Squatters are a growing nuisance in Spain. If you own property there you need to know what steps to take to avoid problems with squatters.

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

Photo: Squatting Internationl Symbol

Introduction

As hinted in the conclusion of my article Adverse Possession in Spain Explained, from last year, squatters are on the rise. The underlying causes are many but can be narrowed down to the following ones:

• It is estimated there are over four million properties standing empty in Spain (source). From these, three quarters are second homes for both nationals and foreigners who use them mainly during the summer season. The remaining quarter are up for sale, whether resales or off-plan.
• ‘Official’ national unemployment has reached an all-time high of 25%, which eerily echoes the exact number reached by the U.S. during the Great Depression (source). In some autonomous communities the average borders 40%. While it’s true that many who are officially living off the dole are in fact working off-the-books (source), this is overrated. The main reason why these people are not starving (or indeed starting social riots) is that in Spain extended family has traditionally acted as a safety net in times of need along with prominent charity institutions such as Caritas (which are now overwhelmed).
• National youth unemployment (under 25-year-olds) is well over 50% and in some communities exceeds 60%. This quadruples the world’s average and doubles the European rate (source).
• As of April 2012, 1.7mn families in Spain have all their members unemployed. A 25% increase over the previous year. (source)
• 700,000 people have become long-term unemployed – meaning they haven’t worked for the last three years (source).
• In the years spanning from 2007 to 2011, there has been over 350.000 bank repossessions (source).
• And last, I wanted to add that one in four minors in Spain are now living below the poverty threshold (two million to be exact). Children who only a few years ago would have been regarded as coming from working middle class families (source).

Yet politicians, and Spanish media at large, insist in calling it a ‘recession’. I beg to differ.

With the above daunting scenario unfolding in Spain, it shouldn’t come as a surprise that squatting is on the rise; what is surprising are its – still – relatively low numbers despite the severe ongoing financial turmoil. Hopefully after Spain’s bailout this trend will curb down.

Insight into the Squatter Movement

Squatting (popularly known as ‘okupas’) is a militant well-organised pacifist movement with a social agenda that flourished in the 80’s in eastern Spain, particularly in Barcelona. Entire communities of youths ‘peacefully’ occupied empty properties, even whole buildings, many of which were derelict and in a state of disrepair unfit to live in by any reasonable standard.

Surprisingly enough, a large part of the population actually support them as they are seen as ‘beneficial’ for neighbourhoods because they are bent on setting communities in what were previously deprived areas, stricken by petty crime, recovering them for society at large. On following their social agenda to occupy derelict property, which is the object of planning speculation, they transform what were previously hotbeds of drug users into productive communities from which whole neighbourhoods benefit as a result. They are legally assisted by lawyers who are ideologically close to them.

The government, over the next decade, clamped down on such practice amending our criminal code in 1995 and then again 2010 to punish this burgeoning movement.

Financial turmoil breeds new class of squatters

The key difference with the above, is that many of the current reported cases are driven by need, not by personal beliefs, as a direct consequence of the financial crisis we are in – hence my introduction to the article. We are no longer talking of well-organised social outcasts following political or social agendas driven by utopian ideals of shaping society. The profile of new squatters are struggling middle class family men that have undergone a repossession and are now finding themselves forced to occupy somebody else’s property to lodge their family. They are not militant members of an organised social movement, they merely act out of necessity. One of the first things squatters will do is change the house locks and ‘empadronarse’ in the property at their local town hall which allows them even more rights.

The good news for foreign property owners is that professional squatters tend to stick to large Spanish cities. You won’t normally find them roaming the costas, much less in urbanisations or golf resorts. They are particularly fond of the region of Catalonia and specifically of Barcelona – they may be squatters, buy one cannot deny they have good taste.

The new breed of squatters, acting out of need, isn’t particularly fond of foreigner’s homes either typically preferring Spanish homes, even their ex-homes; now bank-owned post-repossession.

Criminal Code

A reform in 1995 was enacted to tackle this legal problem. Squatters – smartly – will not break into a property that has inhabitants so as not to be criminally prosecuted. They will only target empty properties, such as second homes, which are not under such strict legal protection. They will rarely use violence. The only article that dealt with this problem pre-reform was art 202 of the Spanish Criminal Code which referred to illegal trespassing. However, it required that the property be dwelt at the time of the squatting.

So what happened if a property was uninhabited at the time of the break in? There was a legal loophole which squatters exploited to the fullest. The ensuing social alarm brought the need to address this legal void.

A new section was introduced by lawmakers in 1995 to accommodate this new disturbing social trend. For the first time this crime was ruled in our criminal code.

Art 245 of the SCC rules this case. The first section punishes using violence or intimidation to enter – or remain – in a dwelling (which is empty) against the will of the owner. Section two punishes the former when no violence is involved.

Surprisingly, the reform only punishes squatters with a mere fine for ‘peacefully’ occupying an empty property or remaining in one against the will of the owner – no jail sentence! The reasoning behind this is that it is a ‘non-violent’ occupation of an uninhabited property. Go figure.

Squatters can, and usually are, accused additionally of a number of associated crimes such as destruction of private property, resistance and disobedience to public authority, public disorder, illegal connection to utility supply, insalubrious living conditions, noise making etc. All these can be used in addition to build a case criminal case against them.

Distinction between the concepts of ‘allanamiento de morada’ and ‘usurpacion’

For the sake of clarity, the former is ruled in art 202 of the Spanish Criminal Code and punishes illegal trespassing. It is devised to defend legally someone who has a right of abode in a property (is actually permanently living inside it) at the time squatters force themselves in – they work in groups. Evicting a squatter in such a case is swift.

The latter was brought in with the reform of 1995 and was geared to specifically target squatting. It is thought for properties that usually stand empty all year round, such as holiday homes, and protects the registered owner, the title holder. It is ruled in art 245 of the SCC.

Can’t I just walk in and change the locks to my property?

No. On squatters taking over your property, you lose material possession of it. Meaning should you attempt to enter it, despite a property being rightfully lodged under your name at the land registrar and you paying all utility bills and even mortgage repayments, it will be regarded as ‘illegal trespassing’ for which you can – and will – be legally prosecuted.

I strongly advise you to seek legal advice prior to taking a rash decision that may land you in a Spanish jail.

Legal Options

1. Criminal Procedure

It begins with a ‘denuncia’ at the local police station. Anyone can file it, as it is a public crime.

Advantages: It is the procedure that punishes squatters the harshest – but only if violence is involved and the property was being lived in. Professional squatters will avoid using violence.

Disadvantages: Multiple.

– Because it is the legal option which punishes them the hardest, it is also the option that protects them the most. They will have many legal safeguards in place protecting their ‘rights’.
– It is slow, even taking years.
– It is expensive.

2. Civil Procedure

The most frequently used in addition to the above.

Advantages: Faster than the above.

Disadvantages: The squatters will not be removed from the property until a judge rules it in a sentence. This may take some time.

3. Administrative Procedure

This procedure is limited to administrative authorities on public assets. It will not be available to private individuals.

Advantages:

– Swift, within the next 48 hours of the occupation. Normally longer.
– No need of a judge’s ruling to evict squatters. Eviction is determined by an Administrative authority, such as a politician if signed within the next 48 hours.

Disadvantages:

– The property must belong to a public administration, leaving out privately owned property.
– Can only be done within the first year of squatting. After a year, the appropriate procedure to be followed must either be a Criminal or Civil one, as a judge must rule on the matter having the owner lost possession of the property.

Illegal Options

The ensuing options, though followed by a minority, are illegal and you may be criminally prosecuted on following some of them – even leading to a prison sentence. I am in no way advocating them, merely adding them as another option which – in my opinion – should not be followed.

4. Taking Justice into your own hands

Advantages:

– Very swift.
– Depending on how it is done, cheap.

Disadvantages:

– You may be criminally prosecuted for hiring thugs, for using physical violence or intimidation, for breaking into the property etc.
– You will have a criminal record if sentenced.

5. Negotiation

Same as point four above, I do not condone this option.

Advantages:

– Very swift.

Disadvantages:

– Is tantamount to caving in into blackmail.
– May prove expensive depending on the amount agreed as ‘compensation’ to ‘free’ the property.
– There is no guarantee that squatters will not return. In fact, it may backfire, as new squatters may be drawn to occupy the property knowing the owner is willing to pay to have them removed.

6. Squatting the squatter

This option consists in outwitting them using their own tactics against them, exploiting the law in your favour – just like they do. You become a squatter on your own property. You will wait patiently outside, until the squatter leaves the property for whatever reason. Seizing the opportunity of a vacant property you then force your way in and immediately proceed to change the locks – again.

Should the police be called in you can always claim that it is your home, showing the title deed and that you’ve decided to change the locks. You will not mention at all the word ‘squatter’ and in any case you can always report them if they foolishly tryin to force themselves back in your property. Squatters will be hard pressed to sue you, as you are after all the legitimate owner.

They will not try to break into the property once you are inside as this would be a crime punishable with jail, which is exactly what they try to avoid at all costs. What you cannot do is first file a ‘denuncia’ against them and then pursue this option as you would surely be prosecuted – you cannot hedge your bets pursuing both options; it’s one or the other. If you follow this option you must forget requesting police assistance and stick to your guns. Just to make it clear, I do not advocate this option.

Advantages:

– Very swift.
– Depending on how it is done, very cheap.
– No violence necessary – there should be no violence at all.
– You can always prove you are the rightful owner if necessary i.e. Title deed, witnesses

Disadvantages:

– Cunning but not very legal. If along time has elapsed, such as weeks or months, squatters may have already registered themselves as inhabitants in the property at their local town hall, in which case your legal position would be tricky to say the least. This would considerable weaken your legal stand and may lead you to being prosecuted.
– You’ll need to be in full control of your emotions.
– Professional squatters will work in teams and they will rarely make the stupid mistake of leaving a squatted property empty. However, not all squatters are professionals as explained in the article’s introduction. If you force your way in while there’s someone still inside you may find yourself being prosecuted for illegal trespassing (regardless if you are the owner). So make sure there is no-one inside at the time.

My Advice

Depending on the personal circumstances of your case the procedure will vary. It can be very fast or slow (years). If there are witnesses, i.e. neighbours, and it has just occurred squatters can be immediately evicted fast-tracking it. However, if time has elapsed, as in days, a legal ruling may be necessary which may delay the procedure furthermore. Most foreigners won’t be as lucky and will only realise they’ve been squatted on booking a holiday and flying over only to find their second home ‘invaded’.

If there is violence or intimidation involved, or if there is actually someone living at the property at the time of occupation I advise you follow a criminal procedure.

Professional squatters will never resort to violence or intimidation to avoid prison sentences. Normally you are better off pursuing a civil procedure against them to have them removed.

Or you can take your chances following one of the above non-legal options – not recommended.

The average time to fully evict a group of squatters is 18 months. This may vary, depending on the cases’ circumstances, as described above. Personally I do not like the current laws on the matter and find them both slow and ineffective. Let’s hope lawmakers address the legal shortfalls in the future adopting a harder and more decisive stance to this worrisome trend. Property owners deserve more legal protection; after all, they pay taxes – well, most do anyway.

In Conclusion

I would advise an owner who has fallen victim of squatters to seek immediate legal counsel. This is necessary because, depending on the circumstances on how they broke in, different legal options fan out. Rushing in to call the police or file a denuncia against squatters – though human – may not be in your best interests.

Speak with a seasoned lawyer first, you may be surprised.

