the corner. Because the more you borrowed the easier it became to lose your property on a market downfall. The writing is on the wall.

I add that in my career I refused point blank to sign such contracts while working for a British law firm that heavily promoted them on the costas. I will still recommend anyone who wants to hear to steer well clear of such contracts. Not to be confused with lifetime loans in Spain which are wholly different and have no purpose of mitigating your heirs’ IHT bill and – needless to say – the loan is not invested in exotic offshore investments – you do as you please with it.

Worthwhile mentioning is the Spanish Tax Office’s clamp down on such structures as of late, eager to offset the shortfall in property tax revenue. The bottom line is that these solutions may prove unsuitable for most people, requiring a careful case-by-case approach.

IHT’s most onerous cases are related to the transfer of large estates or assets bequeathed to distant relatives or non-family members such as friends (Group IV). It is in both of these cases, which are a minority, in which the IHT liability can be high, too high, reaching even 81,6%, which is tantamount to expropriation in my opinion. Hence the need of tailored tax planning which may indeed – at times – justify setting up corporate structures, for tax mitigation purposes, on such cases.

The key to successfully mitigate Spain’s IHT is to plan ahead prior to the purchase of a property in Spain.

Isn’t a Will Drawn up in the U.K. or in the R.O.I. Valid?

A UK or Irish will are perfectly valid to bequeath assets located in Spain. Having said this, many practical problems stem from this that could easily be overcome by means of having made a Spanish will.

So why is it then ‘essential’ to make a Spanish Will?

Fairly often people just don’t realise they are adding unnecessary stress and expenses to their loved ones at a time of bereavement by not having drawn up a Spanish will. For all those owning property in Spain it is highly advisable you make a Spanish will which will be complementary to the will you’ve already made in your own home country.

However I would just like to clarify that making a Spanish will doesn’t avoid you being liable for Spanish IHT in any way whatsoever.

Drawing up a Spanish will, to dispose exclusively of your Spanish estate, has a number of advantages for your beneficiaries, all having to do with saving them time, money and hassle.

 

Making a Spanish Will: The Advantages

 

1. A Spanish will is exclusive to your assets located in Spain. It doesn’t preclude any will you may draw up in your home country whether before or after. This means that the Spanish will won’t overrule your national will and affects only your Spanish estate – providing your national will holds no provisions on Spanish assets.

2. Drawing up a Spanish will may help your heirs mitigate their tax bill. There’s a deadline of 6 months as from the time of the testator’s demise to file and pay Spanish Inheritance Tax. You can request a one-time six-month extension or deferral within the first five months of the death but heirs may still have to pay the penalty and/or delay interests depending on how late they actually pay (totaling 12 months). You can also request to fraction the IHT paying in instalments up to five years. After the six months deadline has elapsed your beneficiaries will incur in penalties for late payment typically ranging from 5%, 10% and 15% if paid in the next 3, 6 and 12 months as from the said deadline. If payment is made after 12 months from the deadline a surcharge of 20% is applied besides the accrued delay interests. Bear in mind that deposit monies held at a bank will be frozen upon death – access to them will be restricted until the IHT is settled with the tax authority.

Spanish wills have the advantage that they can be executed almost immediately whereas a UK or Irish one will no doubt exceed the six-month deadline attracting penalties from the Spanish Tax Office for late payment. The reason is that a Grant of Probate must be followed in your home country which takes a long time in my experience and besides is fairly expensive. It is usual that foreign wills take in excess of a year or more to be executed in Spain. This translates into higher expenses borne by your beneficiaries due to the surcharge for late payment incurred on surpassing afore mentioned six-month deadline.

So in a way, making a Spanish will helps to mitigate your heir’s tax bill as it will ensure they will be able to file IHT within the stipulated legal time frame of six months without attracting penalties and surcharges which could have been so easily avoided.

3. Drawing up a Spanish will saves both money and hassle. On making only a national will your beneficiaries will have to translate all documents (death certificate, will) into Spanish by a sworn translator, notarise them and affix to each of them the Apostille seal of the Hague Convention of 5th October 1961. They will also have to obtain a Grant of Probate which must also be translated into Spanish and apostilled. Additionally a Certificado de Ley (certificate of legal compliance) may be necessary explaining the inheritance procedure in a foreign country.

The above greatly – and unnecessarily I may add – increases the expenses for your beneficiaries besides delaying significantly the whole transfer of estate procedure; thus attracting the penalties highlighted in my point two above. A Spanish will eliminates the need to follow all the above steps.