Owners that take justice into their own hands, particularly on using violence and/or intimidation, may find themselves being criminally prosecuted and remanded in custody pending trial.

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

• Property Litigation
• Tenant Eviction Service

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.

A rent-to-buy contract let’s you enjoy a Spanish property now, whilst leaving the door ajar for purchasing later, if house prices continue to fall in Spain (as most people expect them to!).

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

Original article from 5th November 2.009

Introduction

It has become Spain’s favourite sport to second-guess on when the real estate market will pick up again. Reputed experts, both national and foreign, are jumping in giving all sort of contradicting timelines for its recovery i.e. 2014, 2017 and the most pessimistic ones on 2020. Although it may be fun to indulge on this sport on whether it will be an “L”,“U”,“W” or X-shaped recovery the gist is that it remains a fairly futile exercise as everyone – both experts and laymen alike – are basically clueless on where the market will be heading next. Property prices are now cheap but who is to say they won’t be cheaper next year or even the year after?

As appealing an amusement as may be, I believe it is impractical and rather sterile for most would-be buyers who are now sitting on the sidelines waiting for events to unfold, as in hindsight very few people call the market bottom correctly and most miss out on a lifetime opportunity to snatch a bargain in the dip.

These potential buyers who are now sitting on the fence musing over how much lower house prices can fall may in fact already – unbeknownst to them – profit from today’s market turmoil. A rent-to-buy contract does exactly that. It is an interesting alternative worth looking into in times of uncertainty (such as these) on where house prices will be heading next. In this article I will show you how to take advantage of today’s market uncertainty turning it around in your favour.

A lease purchase simply removes all the associated angst on whether one should still be holding out or else be moving in for the kill. The truth of the matter is that no-one has a clue on when the market will finally hit rock bottom. And even then it may be lingering on a valley for quite a while until it picks up again. So it may be worthwhile playing it smart following this rent-to-own option, jumping in today at tomorrow’s prices.

What is a Let-To-Own Contract?

This type of contract, “contrato de alquiler con opción a compra”, allows you to lease a property, whether off-plan or resale, with an option to buy it within a given deadline normally spanning 2 to 5 years. The main advantage is that the full let is discounted from the final purchase price. So if you finally opt to buy the property within the deadline, the paid rent (rental premium) will be deducted in full from the pre-agreed sales figure. Alternatively, should you choose not to, you can simply walk away and move on.

This contract has multiple advantages for both grantor and grantee in the context of a deflationary environment – such as the current one –. If you are of the opinion that property prices in Spain will be falling steadily over the next years, rent to buy will appeal to you.

The advantages under normal circumstances far outweigh the potential disadvantages. It is worth noting that the below listed advantages are almost certain to take place under normal circumstances; however, the disadvantages may – or may not – take place, which is why I label them as “potential”.

Advantages

For the option holder

Foremost is the flexibility it allows you. You can actually withdraw from the contract as if it were a normal Tenancy Agreement should you spot a better opportunity within the next years, forfeiting the lease of course. At no time are you forced to buy the property at the end of the deadline, it is your choice. This lack of commitment actually enables you to be on the prowl looking out for other opportunities without being tied down.

As written in the definition, the rent premium is deducted in full from the sales price, so it is not forfeited as it would normally be the case in a Tenancy Agreement.

The pre-agreed price of the property stipulated within the contract is normally well below the current market price so as to provide a reasonable incentive to prospective buyers. A markdown varies from contract to contract, but in my opinion should span 20 to 30 per cent discount on current sales prices to warrant signing it. This helps to offset the risk of property prices decreasing even further in the near future (next couple of years) as the pre-agreed sales price has already factored this in. By the same token, should property prices rise again, the pre-agreed price is respected. Win-win.

It allows you the opportunity to scout the area and know your neighbours well before you move in for the kill (commit to purchase). Did you know your next door neighbour may be a local DJ playing music late into the night? Well you could have easily avoided all those sleepless nights if you had first rented the property rather than buying it outright. When you are a foreigner it is important you carefully choose an area where you can blend in nicely. For example, not all areas are family friendly, so it may take a while until you find one that ticks all the right boxes.

If you are still based abroad, and find yourself constantly commuting to Spain, this contract is a great option as it gives you freedom and you only commit if you decide so. No strings attached.

You may freely agree on the time frame to exercise the purchase option tailoring it to suit your needs. Normally they span 2 to 5 years but can agree elsewise.

In some contracts you may assign the option to buy. This allows for even greater flexibility as the would-be buyer can sell on the right to a third party allowing for a speculative angle.

Unlike the UK, there is no option fee to be paid on exercising the option right.

For off-plan you can actually claim back the VAT you are overpaying for the lease which will be set at 18%. Buying off-plan freehold property has currently set a VAT of 8%. You are entitled to claim back the difference only if you exercise the option to buy from a developer. It is advisable there is a clause specifically worded on this point.

You are actually living in the property that will be yours in a near future without being riddled now with the associated stress of applying for a mortgage loan. Although you may not qualify for a mortgage loan at the present time you may qualify in a few years’ time when the credit market ease’s up again. Currently lenders in Spain are focusing on lending only against properties they own (because they are desperate to get rid of them).

If the property is within a Community of Owners you may come to know of internal problems which are non–apparent. You may possibly never have come to knowledge of these quirks unless you had gone through the hassle of leasing the property first. Not least is worthwhile mentioning that you will not be expected to pay the Community fees, these will be taken care of by the landlord.

The applicable laws will normally be Spain’s Tenancy Act (Law 29/1994), the Spanish Civil Code and the Private Contract of course. Tenancy laws in Spain are historically biased towards tenants so it’s always good to be protected by them being a tenant. I advise lodging this contract before the Land Registry.

For the option grantor

The advantages are self-evident. Foremost you actually have a tenant who is foremost interested in buying the property not just in renting it out, avoiding pesky time wasters altogether. An option to buy actually increases the pool of genuine potential buyers as it makes it easier for them to commit now.

The let can help offset any mortgage repayments, community fees or expenses in general thus avoiding slipping into arrears.

Having a tenant inside should normally ensure the property will be looked after properly avoiding it sitting empty which may lead to break-ins or in the worst cases even being vandalised.

On very long-term options it is normal to implement additionally an option fee. If you’re tenant defaults you can always pocket it besides the let’s deposit and the rental premium. It’s a win-win.

Potential Disadvantages

For the option holder

You are actually letting a property. You must ensure you will be able to meet the let on time otherwise you will be jeopardising the contract. Bear in mind currency exchange rate fluctuations if you’re source of income comes from abroad i.e. sterling pounds or dollars against the euro.

As it’s a let, the rent premium may be revised annually by your landlord bringing it in line with inflation. Spanish Tenancy Agreements are normally referred to the Consumer Price Index (IPC in Spanish).

For very long-term options, exceeding normally 3 years, an additional deposit (option fee) may be requested by the landlord besides the normal 1 or 2 months’ deposit for letting out the property. This may not appeal to everyone of course but it is done as a sign of a serious commitment on behalf of the potential buyer.

The main disadvantage is that these contracts last typically 2 to 5 years and in the interim the landlord’s financial circumstances may change – for the worse – i.e. if the property has a mortgage loan taken against it and the landlord defaults, it may lead to a full-blown repossession procedure. You would still have a right to let the property if it’s repossessed, as the lender must respect long-term tenants, albeit you may no longer have the option to exercise the purchase of the property in the same conditions as you agreed to initially. You would actually have to raise the funds now and pay off the outstanding mortgage on the property if you wish to buy it off from the bank. Not to mention that if you additionally paid an option fee you would likely forfeit it in the event of a foreclosure. But truth be said, lenders are showing themselves very flexible with properties they own allowing for plenty of room to negotiate. It is a buyer’s market after all and they are unlikely to let go easily of a potential buyer caving in where necessary to secure the sale.

Buyers prefer long-term options to build up equity and in the interim keep an eye on where the property market will be heading next. Short-term options appeal to vendors but on doing so they will be reducing the pool of potential buyers as few buyers will be interested. It’s a tug of war on which a consensus, balancing both opposed interests, must be sought. At the end of the day concessions will have to be made by both parties.

An important problem to consider is committing yourself on a pre-agreed price that on the long run, despite the hefty built-in discount acting as an incentive, may still be above the current market price. Obviously it makes no sense to execute the option if you are buying a property above the current market value. It would then be a case of a lost opportunity; what could you have done with the rental money if you hadn’t signed this contract? At no time are you forced to buy the property but you will of course forfeit – in full – the paid rental (opportunity cost) negating the main advantage of pursuing a let-to-buy. If you are of the – gloomy – opinion that property prices will be cheaper in five years’ time, you may want to hold out a little longer until you sign a rent to buy contract.

For the option grantor

From the grantor’s perspective it’s that you are letting your Spanish property with a potential view to selling it on at some point in the future. Letting entails the risk of the tenant defaulting becoming a non-paying tenant in which case a formal eviction procedure would have to be followed before the law courts. This can however be mitigated to a great extent requesting for long-term options (those exceeding 2 or 3 years) a deposit (option fee) from the option holder as a token of good will or else you can always include an arbitration clause in lieu of having to resort to the civil courts which brings down significantly the timescale – and costs! – on having the non-paying tenant removed from your property.

The opportunity cost. On signing this agreement you will be held legally bound for whatever timeline you’ve agreed upon. This is particularly annoying in the event of a cash-buyer springing out of the woodwork knocking at your door… Although it may sound unrealistic given today’s bleak outlook, should the market pick up again this is bound to happen and must be carefully weighed in. By accepting a rent-to-buy contract you are implicitly gambling the market will remain depressed for the next years. It makes no sense whatsoever to grant this option if you expect the market to rebound in a couple of years.

It goes without saying you will have to carry out a thorough screening procedure on potential candidates weeding out unsuitable profiles (bad debtor´s list). Fortunately you can now rely on external databases, such as FIM’s, which can greatly assist you eliminating professional non-paying tenants that abuse Spain’s legal system.

In Conclusion

Rent-to-own schemes may not be everyone’s cup of tea albeit it is a very interesting option to pursue if you’re serious and committed on buying a property below the market value (BMV) taking advantage of today’s market turmoil. On following it, you will simultaneously retain a certain degree of freedom should either your personal circumstances – or the markets’ – change. Buying property is always a serious decision for most people and this type of contract actually allows you the flexibility to live in it without forcing you into buying it.

When the market picks up again in “X” years’ time (take your pick), these contracts will no longer be as widely available as they are today both on off-plan and resale property. It is precisely the current financial uncertainty which drives landlords and developers to offer this type of contract that may benefit both them and the would-be buyer (option holder).

Those who are resolute on buying a cheap property, which has already a pre-agreed significant built-in discount in relation to today’s prices, may already profit from the current market uncertainty removing all the associated stress – and potential lost opportunity cost – of second-guessing where today’s property market will be heading next. Might as well leave all the guessing-work to experts throwing darts, however fun it may be, and just play your cards right. Mind you, these “confounded” experts do seem to always get it right… in hindsight.

And to close this article, I recommend you hire a registered Spanish lawyer to either draft this contract or else to review an existing one (if it’s the case) so as to avoid rash decisions that may lead you to future losses.

Remember: only because a contract is labelled as a “let to buy” it doesn’t automatically qualify it as a good deal (it could very well be a raw deal); especially if the built-in discount is not high enough to offset the risk of prices decreasing over the next years – very likely.

“All that glitters is not gold” – Aesop.

Ancient Greek fabulist or story teller.

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

• Rentals
• Conveyancing – Buying

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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.

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

The Spanish housing market will recover when the unemployment goes down says BBVA, one of Spain’s biggest banks. Lawyer Raymundo Larraín Nesbitt looks at the new labour reform and how it might lift employment, which might in turn help the housing market.

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

Photo credit: BBC. Building the Great Pyramid.

Introduction

Spain has the dubious honour of being the country with the highest unemployment rate of all developed countries (OECD), followed closely by Ireland. The causes of this are many and its analysis would exceed the object of this article. However, I will focus on one of the main culprits which has brought about this situation – Spain’s outdated labour market laws.

Labour law in Spain has its roots deeply embedded in the Franco regime. Traditionally it has been overprotective of workers to the point employers regard them more as an obstacle than as a useful tool. It is safe to say that labour court rulings in Spain are biased towards workers. Ironically, these overzealous laws have played out against the workers themselves at a time of great economic weakness fracturing Society, broadly speaking, into a two-tier system of workers:

A. Those with a job. They enjoy a high status of legal protection. To the point that many employers would rather hold on to a bad worker than make him redundant as the severance pay would far outstrip the benefits.

B. The jobless. The losers. They find themselves locked out of the labour market. Particularly affected are young workers, the unemployment rate of under twenty-five-year-olds is well above 50pc. Employers – fearing Spanish draconian labour laws- are highly reluctant to take on new employees, even if required, as labour laws are far too rigid and strict and always biased towards workers. In times of great financial uncertainty employers would rather avert additional concerns and problems and refuse to hire new employees.

This has led to a paradoxical situation, whereby long-standing workers, albeit inefficient, are kept by companies as the costs of dismissal would be prohibitive whilst younger workers, more prepared and with languages, are let go or even not hired quite simply because companies cannot afford the expenses of a dismissal.

The above generalisation helps to explain why Spain has reached all-time record levels of unemployment reminiscent of the Great Depression. Moreover, I believe the official unemployment figures are in fact well below reality. Many young people have flocked abroad seeking new job prospects or else have been forced to extend their studies with the hope of seeing better days. Not to mention the huge amount of people who are studying hard to secure a post as a civil servant which used to guarantee a lifetime free of economic woes. All these are conveniently excluded from the unemployment figures and could easily add over a million to the official unemployment figures.

To give you an idea of how this situation is endangering public finances in Spain, there used to be a ratio four workers for every pensioner; now there is barely a ratio of two workers per pensioner. Moreover, if we take into account not only pensioners but also unemployed and civil servants each active worker is now shouldering – all by himself – a civil servant, or a pensioner or an unemployed on a ratio one to one. Clearly, this is unsustainable. There are scarcely 14 million active workers in Spain and well over 14 million unemployed, pensioners and civil servants. If this troublesome trend continues unchecked, Spain will need to leave the Euro to re-instate its Monetary policy to devaluate its new currency and regain competitiveness. However, Spanish politicians are adamant; they have no intention of leaving the Eurozone and are now addressing the problem of Spain’s weak competitiveness in other manners, such as the current labour reform which in time will lead to lower wages. Much like the trial Greece is undergoing.

As the current Minister of Economy, Mr Luis de Guindos, in Spain phrased it: “Spain needs a very aggressive Labour Market reform”. The aim of this reform would be to get rid of the dead wood and make hiring and firing of workers more flexible. Spain’s Labours laws were far too rigid as they were and locked out of the job market millions of workers because employers feared hiring them. The official line is that the aim of these reforms will pave the way to create a stable legal framework which – in time – will enable growth in the job market. Here’s hoping.

However, the cynic in me sees these changes in law as rather opportunistic. The perfect embodiment to administer bad medicine to an already ailing patient. Lowering wages and smoothing redundancy procedures, making it altogether less onerous for employers. In other words, these reforms will make jobs even more precarious. Wages in Spain are already very low and will be furthermore post-reform. Some economists may argue this is a necessary evil to recover lost competitiveness as Spain faces ruthless competition from third-world countries with more lenient (or non-existing) labour laws. Maybe it is indeed the case; I won’t dispute it. But, being pragmatic, what I find undeniable is that in both the short and medium term, this change in law will make it easier overall to lay off workers and reduce wages. In time, we will see if it actually did contribute to job growth, decently paid jobs that is, not low-pay, dead-end McJobs.

I am of the opinion that Spain needed to address its anachronistic labour laws, which dated back to the Franco era, to make them fall more in line with real world’s demands. I believe this reform should have been implemented more gradually, in a more consensual manner with all opposing forces, rather than just flogged by the ruling government under the pretext of a dire economy. They have chosen a time where the job market is weak and cornered; labour laws have swerved from one extreme to another: from over-protectiveness to almost anything goes. I’m afraid the reform may have in fact been, true to Mr Guindos’ words, over aggressive and perhaps even short-lived as it will surely be challenged by opposing political parties in the near future.

Highlights of the Reform

Royal Decree law 3/2012 came into force on the 12th of February. It brings a slew of changes which I will list briefly in bullet points:

• Unfair dismissals. Severance pay is reduced from 45 days per year worked, down to 33 days per year worked. The maximum amount of months one accrues has been brought down from 42 months to 24. This applies not only to new contracts, but to pre-existing contracts as well.
• Objective dismissals: companies making losses in three consecutive quarters can now lay off staff with only 20 days of severance pay per worked year. Accrued claim is limited to a maximum of 12 months.
• Discounts to employers of up to €3,000 that hire long-term under thirty-year-old workers (SME companies with a maximum of 50 employees). Bonuses on enrolling workers in training courses (acquiring new skill sets).
• Making internal clauses flexible i.e. modifying working hours, changing work shifts (night / day), changing responsibilities and tasks etc. If the worker disagrees with these imposed changes he can request his contract is terminated by the company which leads to a severance pay of 20 days per year worked with a maximum of 9 months accrued.
• Employers are free to reduce wages alleging financial difficulties. i.e. recession
• Forbidden to sign consecutive short-term contracts for more than 24 months.
• Large companies may now ignore the collective labour covenants (“convenio colectivo”) if they are able to demonstrate three consecutive quarters in losses setting out worse conditions than those laid out in the covenants.
• Companies that hire long-term unemployed will receive a discount of €4,000.
• The tax allowance given to woman on returning to their workplace post maternity leave has been eliminated.

In Conclusion

Spain has undertaken the most drastic labour reforms of its short-lived Democracy to ensure its inclusion in the Eurozone and help revive an ailing economy. These reforms will generate great controversy and spark much debate amongst the Spanish society. They are – without doubt – a major milestone in Spain’s labour reforms marking a turning point in Spain’s jobless tide. Let’s hope this is the inflection point from which a new, more robust job market emerges.

The winners of this reform are employers to a great extent and unemployed workers to a lesser extent. The losers are all those that now have a job and have seen their hard-fought rights and benefits significantly reduced.

If you are a worker in Spain, or plan to seek a job in Spain, it is very important you acquaint yourself with Spain’s labour laws which may differ significantly from that of your home country. There are niche lawyers known as “abogados laboralistas” who specialise in this branch of law. Laboralistas are the lawyers you must seek in cases of unfair dismissal to take your case to court. You are bound to win.

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.

As explained in previous articles on Bank Repossessions in Spain, the responsibility of a borrower on defaulting a loan is personal and unlimited in Spain. Frequently, post-repossession, a borrower will still owe capital which increases exponentially over time due to the compound interests and associated repossession expenses creating a debt spiral which acts as a black hole.

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

Introduction

In the above article from 2007 I already offered as an alternative solution to borrowers to pursue what is known as a “dación en pago” (handing back ther keys to a lender); a solution of last resort. A dación en pago allows a borrower to legally hand back the keys and in exchange a lender fully discharges the borrower of the debt. This is formalised before a Notary public by means of a deed whereby property ownership is relinquished in favour of a lender. In this manner, speaking of foreigners, the lender would be unable to pursue you abroad for the outstanding – mounting –debt considering it settled for good. It is akin to placing a legal firewall to avoid jeopardising your home country’s assets.

The dación en pago was an option lenders welcomed back in the early days of the recession – particularly in the case of foreign borrowers – as they normally held no other assets in Spain and pursuing them abroad for the shortfall – although legally possible – was normally a fairly complex and expensive procedure not making it worth their while from a financial point of view. Being pragmatic, it made more sense to accept a dación rather than follow a protracted and winding repossession. Back then lenders demanded properties be in positive equity to accept a dación en pago. As the recession unfolded, giving way to the most important one the world has known since the Great Depression, lenders grew more and more reluctant to accept a dación en pago proposal (as they themselves struggled to secure finance from abroad) to the point this window of opportunity was eventually shut off, even if the property was in positive equity territory.

This procedure is loosely based on art 1.175 of the Spanish Civil Code and article 140 of Spain’s Mortgage Act. There is no article in our legal system which actually enshrines the dación en pago procedure. This is the reason why I always wrote that a dación en pago was not a borrowers’ divine right, despite claims to the opposite by self-appointed qualified online experts. Rather, it was a voluntary agreement reached with a lender (because they actually stand to lose a great deal on accepting it). That is why they insisted as a pre-requisite the property be in positive equity for them to even consider studying a dación to offset their losses on taking over the property. It was really up to them to either accept or decline the proposal; it was pointless to challenge their refusal throwing good money after bad, even more so if the property was in negative equity.

Until now.

The Government’s concern has grown deeper as the recession in Spain has gathered pace since 2007 with thousands of families in its wake being repossessed every year and still owing significant amounts of capital they will never be able to repay back to their lenders. Lenders know it all too well and sell off these bad debts in tranches for a fraction of their book value to specialised institutional investors and debt-recovering companies. This disturbing trend has continued unabated in 2012. This has created serious social problems as hundreds of thousands of families are effectively evicted and locked out of the financial system with no hope of obtaining a loan as they are viewed as financial pariahs by our so-called modern society.

The Spanish Government has finally reacted in 2012, some five years after the recession began, publishing a non-binding Code of Practice for lenders to adopt the dación en pago procedure following a major social outcry which was echoed in Congress. This episode has witnessed some embarrassing moments of its own, such as the intervention of Ecuador’s president advocating the dación in favour of its struggling countrymen facing looming repossessions in Spain. However, if lenders should choose to formally adopt the Government’s proposal, it becomes compulsory for them, being forced to accept a dación.

The catch, as always, is that a borrower must fulfil stringent criteria to qualify for it which – in practice – leaves out most foreigners. Speaking clearly this means the Code of Practice introduced by the Government will benefit foremost nationals and lock out most struggling foreign property owners as one of the requirements is that the Spanish property must be your only asset; excluding those borrowers who hold property abroad i.e. in their home country.

Advantages

They are blatant. You can now walk away from the threat of a looming repossession procedure safe in the knowledge that your lender has signed a legally binding deed before a Notary in which they forfeit taking legal action against you for the outstanding debt. The peace of mind this has given my clients is simply priceless and cannot be understated enough.

The generalised adoption of a dación en pago procedure will make banks think twice before they lend money. This will enable that hundreds of thousands of families are once again recovered for society at large allowing them to move on with their lives starting anew rather than sentencing them for the remainder of their lives as financial zombies. Everyone deserves a second chance in life.

Potential Disadvantages

As a result lenders will now strive to protect themselves as these newly-introduced measures effectively break a long-standing status quo lasting for over a century.