4. Spanish wills are stored safely at no extra charge. On you making a Spanish will you will be given only a “copia simple” (simple copy) or “copia autorizada”. The original is stored by the Notary in his files for record. The Notary will send off to Madrid the details of this will to a registry known as “Registro General de Actos de Última Voluntad” (Central Registry of Last Wills) for safekeeping. Your beneficiaries can always request an authorised copy (“copia autorizada”) of the testator’s last will from the Notary who witnessed it. You can always know before which Notary it was made (if you happen not to know it) by means of requesting a “Certificado de Últimas Voluntades” from the aforementioned Central Registry of Last Wills. It’s just an A4 sized sheet of paper from the Ministry of Justice with the seal of the said registry which specifies which Spanish Notary witnessed the last will and the date on which it was made. The latest will always overrule any prior will unless specified otherwise.

Should you lose your copy, the notary office burn down or you simply don’t know before which Spanish Notary the will was made don’t panic, it doesn’t matter really. All Spanish will’s details are stored safely in the said registry free of charge. One can always request a copy and they will let you know before which Notary it was witnessed if you believe you are a beneficiary. You will have to provide an original death certificate (translated into Spanish with the Apostille seal affixed if the death occurred abroad) and the original “Certificado de Últimas Voluntades” (Certificate of Last Will). The Spanish death certificate is obtained from the civil registry in the municipality in which the death took place.

Be wary of opportunistic companies – read con – that charge you an annual fee to store ‘safely’ your Spanish will with state-of-the-art technology. As read above, this is unnecessary and they are just taking advantage of you.

5. Spanish wills drawn up before a Notary Public (Open wills) add security. Making a will is a personal act. It cannot be granted by means of a proxy. Normally these wills are set out in double column (Spanish and your native language) so you fully understand what you are signing. They are drafted by your appointed lawyer. If your command of Spanish is low it will be compulsory you draw up the will assisted by a translator (which can be an acquaintance with a good grasp of Spanish or typically your own lawyer) who will also sign it. The Notary will read out aloud the will in Spanish to make sure you fully understand and agree with its content. All this adds to the security on you granting a will in Spain.

6. The content of a Spanish will is governed by your own national laws. This means that you are not constrained by Spain’s forced heirship rules. Additionally, If you are British or Irish you have free testamentary disposition in Spain meaning you can make a will exactly the same as you would in the U.K. or in the R.O.I. albeit with all the additional advantages I’ve highlighted above for your loved ones.

Right, you’ve convinced me – what’s the next step for my heirs?

Once heirs have all three documents:

1. Original death certificate
2. Certificate of Last Will
3. Notarised copy of the testator’s last will

They may now obtain what is known as a Deed of Declaration of Acceptance of Inheritance (‘Escritura de Aceptación de Herencia’) before a Spanish Notary Public. With this deed they are now able to file, pay and lodge the death duties.

Only once IHT is paid and lodged – never before – will the property be registered under the beneficiaries’ name at the Land Registry where the property is located. Once registered, the property can be disposed of freely i.e. they can sell it on. Heirs cannot mortgage or sell any of the estate’ assets, such as the Spanish home, to pay IHT as it still doesn’t belong to them legally. This is something that escapes many as they are banking on the Spanish estate itself to foot the tax bill – won’t happen.

In Conclusion

It is important to plan ahead to mitigate IHT, especially on large estates. A specialised lawyer can greatly reduce or even eliminate completely exposure to this tax. IHT rules vary widely from one region to another. There’s an ongoing trend to abolish IHT in Spain.

Ideally foreigners should make two wills; one in their home country ruling on their national assets and a second Spanish will drawn up in Spain which will rule exclusively on their Spanish estate. Spanish wills can be drawn up in Spain (Notary) or else at a Spanish consulate.

A Spanish lawyer can assist you both making and executing one.

“In this world nothing can be said to be certain, except death and taxes” – Benjamin Franklin.

Founding Father of the United States. Exceptionally gifted scientist, inventor, diplomat, writer, printer, postmaster and political theorist. Even politician in his spare time; nobody’s perfect.

 

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

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

 

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

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Community of Owners, or Comunidad de Propietarios

Raymundo Larraín Nesbitt, July, 8. 2012

On buying property in an urbanisation, or block of flats, you automatically become a member of what is known as a “Community of Owners”, CO for short. The CO is composed of all the owners of property within the same development or building. This is a revamped article from my original article dating back to June 2.009.

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

 

Original article from 26th June 2.009

 

Introduction

Community of Owners is an article which gist is to provide some guidance on what becoming an owner in a community entails, with particular focus in Andalusia.