I can foresee lenders adopting the following measures to counter their real estate losses as a consequence of generalising a dación en pago procedure:

– Credit restriction. Lenders will foreseeably tighten their criteria when it comes to lending for property-related purchases. Only those families which are deemed financially capable of repaying their loan will have access to credit. Up until the recession began, mortgage loans were handed out recklessly to anyone with a pulse. This has backfired spectacularly over time on financial entities, particularly on savings banks which had lenient standards to put it mildly, as it was entirely predictable. Seeking short-term gains, losing sight of the long-term business viability, brings these debt-laden problems.
– Credit will become more expensive. Meaning the rate charged to certain borrowers will be increased as a result to offset – repayment – risks.
– Additional guarantees/collateral requested i.e. family assets, personal guarantors (i.e. family members that guarantee a mortgage loan with their own properties etc. As a side note, I always advice everyone to never accept being appointed as a personal guarantor, even if it is for a family member or a friend, as you stand to lose your own property if they default on their mortgage loan. It is very foolish.

Bank shareholders and stakeholders have good reasons to be weary of these measures introduced by the Government as they will potentially incur in heavy losses. Being cynical I guess it will eventually be the taxpayer – you and me – who will pick up the tab after all.

Code of Good Practice

Was approved on the 9th of March and is compulsory for all those lenders who voluntarily adhere to it. It introduces three very interesting measures.

1. Debt restructuring. Before a dacion is even contemplated – providing you fulfil the below requirements set out in point three – a lender will first strive to restructure the debt. Amongst the measures introduced are:

– 4 years of interest-only (“carencia”)
– Extending mortgage repayments up to 40 years
– Reducing the applicable interest rate to Euribor plus 0.25

2. Debt reduction. Failing the above, the lender will then be forced to bite the bullet and write-off part of the debt burden to make repayment terms more manageable for the borrower. At this point the lender will be incurring in losses for the first time. The threshold is that repayments must be below 60pc of the family’s monthly income.

3. Dación en pago. Only if the two previous points fail, will a lender then consider following a dación en pago as the last resort. Lenders will incur in heavy losses on accepting it, which is why this option is only considered if there is no other one available to them. More details on this can be found in my article Dación en Pago Explained, from 2009.

To benefit from a dación en pago a borrower must comply with the following five points:

– Failed the above two points: debt restructuring and debt reduction plans. Post-restructuring, repayments that still exceed 60pc of the family’s monthly income will qualify for a dación.
– The value of the property, following a sliding scale, must be below €200,000 in large cities, such as Madrid, and below €120,000 for towns with less than 100,000 citizens.
– The property must the borrower’s only home (in Spain or elsewhere).
– All family members must be jobless (in Spain over 1,5mn families comply with this).
– No one acting as guarantor.

At the time of writing this article, 95pc of Spanish lenders have adhered to this Code of Practice. A list of all those lenders which have voluntarily accepted it will be published before the 10th of April.

In Conclusion

The generalisation and adoption of the dación en pago procedure, now finally a borrowers’ right, is a welcome respite for struggling borrowers. However, as I’ve pointed out, these new measures will benefit Spanish nationals foremost for a number of reasons.

More could be done to generalise it so that even more borrowers were eligible making it truly an option open to everyone that needs it. A compromise had to be reached at some point with lenders and the above five requirements were decided as the cut-off point. In any case, it is a positive first step in the right direction and thousands of families will now stand a second chance in life as a result of it.

If you are unsure on whether you may qualify for a dación en pago, seek legal advice.

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

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

Legal services Larraín Nesbitt Lawyers can offer you

• Dación en Pago

Related articles

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

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

2.012 © Raymundo Larraín Nesbitt. All rights reserved.

Mortgages are a useful legal tool that allows most would-be buyers the necessary financial means to acquire an overseas property. Spanish mortgage loans are similar to their UK counterparts with some nuances borrowers ought to be keenly aware of.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
21^st of February 2012

Introduction

The purpose of this article is to continue the trend started in last month’s article (Spanish Mortgage Loans: Beware of Abusive Clauses) and shed some light on this often overlooked and obscure matter that may in time have such a large impact on our lives.

In this article I will focus specifically on real estate related mortgages.

Definition

A mortgage loan is an accessory contract, as the main contract is always the loan itself, which places a royal right against a real estate asset (whether movable or immovable) and is agreed upon in a public deed of registry. A notary public (notario) will bear witness and sign both the purchase deed and the mortgage deed along with borrower and lender. If a translator is necessary, they will also sign alongside. The deeds then have to be lodged before the Land Registry. The registrar (registrador) undertakes a second legal check before the mortgage is lodged. Both the notary and registrar are top-ranking civil servants who have attained a Law degree and have studied a very hard exam that can take several years to be admitted in their positions.

From the above, it can be surmised that a private loan that is not witnessed by a notary nor lodged at the land registry is not valid. In fact, any other mortgage loan that is drawn up afterwards and complies with the above legal formalities will always prevail against any former ones that lacked said formal requirements.

Essential Elements

In Spain, prior to signing a mortgage deed, lenders are required to clearly lay out the essential elements of the offered mortgage in a document known as a binding offer.

Capital: this is the amount you are taking on.
Duration: it is the period within which you must settle the loan i.e. 20 years
Rate of interest: is the price of the money you are borrowing. The higher the interest, the more you pay on the long run.

Types of Mortgages

There are many different types of mortgages. I will solely focus on this article on property- related mortgages and its main variations.

Fixed interest: As its name implies, the interest rate is locked throughout the duration of the loan. This has its advantages, such as giving forward visibility and not falling victim to fluctuating interest rates. It allows the borrower to plan ahead its monthly financial commitments eliminating any uncertainty as to what is owed to a lender each month. The main drawback is that the borrower will have to normally pay a premium throughout the life of the mortgage loan to offset the lack of risk and compensate for when interest rates are raised. This premium may be a couple of points above the current rate of interest.

Variable interest: The loan is normally referred or linked to an index which fluctuates over time. In Spain over 95 pc of mortgages belong to this type. Most of these mortgages are referred to the Euribor rate of interest which stands for Euro Interbank Offered Rate. It is the rate at which banks within the eurozone lend to each other (when they actually do trust to actually lend to one another…). The main advantage is that when interest rates are low, such as now, monthly repayments are also low saving borrowers considerable money on the long run. The disadvantage is that should rates rise, your repayments will follow suit thus increasing your monthly loan burden.

Spread (diferencial): In variable interest loans, points are added to the referred index. If you are non-resident in Spain this spread will be considerably higher to offset the risk of default as opposed to resident borrowers. The latter are considered “safer” as they already have assets within the country that can quickly be seized if necessary.

Interest-only (carencia): Some lenders may offer interest-only mortgages, particularly to young couples, as a teaser to entice them. In Spain these periods normally will last only a couple of years at most. It is a good idea for first-time buyers to get hold on the property ladder at a time when their source of income is precarious or low. Within the last years it has additionally been offered to struggling mortgage borrowers with the aim of easening up the financial burden of their repayments. In some cases to qualify you may need to demonstrate you are currently unemployed (sic).

Legal liability of a borrower in the event of default

This is a fairly important point that differs widely from its UK counterpart. If there is one milestone I want to highlight in this article, hands down it is this one.

In Spain, a borrower has a personal and unlimited liability which extends to all his current and future assets. The legal implications of this are very serious. Unlike in other countries, where in the event of the borrower defaulting the liability is limited to the value of the guaranteed real estate itself, in Spain the liability can have far-reaching consequences. A Spanish lender pursues the borrower himself, not the property, as the responsibility is personal. Additionally this implies that lenders pursue you abroad – and may seize – your home country’s assets for the shortfall incurred on defaulting on your Spanish mortgage loan. More on this in my article Spanish Creditors Pursuing Debts Abroad.

Because of how the legal system of repossessions is designed, biased towards lenders, a borrower can find himself owing a great deal of money to a bank after the underlying collateral, the real estate, has been repossessed. Unlike the UK, the deadline to repay this mounting debt does not expire, at least in practice. Compound default interest rates are added as well as the associated repossession expenses (i.e. lenders’ lawyer’s fees).

Formally a borrower’s responsibility on defaulting a mortgage loan is twenty years. However, in practice lenders may at any point in time interrupt this by means of a formal notification to the defaulter thus renewing the twenty-year deadline. Rinse and repeat and you may find yourself in the receiving end of a mounting debt spiral which follows you to your deathbed. Lenders outsource this debt-chasing to law firms who will make sure the debt remains always alive by contacting the borrower regularly, ensuring the twenty-year limit is always in order. The logic behind this, is that the defaulting borrower may come into wealth over time, i.e. inheritance, and may now be in a situation to settle his debt. In my humble opinion this system should be amended and borrowers should be given a chance to rebuild their financial lifes without turning them into financial pariahs.

Additionally, lenders will inform credit-rating companies, such as Experian, of your credit worthiness which may have a large impact in your home country. You can read further on the practical consequences in my article Bad Debtor’s List (‘Fichero de Morosos') The conclusion one can draw is that defaulting on a Spanish mortgage loan is a very serious matter that ought to be pondered very carefully and in my opinion ought to be avoided at all costs.

Fortunately in Spain debts are cleared on a debtor passing away (and naturally no one is sent to prison in Spain for bad debts). The exception to this rule is that debts can be inherited on accepting a troubled Spanish estate. At times it may be wiser to waive off the right to accept an inheritance if it implies the passive outstripping the rights and assets.

Dación en Pago

For all those who’ve slipped into mortgage arrears in Spain or are likely to and are thinking of handing back the keys as a solution, there’s a formal legal procedure to do it known as dacion en pago. For a property owner, a dacion en pago means basically handing back the keys to their lender (relinquishing property) and in exchange being discharged of the remaining mortgage debt. You can read an in-depth article on how it works in practice on reading Dación en Pago Explained or How to hand Back the Keys.

Unlike other countries, the dación en pago is not a legal figure that formally exists within our legal system. The procedure is loosely based on art 1.175 of the Spanish Civil Code and article 140 of Spain’s Mortgage Act . For the lender to accept it two conditions are required:

1. The property must not be in negative equity (no-negative equity rule).
2. The lender must not have started a repossession procedure against the borrower.

Even if you have slipped into arrears by some months, lenders will still accept a dacion providing you comply with the above two requirements.

When I first wrote an article on the matter, on the 21st November 2008, lenders were more open to the idea of a dacion. However, as the financial crisis has intensified and persisted over time, lenders have grown increasingly reluctant to the idea of accepting a dacion en pago. Only borrowers whose properties are significantly in positive equity territory are allowed to follow this procedure. Over the years they have raised the yardstick to the point it has become unattainable for most defaulting borrowers. There is now a social movement in Spain, which is gathering pace, to have the dacion en pago included as a figure in our legal system.

What many fail to see, is that a dacion implies huge expenses for a lender on accepting it not to mention the running expenses of keeping a property (i.e. Community fees and property taxes). To this you must add the huge provisions they need to set aside to cover the risk. The last thing Spanish banks need now is yet another repossessed property or dacion which act as financial millstones around their necks at a time where they are struggling to secure finance abroad. Hence their growing reluctance to accept a dacion, even if that means resorting to a repossession procedure.

For more advice on how to cope with mortgage repayments, please read my article Advice to Struggling Mortgage Borrowers in Spain.

Bank repossessions in Spain

This subject and its associated legal procedure is covered in detail by my article Bank Repossessions in Spain.

Lifetime loans or reverse mortgages in Spain

This subject is covered in my article Lifetime loans in Spain Explained, published in SPI on the 21st February 2011.

In Conclusion

House ownership in Spain accounts for over 80pc of property. Owning one’s own property is deeply embedded in the Spanish psyche. Most buyers rely on a mortgage to finance their dream property. Make sure you fully understand the mortgage terms prior to signing a mortgage deed. Do not be afraid to ask any queries on the matter no matter how stupid they may seem to you.

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

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

Legal services Larraín Nesbitt Lawyers can offer you

• Conveyancing – Buying
• Conveyancing – Selling
• Mortgage Service

Related articles

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

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

2.012 © Raymundo Larraín Nesbitt. All rights reserved.

The purpose of this article is to shed some light on the obscure legal clauses you should keep an eye on so as to avoid rash decisions that may lead you to unpleasant and costly mistakes with a Spanish mortgage. In extreme cases, they may even lead you to lose your Spanish property as well as jeopardizing your assets held abroad i.e. in the United Kingdom or in the Republic of Ireland. More on this in my article Spanish Creditors Pursuing Debts Abroad.

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

Original article from 4th June 2.009

The following list only collates the ten most common abusive mortgage clauses, for reasons of space, but in fact you ought to be aware there are many more.

What is regarded as an abusive clause?

For a clause to be deemed abusive under Spanish law two requirements need to be met:

a) The clause must inflict harm on the consumer, whether financial or of some other nature. The consumer can either be a physical or legal person. It is important they are viewed as an end-user or consumer who is not knowledgeable on the matter.

b) The clause must benefit the professional who’s drafted the contract within a business relation. This professional will be either a company or professional acting privately or publicly.

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

Spanish Mortgages: Abusive Clauses

The following is by no means a closed list. I have only included the most frequent ones.

1. Collar clause. In Spain 95 pc of mortgage loans are of variable interest. Of these, the vast majority take the Euribor rate as reference. However, lenders can – and normally do – mark-up this rate with a spread. If the Euribor increases, so do your monthly instalments having to pay more; if it decreases, you ought to pay less; simple, right? Wrong!

This is when this nasty clause comes into play by which lenders secure themselves a minimum interest rate, a spread or financial cushion, which normally spans 3 – 4 pc. So even if the Euribor rate should fall below, you will still have to pay the said minimum interest rate. To put it simply, a fall in the Euribor rate will not benefit you, as you have a clause that locks up the minimum interest rate you pay a month and prevents you from paying less. In Spanish this clauses is known as “cláusula suelo” (collar clause or tracking mortgage in English). You can read further on the matter in my article Mortgage Collar Clauses Revisited.

EDIT May 2015: Spain’s Supreme Court in a landmark ruling of 9th of May 2013 has declared collar clauses as abusive and therefore null and void in all Spanish mortgage loans, unless expressly agreed to, going forward from said date. In other words, prior to the 9th of May 2013 collar clauses are valid for old mortgage loan agreements.

On the other hand to be fair, lenders cap the top Euribor rate at an average of 10 – 11 pc. So even if the Euribor surpassed those levels you would only be forced to pay the said rate. But quite frankly, if the Euribor rate ever hits 11 pc, paying a high mortgage instalment will be the least of the problems in the Eurozone. For this reason, one should reasonably expect the Euribor rate to remain relatively low as opposed to high. Meaning this collar clause has a negative impact on consumers at large on the long run on taking a Spanish mortgage loan. Lenders reap the benefits of this clause however. Which is why it has been regarded as abusive by judges; it had been sneakily devised to be one-sided. It is like playing with loaded dices, lenders always win regardless of the outcome.

This clause is the single reason on why so many borrowers realised unpleasantly a couple of years ago (when the Euribor fell to an all-time record low) that their mortgage repayments did not fall as much as they were gleefully expecting. In most cases, their monthly instalments simply didn’t budge despite the dramatic fall of the interest rate of reference.

What happens if I’ve already signed a loan with a collar clause?

You can shop around for another loan and swap over to another lender which doesn’t include this abusive clause. This clause is only included by an estimated 30% of lenders. So there are plenty of lenders to choose from which do not include them. Moreover with the Amended Mortgage Act recently approved by the Government it is now considerably cheaper to swap lenders as the taxes and expenses involved have been significantly reduced allowing the consumer greater freedom of choice. Choice is the ultimate luxury in life.

For the undaunted you may also opt for legal action against your lender. Many such class action lawsuits have been successful over the last three years in Spain. Judges are prone to rule in favour of consumers as they are deemed as the “weak link”.

2. Developer’s Subrogation clause. By law on buying off-plan, you can turn down a developer’s mortgage and take on any other mortgage that you may wish. In other words, you are not forced to take the mortgage the developer offers you. This may become abusive when you are charged 1 pc commission for cancelling a developer’s mortgage (and taking on another lender of your choice). This clause is abusive and a purchaser under Spanish Consumer Law should not pay for this expense (Additional Disposition number 10.22 of Law 7/98 LCGC). This is a classic example set out in Spain’s Consumer Act, Law 26/1984.

Notwithstanding the above, I must add that taking on the developer’s mortgage normally entails a borrower saving an average €3,000 or more in tax and associated expenses. So you should basically first do the maths to establish whether it benefits you to turn the developer’s proposal down and swap elsewhere or else accept it (subrogate in it; take the position of the developer before his lender).

3. Mortgage resetting rate. This particularly annoying abusive clause allows the lender to automatically reset the mortgage interest rate when the referred index increases (i.e. Euribor) but requires the borrower to notify the lender formally when the opposite takes place. This may not be a problem when you live in Spain but may become a real nuisance if you live abroad as you will surely skip the deadlines to notify the lender meaning you will not be able to benefit if the referred interest rate decreases.

A variant of this clause is the unique ability of lenders to react swiftly and efficiently to rises in the interest rate of reference in a mortgage loan but likewise show an inordinate inability should the opposite happen. Lenders would make a seasoned cheetah blush when it comes to their speed and agility in revising and resetting mortgage rates on a quarterly basis – if it benefits them – whilst a borrower can only reset his rate annually (providing of course they actually notify the lender in time in most instances…bit of problem mind you complying with a deadline if you happen to live abroad). What this means is that a lender can take immediate advantage of a rise of interest rates (charging a borrower more from the get-go) whereas suspiciously they prove themselves to be obtusely slow to react to a decrease in interest rates (meaning they would earn less as you would be paying less in your monthly instalments) and of course it falls on the borrower to nudge them to reset the rate in their favour. That is why it is abusive, because – again – it is one-sided.

4. Mortgages to be repaid within the next 40 years. This is not really an abusive clause per se, it has more to do with the mechanics of compound interest and the repayment method selected. As I explained in my article on Bank Repossessions in Spain from 2007, after having paid for 25 years a standard mortgage loan in Spain you will have mostly paid for the interests accrued on the capital not having repaid most of the capital itself. Most Spanish mortgage loans follow the French repayment system which, unlike the German system, has this particularity that one ought to be keenly aware of. Many borrowers, following this example, mistakenly think they’ve redeemed already half of the loan after 25 years, when the truth is that after a quarter of a century there is a substantial amount of the capital itself outstanding as they have mostly paid rolled compounded interests on the capital itself! That is precisely why on signing up for a mortgage you, on average, may end up paying double the asking price of a property on the long run (for decades-long mortgage loans). This particularity of the Spanish mortgage system is particularly aggravating for those who stop paying their mortgages, for whatever reason, as many defaulting borrowers fall in the believe that most of the capital has already been repaid when it is simply not the case. That is one of the main reasons why defaulting on a Spanish mortgage loan is such a serious matter, besides being personally liable with all your assets (both current and future, whether held in Spain or abroad).

5. Imposing the Notary at completion. A borrower has the freedom to choose any Notary to witness the signing of a mortgage loan. Any clause that imposes the opposite is null and void and may be disregarded.

6. Lenders’ bank charges for non-requested services which are tagged on to the mortgage loan. This occurs when on signing a mortgage loan a lender throws in a bunch of unrequested services such as life covers, home insurance, pension plans or non-requested credit cards. This is null and void as per Additional Disposition number 10.23 of LCGC.

Having said this, the reason why an offered mortgage loan may be so competitive in the first place is only because a lender has tagged these unrequested services which help them to offset the financial shortfall of the loan itself. On removing them, the lender will be forced to immediately raise the applicable interest rate as this interest rate was, in practice, not feasible (without incurring in a financial loss). It was merely a ‘bait’ to entice you to hire the whole range of financial services available – unbeknownst to you – (this is really where they will make a profit, not from the mortgage loan itself).

7. Clause rounding off to the nearest decimal point in variable interest loans.This clause will round off the figures in detriment of the borrower. This may not sound like such a big deal but when the lender rounds off the interest rate applicable on, for example, a €300,000 loan to be repaid in 25 years’ time this can translate into thousands of Euros which are unduly added in on repaying it. This has been forbidden as from the 22nd of November 2002 onwards (but some lenders still attempt to include it nonetheless).

8. Clause by which the borrower pays all legal fees on litigation. This clause means that if the borrower decides to take their lender to court, for whatever reason, no matter the outcome of the ruling they will have to pay not only for their own legal fees albeit additionally for the lenders’ as well (both lawyer and advocate). And bank’s lawyer’s fees are not exactly cheap…

9. Clause by which the lender, on the borrower defaulting one instalment, terminates the mortgage contract and initiates a full-blown repossession procedure. This clause is abusive and is fairly common in mortgage contracts. This may be highly unfair to the borrower as they may have defaulted or paid late one month for a legitimate reason, other than being penniless of course. The law allows for the borrower to mend his delinquency and repay the owed amount with the accrued delay interests. If after three months the situation remains unchanged the lender is legally free to initiate a formal repossession procedure.

10. Clause by which the spread is increased significantly. In a deflationary economic environment in which the Euribor rate falls to an all-time low, lenders that failed to include the above mentioned collar clause (point one of this article) may choose to increase the spread charged on (top of) the Euribor rate so as to offset the shortfall in interests.

E.g. from an initial contractual starting spread of 1 pc tagged onto the Euribor, they now raise it by two points to 3 pc plus Euribor on the rates being reset.

So on the right hand you are left with nothing and on the left hand nothing is right. Bottom line, you can call it one name or the other, but the effects for the borrower will be exactly the same as those described in the above first point of this article (collar clauses). So why on earth do this then? Because a lender can claim they are not evil by applying collar clauses to naïve customers when in fact they are applying something different, but with identical effects on a borrower’s pocket. It all hinges on perception; on how aware and financial savvy consumers are. As consumers eventually got wind (through the media at large) on the abuse of collar clauses, lenders swiftly jumped to increase the borrowing spreads so as to maintain the status quo without being portrayed in an unfavourable light by the media.

In Conclusion

ADICAE (Spain’s Banks and Insurance Consumers’ Association) estimates that 97 pc of mortgage borrowers in Spain are unfamiliar with fundamental elements of their own mortgage contracts. Hopefully, by reading this article, you will have grown more financial savvy on mortgage loans and no longer be part of the said sad statistic.

So before you rush head-on to sign on the dotted line for a new relaxed life style under the sun, slow down and make sure it is first reviewed by an expert, such as a Spanish qualified lawyer or an experienced mortgage broker. Trust me, their advice will be worth every penny.

“A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain” – Mark Twain.

American author and humorist.