I strongly recommend reading the law itself as I have considerably abridged the sections pursuant to it, on reviewing them, giving only a brief overview of what they entail.

This is a link to the Commonhold Act in English as amended by Law 8/99 & others, courtesy of Castillo Traductores.

General Legal Framework

There is a legal framework acting nationwide as the backbone to all communities in Spain, set out by the Commonhold Act 49/60 (aka Ley de Propiedad Horizontal, Horizontal Property Act, or else Commonhold Act) and by the Spanish Civil Code (arts 396 et seq).

The Law on Horizontal Property was amended most significantly by Law 8/99, amongst others, to update it to social reality.

Bylaws and Community Rules

In addition to the above general laws, the day-to-day running of each community is really determined by the Communities’ Bylaws (Statutes) which are drafted at the time of lodging the Master Deed (aka Escritura de División Horizontal or Horizontal Deed). Unanimity is required to amend either the Master Deed or the Community Statutes (arts 5 and 17). So in practice it’s quite a feat to change either of them.

That’s why a community may, at its own discretion, approve its own Community Rules (in Spanish Normas de Regimen Interno or Normas de Funcionamiento de la Comunidad de Propietarios), which are not to be confused with the above Community Statutes. These Community Rules need only a simple majority vote to be approved and amended so as to waive the unanimity rule. They allow for great flexibility and will rule, for example, on communal services such as garbage collection or the use of communal facilities such as the swimming pool or lifts. They cannot rule on matters reserved only to Bylaws.

Normally, on buying off-plan, there will be a clause by which the purchaser allows the developer to draft and lodge the Master Deed as well as the Community Statutes at the Land registry. Owners may later on amend these, complying with the strict majorities that are required by the Commonhold Act (unanimity).

This means that every development may enact their particular laws governing it but always subject to, and, in compliance with the general legal framework that must be respected at all times. Bylaws will rule for example the Community’s governing bodies such as the need or not of the role of a vice-president or how must the owners be notified in advance of an owner’s assembly.

Bylaws stem from Spain’s Commonhold Act and adapt it to the requirements of each particular CO. That’s why each CO has its own unique Bylaws, tailored to suit their individual needs.

Naturally, in this article I can only offer a general overview of the shared legal framework and concepts which underpin all communities without focusing on particular Bylaws, which are unique to each CO.

Commonhold Quota

On drawing up the Master Deed before a Notary, every property within the community is assigned a quota or percentage thereof. This quota is composed both of privative and communal elements which are assigned to each property. Store rooms and garages are included as well for this purpose.

A quota is important mainly for two reasons:

1. The expenses of the community will be allocated in proportion to your quota. So the larger the quota, the more you will have to contribute. These can be paid monthly, bi-monthly or even quarterly depending on the Community Rules.
2. Secondly, on voting at owners’ assemblies, the quotas need to be tallied for majority vote purposes. So, each owner does not equate to one vote. There may be a single owner, such as a developer, holding a significant communal quota which translates into great voting power. The resolutions reached bind all units within, regardless of whether they cast an opposing vote as majority rules apply (read below).

Owners’ Duties

Section 9 rules them in detail. The main duty will be, of course, to contribute to the maintenance and financial upkeep of the CO.

Failure to pay the community fees will result in the CO placing a lien against your property and possibly auctioning it off. This legal procedure in Spain works surprisingly efficiently. You have been warned!

This important article mentions as well the endowment of the communities mandatory reserve fund, in accordance to each owner’s commonhold quota. The purpose of this fund is to create a financial pool for the maintenance and repair of the building i.e. façade’s flaked painting or lift repair work. This reserve fund shall be endowed with an amount not lower than five percent of its last ordinary budget. Its funds will be used as well to pay for the building’s insurance cover.

On buying a resale in a community, the new owner will be held liable for the prior owner’s communities’ debts for the current year of transfer of ownership as well as the natural year immediately precedent (art 9 e). The property itself will be burdened with a lien for unpaid communal debts.

Which is why under law, the signing of the deed of transfer of ownership requires a Communities’ certificate stating that communal fees are up-to-date for that unit, signed by the communities’ administrator. The purchaser can however waive this requirement voluntarily – not advisable.

It is also very important to find out – prior to buying a property in an urbanisation – what your quote translates to in terms of monthly contribution. Some of those private gated communities that lure you with their breath-taking views, lush tropical gardens and dream-like infinity pools command steep monthly fees. You have been warned!

Communities’ Governing Bodies

Art 13 establishes the governing bodies are the Owners’ General Assembly (whether annual or extraordinary), the president (vice-presidents are optional), the secretary and the administrator.