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

Larraín Nesbitt Lawyers is a law firm specialized in litigation, conveyancing inheritance and taxation. 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

• Litigation

Related articles

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

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

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

The Spanish wealth tax, known as patrimonio, might catch you buy surprise. It has been reintroduced during Spain’s financial crisis, but with a much higher tax-free allowance of €700,000 per person that also applies to non-residents.

The information for this article was provided by Blevins Franks, an international tax advisory service, and updated by Raymundo Larraín Nesbitt, a lawyer qualified to practise in Spain. This information is provided to help you do your background research, but not as a substitute for qualified legal advice.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8^th of November 2011

Spanish Wealth Tax History

1977: Introduced as a temporary tax, still going strong more than thirty years later.
2008: Suspended (set to zero) as of 01/01/2008
2011: Restored for tax year 2011 & 2012 (with important changes to the taxable base)
2013: Extended for the year 2013 & 2014

Never believe claims that a new tax is just a temporary measure!

The Wealth Tax (Patrimonio) in Spain

Most foreigners moving to Spain or buying property there understand that they will have to pay Spanish taxes like income tax, capital gains tax and inheritance tax. Not everyone, however, is aware that Spain imposes an extra tax, one with no equivalent in the UK and which is payable on top of the other Spanish taxes: The Wealth Tax in Spain.

Spanish Wealth Tax is payable by both residents and non-residents (if they own property in Spain), although the rules are different. Residents pay wealth tax on their worldwide assets but have quite generous tax-free allowances, whereas non-residents are only liable on net assets within Spain but miss out on some of the allowances.

Spanish Wealth Tax Legal Background

Wealth tax legislation is devolved to the autonomous governments, who can either use the national law, or pass their own laws on the following:

1. Tax-free allowances
2. Deductions and tax rebates
3. Levied tax rate

Some regions, like Catalonia, Valencia, The Balearics, and Andalucia, have passed their own laws. Others just use the national law. Now that the wealth tax has been re-introduced (September 2011), some regions are expected to review their laws.

Residents are subject to the laws of the autonomous regions where they live. Non-residents are always subject to the national law, regardless of where the property they own is located.

For residents, some regions apply a tax rebate of 100pc; meaning no wealth tax to be paid, whilst other regions apply no rebate, meaning the wealth tax must be paid in full. This disparity in laws leaves the door ajar for tax mitigation strategies for residents should the tax outlive its foreseen two-year period.

This guide only deals with the national law. If you live in Spain, and fullfil the conditions of residency, you need to consult a local tax specialist for more information.

Under this law, non-residents are also obliged to appoint a fiscal representative living in Spain, for example a lawyer or gestor. That will be an extra cost to bear in mind.

Timeframe

Its reintroduction, following the published law, will only be for a two-year period, 2012 and 2013, which corresponds to tax periods 2011 and 2012, respectively.

The reason, following the law’s own wording, is to “weather the financial storm which afflicts Spain at a time where those who own more have the moral obligation to contribute more to society following the legal principle enshrined by art 31 of Spain’s Constitution”. As from 2014 this tax will be abolished, in theory, again. Don’t hold your breath.

Wealth Tax in Spain – Deductions

Residents and non-residents are entitled to the following deductions per person:

– Individual deduction: €700,000 (previously €108,182.18 for residents, €0 for non-residents). Note that in Catalonia the deduction is €500,000.

Residents are also entitled per person to:

– Main home / permanent dwelling deduction: €300,000 (previously €150,253.03 for residents, €0 for non-residents)

Non-residents, by definition, cannot benefit from a permanent dwelling deduction

A married couple would each be entitled to the individual deduction as well as the deduction on their share of the main home owned in joint names (residents only).

So, for example, a married couple, resident and non-resident alike, has a combined tax-free allowance of €1,400,000 on their net estate. Taking into account a main home, a resident married couple has a total tax free allowance of €2,000,000.

Also note that this tax is on net assets, which means you can deduct mortgage debts (residents and non-residents alike)

Spanish Wealth Tax Rates

The wealth tax follows a progressive sliding scale, the larger the estate, the more you are taxed, with a cap set at 2,5pc for estates in excess of €10,7mn.

As stated above, the first €700,000 is the national tax-free allowance (for residents and non-residents alike).

The current rates under the national law for 2011 and 2012, applicable to net wealth on 31st December of each year, after all relevant deductions, are as follows:

In Madrid, the tax rate for Patrimonio is currently set at 0%, so residents of Madrid do not have to pay any Patrimonio wealth-tax.

What’s Included in Your Estate

This tax is accrued on all your net assets held on the 31st of December of each year:

1. Real estate
2. Professional activities
3. Bank deposits
4. Insurances and temporary income sources
5. Luxury assets such as: jewellery, fur coats, racing cars, yachts, aeroplanes
6. Works of art and antiquities
7. Royal rights, administrative concessions and intellectual property rights
8. Contractual options and the remainder of economic rights

Assets Exempt From The Wealth Tax

Some assets are exempt from wealth tax. These include:

• Household contents (but excluding jewels, fur coats, vehicles, boats, art, and antiques)
• Owner managed small businesses
• Family companies meeting certain conditions (shares in property investment companies are not exempt unless the company carries on a commercial activity – see below)
• Pension rights
• Intellectual property rights in the author’s ownership
• Business assets. For the assets to qualify as business assets, the activity must be the taxpayer’s main source of income (i.e. the income from the business must constitute at least 50% of his taxable income) and the activity must be carried out by the taxpayer on his own account and on a habitual basis.

Where a rental/property development business is carried out, the following conditions must be fulfilled for the activity to qualify as a commercial activity. Provided these conditions are fulfilled, the properties used in a rental/development business can be exempt from wealth tax in Spain.

1.There must be premises used exclusively for the management of the business activity. Part of a building can qualify provided the part used is separate from any other activity and is used exclusively for the management of the property business. A shared office will not qualify.

2.There must be at least one member of staff employed on a full-time contract. This could be your spouse but he or she would need to be registered as an employee for social security in Spain and contributions would be deducted from their salary each month.

Shareholdings are also exempt from wealth tax provided:

1.the company is a trading company
2.you own at least 5% of the share capital (or at least 20% including shareholdings belonging to a spouse or other family members)
3.you carry out managerial duties for the company
4.you derive a salary for such activities which is at least 50% of your total net earnings

Spanish Property values and the wealth tax

When working out the value of all your eligible assets each year, you must value your property at whichever is highest of the following values:

1. Catastral value (this value is included in your IBI receipt, akin to the UK’s Council tax)
2. Assessed value by Tax Authorities on filing other taxes
3. Price paid in your Title deed

Liabilities in general reduce taxable wealth, but not where it is a loan used to buy an asset that is specifically exempt or covered by exemptions. So where a mortgage is for the purchase of the main home (the value of which for wealth tax is covered by the main home exemption) no deduction is available for that mortgage.

For a non-resident, only Spanish liabilities would be taken into account and there is no exemption to consider. To obtain relief it would normally have to be a Spanish mortgage attached to a Spanish property.

Spanish Wealth Tax – Bank Balances

Bank balances are valued at the higher of the closing balance on 31st December or the average balance during the 4th quarter.

‘Personal Portfolio Bonds’

Life assurance contracts (such as a ‘Personal Portfolio Bond’) are taxed very favourably in Spain, helping to legally reduce various Spanish taxes including wealth tax.

The Spanish tax regulations state that cumulative wealth and income taxes cannot exceed 60% of a resident’s total taxable income (there is no limit for non-residents), subject to a minimum of 20% of the wealth tax calculation. This is a major way that a wealthy person can avoid wealth tax as a resident of Spain.

If you are able to tie up your capital for five years, you can also set up your Personal Portfolio Bond so that the life assurance has no immediate ‘value’ at all and can therefore be excluded from your wealth tax return. All you need to do is agree with the life assurance company that the contract cannot be redeemed for five years and one day. This will mean that no withdrawals are possible for the first 5 years, so you will first need to ensure that this is the best option for you.

Joint Income Tax Returns for the Wealth Tax in Spain

If you are married and have opted to file a joint income tax return, then to calculate your wealth tax limitation you need to add together the total income tax due and each individual wealth tax calculation. If the 60% limit is exceeded, the reduction in wealth tax is pro-rated between your spouse and yourself in proportion to the amount of each of your taxable wealth.

Returns and Payments

Where there is a liability, the wealth tax form must be completed after the end of each year and the tax is payable between May and July. Husband and wife need to make separate returns reflecting their shares of any joint assets and liabilities in addition to any personal items.

Whether you are buying property in Spain as a holiday home or investment, or if you are planning to move there permanently, it is important to make sure you are informed of all the tax issues in advance. Many British people are caught out by rules they were not aware of and this can result in more tax being paid than necessary. Professional advice will prove invaluable, and in order to make sure you are fully informed and kept up to date with any changes, find an adviser who specialises in both Spanish and UK taxation.

+ The official decree bringing back patrimonio (pdf in Spanish)
+ Summary of the new conditions from the Spanish Tax Authority (Agencia Tributaria) pdf in Spanish

The information for this guide was provided by Blevins Franks and Raymundo Larraín Nesbitt (a Spanish-qualified lawyer).

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.

2007 © Blevins Franks and 2011 © Raymundo Larraín Nesbitt. All rights reserved.

Spanish Wealth Tax Rates and Conditions in the Past

The rates for 2007 returns (applicable to the net tax base of wealth owned on 31st December 2007) were as follows:

Wealth tax in Spain Deductions

Residents

• Individual deduction: €108,182.18
• Own home deduction: €150,253.03

A married couple would each be entitled to the individual deduction as well as the deduction on their share of the main home owned in joint names.

Non-residents

If you own property or other assets in Spain but are not resident there, you are not entitled to any deductions and have to pay wealth tax on these assets at the rates above. It may only amount to a few hundred Euros, depending on the value of the property, but you will always have some liability as a non-resident owner of Spanish property.

The information for this guide was provided by Blevins Franks and Raymundo Larraín Nesbitt (a Spanish-qualified lawyer).

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

Larraín Nesbitt Lawyers is a law firm specialized in taxation, conveyancing, 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

• Fiscal Representation (Non-Resident Income Tax)
• Inheritance Tax
• Wealth Tax
• IBI Tax (Town Hall Rates)
• Tax model 720

Related articles

• Spanish Wealth Tax (Patrimonio) – 8th November 2011
• Taxes on Selling Spanish Property – 8th December 2014
• Changes to Spain’s Inheritance and Gift Tax Law – 21st February 2015
• La Complementaria or ‘Bargain-Hunter Tax’ – 8th May 2015
• Taxes on Buying Spanish Property – 8th July 2015
• Non-Resident Taxes in Spain – 8th December 2015
• Spanish Inheritance Tax for Non-Residents (Part I) – 21st February 2016
• Spanish Inheritance Tax for Non-Residents (Part II) – 8th March 2016
• Holiday Home Taxation in Spain – 8th of July 2017

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

2.007 © Blevins Franks and 2.011 © Raymundo Larraín Nesbitt. All rights reserved.

In this article I will focus on explaining the different guarantees and insurances in place that cover construction flaws in new build property. These are mandatory and are set out by Spain’s Building Act 38/99 (Ley de Ordenación de la Edificación, LOE for short).

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of November 2011

Introduction

I will purposely exclude the issue of Bank Guarantees securing off-plan deposits in Spain as it is unrelated to the topic at hand and has already been dealt with at length in other articles of mine. The reason being is that BGs are unrelated to off-plan construction flaws as their scope is securing buyer’s deposits.

Spain’s Building Act, Law 38/99

Is a fairly important state law that is applied nationwide. One of the main goals of said law as its preamble explains is protecting Consumer’s Rights. It doesn’t escape anyone the importance the construction sector has had in Spain over the last decade and will foreseeably continue to have in the future. Some have even gone as far as labelling it as Spain’s economic heart along with tourism due to its important GDP contribution.

Said law identifies the different construction agents involved within the building process and their civil liability. If the individual responsibility cannot be ascertained they can all be sued jointly. I will refer to them broadly as “agents” as referred to in Arts 8 to 16 which broadly include among others: the architect(s), technical architect, structural engineers, developer, constructor, construction project director and materials purveyors.

To avoid any unnecessary confusions, “agents” is the generic term employed by said law, “agentes de la construcción”; it does not refer at all to Estate Agents or Real Estate Agencies.

Construction Guarantees and Ten-Year Building Insurance

Art. 17 of the LOE rules on the three different guarantees available as well as the time periods covered. A common problem is finding out as from what time does the period of protection start. This is covered further below under the heading “Guarantee Protection Timeline”:

1. Construction flaws: 1 year. 

Both the developer and constructor will be held jointly liable for a period of one year.

Examples of this would be: mismatching floor tiles, missing tiles, flaked painting, faulty door knobs, leaking faucets and in general all those related to shoddy workmanship or substandard materials (i.e. wooden carpentry, faulty window frames that let in heavy rainfall).

These flaws are apparent to the naked eye and are what one would normally pick up on doing a snagging list prior to completion. I advise hiring an independent professional snagging company which are fairly experienced at dealing with these issues, Lawyers do not write up snagging lists. My advice is not to complete until the snagging flaws are remedied or else practice a retention upon completion to secure the job is done within, for example, the next 6 months after closing. The reason being is that once you hand over the money at completion they may not be as “keen” to solve the flaws. Thus a retention or delaying completion, until these minor flaws are fixed, will allow you leverage on negotiating acting as an “incentive”.

2. Dwelling hazards: 3 years. 

The second batch of guarantees aimed at those flaws that directly affect habitation. These problems pose a threat to dwellers’ health, hygiene or even the environment itself. The guarantee period is three years.

Examples of this are: humidity patches in bedrooms (which may lead to aggressive mold growths if unchecked), faulty electrical appliances, leaking gas pipelines.

These problems are normally severe. Imagine you fly over to Spain on holiday and have invited some friends to show off your new property. On opening the door to your house the whole floor is flooded with large batches of green fungus growing on the walls. You cannot live in a property in such a poor state, never mind having to pay for alternative accommodation such as hotel lodging for you -and your friends- in high season…

3. Structural Problems: 10 year warranty. 

This is the famous “Seguro Decenal”, or ten-year warranty, you may have been quoted a myriad of times on buying. It covers serious structural problems compromising the mechanical stability of the building which may be life-threatening rendering the property inapt to be dwelled. An insurance company is hired and tasked with the role of overseeing the different stages throughout the whole construction process; from start to end until the property is delivered legally (Acta de Recepción) and it has fully verified the materials and build comply with our laws and construction specifications.

Examples of this are: landslides due to unstable foundations (heavy rainfall or quicksand) which may cause the entire structure to shift and crack, retention wall boulders falling off a cliff, huge cracks (in ceilings, walls, beams or pillars) compromising people’s life, collapsing roofs due to heavy rainfall.

Unfortunately the application of this ten-year insurance is fairly restrictive in practice. This insurance is mandatory for all new build property and must be submitted on applying for a Certificate of End of Construction. When in a development the Horizontal Division deed is drawn up this insurance will be one of the mandatory documents a Notary will demand from a developer in compliance with Spain’s laws.

Due to all the practical problems this caused, an amendment was brought about on by Law 52/2002 of 30th December 2002, additional disposition number two, which would be enforceable as from the 1st January 2003. This resulted in the exemption of self-developers that built just one dwelling for their own use to apply for the 10-year building guarantee. The underlying reason is that it is taken for granted they are actually going to live in the property themselves so it’s in their own best interests to secure the construction is carried out correctly. The loophole hear is that a self-developer may build a property to sell it on for a profit in which case the law establishes legal safeguards so a consumer buying this house is not deprived from such a vital insurance (but in practice this safeguard can actually be easily circumvented…).

It should be noted that self-developers are legally exempt from applying for a 10-year construction warranty.

Guarantee Protection Timeline

A fairly common blunder is to think that the above two guarantees and the ten-year insurance deadline actually start as from the time of completion at the Notary; which is when you hand over your money in exchange for the Title deed, right? Wrong. Think again!

From a layman’s perspective this seems ludicrously obvious as after all you are not an owner until you close on the property at the Notary and you are formally handed the Title deed. In practice it doesn’t work out like that and leads to interesting legal problems.

The above deadlines are to be counted as from the time the developer attains what is known as the “Acta de Recepción” (Art 6 and 17 of the LOE). This is when the constructor hands over the development to the developer considering his work concluded. By default, as this is often unknown, it is taken as from the time the Certificate of End of Construction (CEC, for short) is signed by the developer’s appointed architect and countersigned with the official seals of both the Architect’s regional College and Technical Architect’s regional College. This document, as its own name implies, means the development or construction phase within a development is regarded as finished pending the granting of a First Occupancy Licence (LFO, for short) by a town hall.

Once the developer attains the CEC he applies for a Licence of First Occupation at the local town hall’s Planning Department. In theory a LFO is issued within a few months of the developer submitting the CEC. But as we all know in practice this may take longer, as in much longer. In extreme cases even years because the development may not comply with legal requirements which hinder altogether the legal delivery of the property, that is, the issuance of the said LFO. The attainment of a LFO is the major milestone in the off-plan build process as from this moment onwards the property is regarded as legal and fit for human habitation. From that moment onwards one can request all official utility services (water, electricity, gas).

For example, let’s imagine a property with a CEC issued in 2000 which attains the LFO three years later. In 2003 Mr and Mrs Skyrim which had previously signed an off-plan Private Purchase Contract are required to complete by recorded delivery. It becomes apparent after having lived for a few months there are outstanding building flaws which ought to be dealt with. Unfortunately for them they can no longer claim either the one-year or the three-year guarantee as more than three years have elapsed already since the CEC was granted which is when the timer started off. They can still claim on the ten-year guarantee – if applicable – but as previously written its application in practice is restrictive.

In the above example my previous advice on either holding out for completion (not always legally possible) or else practice a retention before a Notary at completion until the flaws are mended comes in very handy.

Time to Claim

We mustn’t confuse the above protection guarantee timelines with the timeline to exercise our rights to have the problems fixed either out-of-court or litigating. Art 18 of the LOE rules it will be 2 years as from the time the flaws or problems become apparent.

For example, a property attains a CEC in January 2000 and the LFO is attained in May of that year. I complete in June and in November of 2000, after heavy rainfall, large batches of humidity appear in the master bedroom. I will have two years to claim as from November onwards. To do this I need to claim within the three years of protection which started off in January 2000 and end in January 2003. So I could for example wait almost three years, for whatever reason that interests me, until December 2002 to claim. On claiming within the three year protection period the developer has two years to mend it (setting it back till December 2004); that’s almost five years.

I would however advise on the damages or construction flaws being reported immediately. The importance of claiming on time is explained clearly in the below example:

Example relating to a 10-year Building Guarantee. Mr and Mrs Morrowind buy a new build in 2000 and it becomes apparent in October 2002 the main beam in the living room is collapsing. They believe they are protected until 2010 and can claim within this decade. In 2006 they claim for this structural damage thinking they are still on time. Unfortunately the 2 year deadline to exercise their right has elapsed (concretely in October 2004). Which just stresses the importance of distinguishing clearly in Spain’s Building Act between the guarantee protection timeline set out in art 17 (in this case 10 years as it’s a structural fault) and the timeline to exercise said right set out in Art 18 (only 2 years) as from the time the flaw was apparent (October 2002).

Creating and Upholding Legal Evidence

It is important that with a view to a potential court case all communication addressed to the developer is done by means of recorded delivery letters (burofax) with acknowledgement of both content and receipt (“acuse de recibo con certificación de contenido”). Emails will not suffice. I would advise all formal communication are done only through your appointed lawyer.

Moreover, you should have a Notary visit the property and witness the damage by means of an “Acta Notarial” (a qualified witness report) which can then be used to your advantage in a court case as irrefutable evidence of the damage and the date on which it was witnessed by this high standing civil servant.

Conclusion

Despite the – justified – rampant gloom and doom, Spain will continue to attract foreigners within the next decades to enjoy our affordable lifestyle under the sun. Scores will settle down buying houses, either as resales or new builds.

Which is why it is important a culture of awareness on Consumer Rights is created so foreigners at large, and in particular fellow expatriates, know what their rights are and how to exercise them. I leave the latter for another article.

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

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

Legal services Larraín Nesbitt Lawyers can offer you

• Conveyancing – Buying
• Conveyancing – Selling
• NIE Number (Tax Identification Number)

Related articles

• How to Buy Property in Spain – Advice by the Foreign & Commonwealth Office
• Buying Distressed Property in Spain – 8th August 2011
• Community of Owners in Spain: Challenging Assembly Resolutions – 10th October 2011
• Off-Plan Construction Guarantees – 8th November 2011
• Rent-to-Buy in Spain: The Smart Choice – 8th April 2012
• Non-residents: Six Advantages of Making a Spanish Will – 8th August 2012
• Community of Owners, or Comunidad de Propietarios – 8th July 2012
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• Bank Guarantees in Spain – 8th April 2013
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Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

2.011 © Raymundo Larraín Nesbitt. All rights reserved.

Oh, no! It’s that dreaded time of the year again – you groan –, an AGM is up next. Marked in red in your calendar, you know you’re in for a rough ride. You rattle your brain on who you can delegate your vote so as to avoid attending personally. Hmm, how about them charming Swedish couple living on the ground floor?

By Raymundo Larraín Nesbitt
Lawyer – Abogado
10th of October 2011

Introduction

After years of sowing problems, malcontent is generally rife in Communities of Owners (Comunidad de Propietarios, in Spanish). General Assemblies develop into pitched battlegrounds in which all the budding problems that have slowly been brewing up over time concoct and all hell breaks loose. Disgruntled owners with an axe to grind sprout from the woodwork. Owner’s Assemblies are the perfect venue to voice their discontent and rally followers to their cause even calling in artillery strikes (lawyers) if needed be.

Lawyers are – of course – only too eager to assist in the ensuing mayhem!

Problems, Problems, Problems

The truth of the matter is that the vast majority of owners do not attend General Assemblies. Many have been previously scalded in prior AGM’s and would rather avert protracted squabbling for hours on end altogether delegating their vote.

The problem is that on doing so, unbeknownst to you, resolutions may be passed that are detrimental to your interests i.e. its approved that your neighbour can install his noisy A/C unit right below your master bedroom window. Trust me, you won’t get to sleep anytime soon in summertime.

That’s why at times Assembly resolutions may need challenging as they can be unfavourable to either the Community and/or yourself.

Before you continue reading this article I strongly advise you read first my article on Comunidad de Propietarios: Avoiding Problems with your Neighbours in Spain from the 26th of June 2009. Said article clearly lays out the Spanish Commonhold Act principles and its legal framework. The following article is using it as a necessary stepping stone to focus on a particular problem (challenging Assembly resolutions). Concepts such as Community By-laws (aka Community Statutes), Internal Community Rules or even what a Master Deed is are concisely explained within and are deemed necessary to fully comprehend the following article.