Presidents and vice-presidents must be appointed from among unit owners only. The roles of secretary and administrator can be held by unit owners as well as by outsiders providing the latter hold the necessary professional qualifications and are legally licensed to perform such roles.

The Statutes will be the ones which detail exactly what roles exist in each Community of Owners.

Owners’ Assemblies (AGM’s and EGM’s)

At least once a year an AGM will be called to approve the budget and accounts. An EGM may additionally be called at anytime, needing 25% of the unit owners’ quotas.

The notification must be given with a minimum of 3 days’ notice. This creates practical problems to non-residents owning second homes in Spain. Therefore, communities with a high number of non-resident owners may include in their Bylaws more realistic notices of, say, 14 days and to be notified by e-mail in addition to placing it on the Community’s Notice Board. There’s freedom and flexibility to rule on this as each community deems fit in accordance to their own needs and circumstances. Logic should prevail.

Majority and Unanimity Votes

Section 17 deals with when unanimity votes are required. Basically, unanimity is necessary for modifying the rules contained, either in the Master Deed or in the Community’s Bylaws.

A majority vote (three fifths of the owners’ assessed quotas) is required for things such as the lift service, janitors, security services or any other common service or facility. This type of majority vote will be the one used to decide on the Community Rules. Proxy votes are also allowed. Only owners who are up-to-date with their community fees may vote at owners’ assemblies.

You may find that in new unsold off plan developments, a developer may hold the majority vote as he still holds a large stock of unsold units. Conversely, it can be its lender, if they have taken over the developer’s units. Either way, they are both obliged to contribute to the communities’ upkeep, paying their communal fees in proportion to their communal quotas, like everyone else.

Resolutions of the General Assembly

Section 19 deals with the recording of the resolutions reached. They will be recorded in a book of minutes, validated and stamped by the Land Registrar.

A copy of the meeting’s minutes will be sent to each owner with the adopted resolutions following the AGM or EGM.

The secretary will act as the custodian of the general meetings minutes book.

Challenging General Assembly’s Resolutions

Section 18 rules on how assembly resolutions can be challenged at court. I’ve written a specific article on the matter due to its complexity: Community of Owners in Spain: Challenging Assembly Resolutions – 21st October 2011.

This can be done on three accounts:

a) When such resolutions are contrary to Law or the Community Statutes;
b) On them being seriously detrimental to the interests of the community and benefit one or several unit owners.
c) When they are seriously detrimental to some unit owner who has no legal obligation to sustain such detriment or when they have been adopted in abuse of power.

There are four deadlines depending on the matter. The most important deadline is the 3-month-rule. Or else a year if a resolution is against the Law or the Community Statutes. I would always advise challenging a resolution before the three-month deadline is up as a judge may not agree with you that the adopted resolution is against the law or community statutes, in which case you wouldn’t have a year to challenge it, only the said three months.

Only owners who are up-to-date with their community fees may challenge community resolutions before a court. Alternatively they can lodge the owed amounts before the law court prior to litigating. You can only challenge assembly resolutions at court.

Property located in Andalusia

Following arts 7 & 9 of Decree 218/2005, off-plan vendors of property located within the autonomous region of Andalucía must hand over the DIA (Documento Informativo Abreviado) to purchasers. The DIA is the Spanish equivalent of the UK’s HPI, Home Purchase Information, or Seller’s pack. Both the Community’s Statutes and Community Rules must be included in the DIA pack.

Conclusion

The bottom line is that Community Statutes, or Bylaws, are the ones that really rule on the everyday life of each community and are unique. No two communities hold the same statutes. There is a general legal backbone common to all communities in Spain which are the Commonhold Act and the Spanish Civil Code.

It is always highly advisable that, prior to purchasing property on a development, you always request a copy of the Community Statutes, known in Spanish as Estatutos de la Comunidad de Propietarios, as well as the Community Rules, if existent. You may avoid unpleasant surprises, such as communities that ban pets or even piano players!

Communities of Owners should be run – in theory – like small tidy democracies.

Well, that’s the theory anyhow. In practice, they resemble more dictatorships with full blown egos as many owners can vouch for. I would advise you bring your tin hat to owners’ assemblies and prepare for some serious and protracted trench warfare, whereby each owner will hold his own ground, yielding occasionally to fleeting interests.

Maybe it’s a good idea to bring along a Spanish lawyer as added reinforcements!

Good luck; trust me, you’ll need it.

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

 

Related articles

 

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

2.009 and 2.012 © Raymundo Larraín Nesbitt. All rights reserved.

 

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