General Assembly Resolutions

Section 19 of Spain’s Commonhold Act (Ley de Propiedad Horizontal 49/1960, amended significantly by Law 8/1999) deals with the recording of the resolutions reached. They will be recorded in a book of minutes, validated and stamped by the Land Registrar. By Law, a copy of the meeting’s minutes (normally a photocopy) should be sent to each owner with the adopted resolutions following either the AGM or EGM. The secretary will act as the custodian of the general meeting’s minutes book.

Make sure you verify what resolutions have been passed, regardless whether you attended or not. If you spot one that affects you adversely it’s high time to challenge it.

Challenging General Assembly Resolutions

Section 18 rules on how Assembly resolutions ought to be challenged.

By the word “challenged” it is understood that this is carried out though a court decision i.e. judge’s ruling. It does not suffice, although it is formally required to challenge, to record your dissenting vote. Sending recorded letters (i.e. burofaxes), post Assembly, addressed to the Community’s President showing your disconformity to a passed resolution, being vocal about your discontent, chain e-mailing fellow community members et cetera serve no practical purpose whatsoever other than to unwind letting off steam. Legally, as per the Commonhold Act, if you really want to challenge a resolution it needs to be done through a lawyer before a court. Only a judge’s resolution can successfully overturn what has been approved democratically at a GA.

This can be done on three accounts only:

1. When such resolutions are contrary to Law or the Community Statutes

Examples:

a) The proposed resolutions were not included on mailing the voting agenda of the Owner’s Assembly which is sent to each owner prior to the meeting being held so they know in advance what is to be voted. Owners are therefore at a disadvantage as they may be blissfully unaware that a particular resolution that affected them was going to be passed i.e. no-one mentioned your neighbour’s A/C unit was to be placed right below your master bedroom window.

b) When the required majorities detailed in section 17 are unmet. Some resolutions, depending on their nature, may require unanimity in lieu of majority votes. Unanimity is required, by law, to modify a Master Deed or the Community’s By-laws.

2. On them being seriously detrimental to the interests of the Community and benefit one or several unit owners.

Examples:

a) The authorisation to one owner to use exclusively a communal element belonging to the Commonhold i.e. the President may now use the flat roof or a communal parking space for his own private purposes.

b) Writing-off existing arrears from one of the owners i.e. the vice-president’s brother-in-law

3. When they are seriously detrimental to some unit owner who has no legal obligation to sustain such detriment or when they were adopted in abuse of rights.

Examples:

a) When the Owners’ Assembly adopts some owners paying more than they should i.e. villa owners in a golf resort paying the same community contribution than a one bedroom flat. It is blatant that larger properties (with have larger Commonhold quotas) ought to contribute more.

b) When the OA turns down an owner’s petition which causes him harm i.e. they do not allow him to install glass curtains to enclose his terrace when other owners have been previously allowed, whether tacitly or expressly.

Requirements to Successfully Challenge a Resolution

As a general requirement, only owners who are up-to-date with their community fees may vote and challenge community resolutions before a court (section18). You may even pay your arrears on the same day the GA is being held and thus be allowed to vote. Alternatively you can lodge all arrears before the law court that will be hearing your case.

As a particular requirement, if you do assist to an Owners’ Assembly it is of paramount importance your dissenting vote is recorded at the agenda’s minutes by the Secretary. It must be expressly recorded that you plan to challenge said resolution at court. If it’s not carefully worded as I write, it is highly likely the judge will turn down your petition to challenge it. It does not suffice that in the agenda’s minutes it was merely recorded you casted an opposing vote. It must be specifically written and recorded that, besides your opposing vote, you plan to challenge this resolution at court. Many Owners’ Assembly resolutions which are challenged result in being thrown out of court because of this apparently trivial detail. The Devil is in the detail.

Deadlines to Challenge

It goes without saying that all resolutions passed by the General Assembly are mandatory for every owner unless they formally challenge it i.e. through a law court represented by a lawyer. The reason being is that as per section 17.1 and section 9 all owners who have been notified of the adopted resolutions and have not formally opposed them are legally presumed to have voted favourably.

The deadlines are to be counted as from the following day on which they were passed at the Assembly and are natural days (as opposed to working days).

Example: resolution adopted on the 3rd of March which is detrimental to the Community’s interest. The deadline is 3 months, starting on the 4th of March and ending on the 4th of June.

Initially there were only three deadlines in Spain’s Commonhold Act. Albeit a recent Supreme Court ruling added a fourth one as doctrine.

i) There’s a deadline of 30 natural days if you neither assisted to the Owner’s Assembly nor did you delegate your vote on a resolution that formally requires a unanimity vote i.e. affecting the Master Deed or the Community’s By-laws. This is counted as from the time you received in your mail box a copy of the passed resolutions or else as from the time they were posted in the Communities billboard. A letter must be sent to the Community’s Secretary acknowledging your dissent and your intention to challenge the passed resolution at court. I suggest this letter is sent by recorded delivery with acknowledgement of both content and receipt (i.e. burofax). This letter will be used at court on challenging a resolution. If you don’t do it exactly in the described manner, it is presumed you voted favourably as per section 17.1 in which case you are bound by law and must obey the resolution.

ii) A year if you neither assisted to the Owner’s Assembly nor did you delegate your vote

iii) 3 months as from the time the resolution was passed (if you assisted or delegated your vote) when it is detrimental to the Community or to a unit owner or else was passed with abuse of rights.

iv) A year if they are contrary to Law or the Community Statutes (By-laws). If after a year elapses it still remains unchallenged the adopted resolution becomes resolute and is convalidated despite it being contrary to Law or the Statutes.

In Conclusion

I would advise challenging an adopted resolution as soon as possible and preferably always before the three-month deadline is up. The reasoning behind this is that a judge might not concur with you labelling a resolution as contrary to Law or the Community Statutes in which case you wouldn’t have a year to challenge it, only three months. You would run the risk of having already surpassed the three-month deadline to challenge it and your case would be thrown out of court as a result.

It is a fairly common blunder that owners, blinded by their own self-righteousness, deceive themselves into thinking the conflicting resolution is indeed “illegal” and therefore have ample time to litigate (one year). This may -or may not- be the case depending on the judge’s ruling. It is far wiser to play it safe and not take risks challenging it at your earliest convenience within the said three-month deadline.

If you foresee problems with your Community of Owners I strongly advise you to hire a lawyer that can safely guide you through the Commonhold Act minefield. Bear in mind that opposing forces will bring their own lawyers into the fray!

“The first thing we do, let’s kill all the lawyers” – William Shakespeare. Henry VI, Part 2.

World lauded English poet, playwright, and actor. Arguably the finest writer in English language.

Legal services Larraín Nesbitt Lawyers can offer you

• Community of Owners
• Property Litigation

Related articles

• Community of Owners or Comunidad de Propietarios – 10th October 2011
• Community of Owners Insurance Policies – 8th August 2013

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

2.011 © Raymundo Larraín Nesbitt. All rights reserved.

There are many ways to acquire property in Spain, and not all of them involve paying in exchange for ownership!

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8^th of September 2011

Photo credit: © Jon Wrege.

Introduction

You may have heard recently in the news the anecdote on how a homeless acquired, without compensation, a million dollar McMansion in the US through an obscure and long-forgotten law known as “Adverse Possession”.

This legal figure sinks its roots deeply in Roman law and is known as “usucapio”. The Spanish Civil Code knows it as “usucapion”, or “Prescripción Adquisitiva”, and is ruled in arts 1.930 et seq. Usucapio is a perfectly acceptable way of acquiring property in Spain with the same legal validity as, say, an exchange of contracts before a Notary Public. Adverse possession can also be found in England and Wales’ laws.

The purpose of this article is to divulge adverse possession, giving a sweeping overview on how it works in Spain. I will purposely cut out complex technicalities which are of interest to no one, except us lawyers.

Definition

Adverse possession is the legal procedure whereby title to another’s real property or royal rights are acquired, without compensation, by holding the property for a statutory time period.

Historical Justification

In Roman times, ongoing wars were taxing on population and frequently land and farms were left abandoned after their owners perished on the onslaught. The Roman Empire, ever expanding, ever hungry, could not afford fertile land sitting empty without anyone laboring it. Usucapio was the jurisconsults’ answer to this riddle. Romans, ever pragmatic, devised a legal figure whereby citizens could, after a stipulated period of time had elapsed, take full ownership of these derelict lands to work them and make them productive once again for the good of the Empire.

Fast-forward a couple of millennia and we are in the midst of a post real estate bubble. We are witnessing how entire developments, tallying hundreds if not thousands of units, are sitting empty in countries such as Ireland, USA, Spain and worst of all in China as a testimony to Man’s folly. Shrewd opportunists are taking advantage of this legal figure to gain ownership on some of these units (mind you, I wouldn’t risk trying it in China).

Before you fret, picturing hordes of unemployed workers crawling over you Spanish overseas villa walls to break in and ransack it, Hannibal ad portas scenario, let me reassure you by telling you that this procedure in Spain is far from easy and normally spans decades to take effective ownership of the property (and this normally must be unchallenged to top it off). But you do risk losing material and legal possession of a property in the interim whilst the case is being heard at court, which may take quite a few years, bearing in mind how clogged Spanish law courts are as of late.

Limitation Periods

To further understand this I am forced to previously explain what are meant by “good faith” and “just title”. The former is when you acquire real property from someone you believe is the rightful owner, whether true or not. By just title is understood the legal procedure of handing over a property in a legitimate manner. Good faith is always presumed albeit just title is not and must be proved i.e. farmer selling you unregistered rustic land or a beneficiary inheriting it.

1. Movable property

i) With good faith, it’s 3 years. Possession of movable assets with good faith is equivalent to just title. i.e. someone selling you a bicycle.
ii) Without good faith, it’s 6 years. This possession must be uninterrupted.

Example, let’s say you borrowed, not stole, your neighbours’ lawn mower and have used it thereafter, unmolested, for the following six years. After this time limit you have become the rightful owner to it.

2. Unmovable property (Real Estate)

i) With good faith and just title, 10 years if the owner lives nearby.
ii) With good faith and just title, 20 years if the owner is absent. By absent it is understood the owner lives abroad or overseas.
iii) Without good faith and just title, regardless of whether the owner lives nearby or is absent, 30 years.

In Conclusion

With over a million properties standing empty in Spain, national unemployment (youth unemployment worst of all) soaring to unprecedented new levels, credit shut off, looming bank repossessions set at all-time record-highs, increase in taxes, the combination is ripe to leave the door ajar for social unrest to slip in. Some may take advantage of adverse possession (or even go further, starting social riots as has been the case of England).

Adverse possession is one of many legal ways to acquire title in Spain. Remember that squatters in Spain also have legal rights, which often involves having to fight them off at court. Do not take law onto your own hands. Always seek legal advice if you believe you’ve fallen victim to it.

“Possession is nine-tenths of the law”.  Scottish expression

“Possession isn’t nine-tenths of the law. It’s nine-tenths of the problem” – John Lennon. Outstanding English musician, singer and songwriter.

Legal services Larraín Nesbitt Lawyers can offer you

• Conveyancing – Buying
• Conveyancing – Selling
• NIE Number (Tax Identification Number)

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.

2.011 © Raymundo Larraín Nesbitt. All rights reserved.