Off-Plan Construction Guarantees: Know Your Rights

Raymundo Larraín Nesbitt, November, 8. 2011

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.

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Community of Owners in Spain: Challenging Assembly Resolutions

Raymundo Larraín Nesbitt, October, 10. 2011

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.

 

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Adverse Possession in Spain Explained

Raymundo Larraín Nesbitt, September, 8. 2011

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
8th 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.

 

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

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Buying Distressed Property in Spain

Raymundo Larraín Nesbitt, August, 8. 2011

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

In this article I’m going to focus, briefly, on the advantages and disadvantages of buying a so-called 'distressed property' from either a bank or a REA as well as shedding some light on the types of distressed assets available to small-time investors.

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

 

Introduction

Spanish Banks, following the collapse of the Spanish Property bubble in 2007, have become the de facto largest Real Estate holders in Spain with thousands of properties on their books, whether resale’s or off-plans. Every major lending institution has incorporated specific real estate divisions to off-load the glut of properties available, acting as conduits. The number of unsold property in Spain is estimated to be in the region of one million units. The market will probably take a considerable amount of time, years, to absorb such a huge stock. And the pain will be prolonged furthermore if the credit shortage, the market’s lifeblood, is sapped away in the wake of increasing interest rates in the Eurozone.

As I have pointed out previously in other articles, this phenomenon has unleashed a fierce competition, with Real Estate Agencies (REA, for short) and Developers on the one hand, and lenders on the other, all vying to sell properties. In Spain you can choose nowadays whether to buy property from a bank or from a REA. You will be spoilt for choice.

Despite what many would believe, there is a case to be made in favor of REAs. The Market has already cleansed the majority of the fly-by-night rogue cowboys who had set-up shop in the heat of the moment and who gave a bad name to the Spanish property industry. The Estate Agencies which have been left standing after the dust has settled down are those which always had a more professional approach to clients and, in their majority, were already consolidated long-established companies spanning in some cases decades. I find it hardly surprising to witness how these well-respected realtors are still standing in the bubble’s aftermath given their hard-earned professionalism.

 

Types of Distressed Property

 

Broadly speaking, there are two main types of distressed assets available to pick from, hinging on whether a repossession procedure has concluded (or for that matter even started) or whether it is ongoing. Each has its own associated advantages and disadvantages.

1. Non-Performing Mortgage Loans, Key-Ready Properties or Pre-Auction Real Estate Assets (cesión de crédito)


Broadly speaking, NPLs is the typical case when a borrower falls into arrears by more than three months and faces the prospect of a repossession procedure. The lender, after three months in arrears, is in a position to issue legal proceedings against him. These properties, usually, involve a three-way negotiation between borrower, lender and investor. They are also known as short sales or fire sales.

Another sub-type of NPLs occurs when developers, unable to meet their financial commitments, relinquish ownership legally (following a legal procedure known as ‘dación en pago de deuda‘) and in exchange a lender discharges them from the mortgage debt, and its liability, in full (for more details on this procedure, please read my article on The Dacion en Pago Explained). In this manner, struggling developers are letting go of whole developments tallying hundreds of units. These are the type of so-called distressed property in which some investment funds (vulture funds) are specialized in acquiring, especially from ailing Spanish Savings banks. They have the leverage to negotiate huge discounts as they are buying properties in bulk numbers, in the hundreds, from Savings banks. In this particular case there’s only a two-way negotiation, investor fund and bank. The developer is now out of the picture.

Additionally, and exceptionally, it is also the case of bank properties which have already undergone a full-blown repossession procedure (‘Adjudicación Bancaria’ or post-auction properties) and whose previous owners have already been formally evicted by a bank. I write it is exceptional because a repossession procedure is currently taking, post credit-crunch, an average of 2-5 years in Spain. So post-auction properties available now, in 2011, are probably the ones which were repossessed early on at the start of the market’s collapse. We still have not seen the brunt of these much sought-after repossessions which everyone is keenly waiting for, quite simply because they are still NOT available in today’s market. The above should be noted by those eagerly booking flights to Spain expecting to find 50% discounted deals and who end up being sorely disappointed as these deals are, apparently, nowhere to be found.

The deluge of repossessions in Spain took place post 2008, when the Euribor rate, index to which 95pc of Spanish variable rate mortgage loans are referred to, peaked off reaching an all-time high in October 2008. Needless to say, these coveted properties, genuine bank repossessions, will truly be the “real deal”. These property’s prices will be well-below the market’s value (BMV). However, such properties are currently scarce as we’ve only yet seen a trickle of them. As repossessions in Spain peaked off post 2008, and a full repossession procedure is taking 2-5 years on average, the glut of bank repossessions will probably not be made available in the market until after 2013.

These are the type of properties which savvy investors picked up in Spain’s last recession, mid to late nineties, and who experienced an astounding capital appreciation in the ensuing real estate cycle. If you are lucky enough to pick one of these, you have guaranteed bragging rights.

Advantages

  • Pre-auction dwellings will be cheaper than your average market property, but not necessarily dirt cheap. The exception would be what I label above as genuine bank repossessions (post-auction) which are foreclosed properties that have undergone the full 2-5 year repossession cycle and which are now empty bank-owned property. These properties are genuinely below market value (BMV) but are currently scarce for the above reasons.
  • They are key-ready properties. Meaning once contracts are exchanged you can take possession of them immediately being able to let them right off the bat (providing they have been issued with a First Occupation Licence, LFO for short, if they are off-plan). Additionally in some regions of Spain, i.e. Balearic Islands, a specific municipal licence is mandatory to rent a property. Not all properties can be legally rented in such regions, only those that qualify, so you can be heavily fined by a town hall if you are caught letting lacking the mandatory licence to rent. For more details on the legal significance of LFOs, please read my article on The Licence of First Occupation Explained.
  • Banks will be able to provide you with unmatched lending terms, providing you qualify for a credit. You will be hard pressed to find better finance conditions elsewhere. Bear in mind lenders has a vested interest in selling these properties which entail maintenance expenses (property-related taxes, Community of Owners’ fees etc.) as their core business is lending, not acting as landlords.
  • You can even inspect the property prior to making a decision on whether to acquire it or not. This is a huge advantage that removes uncertainty as you actually know what you’re money is buying. The owner’s permission will be required however, as they are still dwelling in it, but they are bound to cave in as it is in their own best interest to avoid a repossession procedure as this would potentially jeopardize their whole estate, whether in Spain or located elsewhere.
  • You will waive having to wait for years on end until a long protracted repossession procedure is concluded.
  • Pre-auction properties tend to be in a spotless state as the borrower, the owner, has a vested interest in shifting the loan burden to someone else ASAP. So it’s not in their best interests to trash the property. Post-auction, a bank will be the owner and they will likewise have a vested interest in offering an attractive property for viewings.

 

Disadvantages

  • Due to their nature, the procedure may be somewhat rushed when it involves a three-way negotiation, as time is pressing for the distressed borrower because a repossession is looming. Time is of the essence in this scenario as a Branch Manager can only do so much to stave off temporarily a full blown out repossession procedure. Even more so nowadays when many competencies have been taken from local branches and are now decided upon strictly from lender’s centralized headquarters. This disadvantage does not apply in two-way negotiations, bank and investor, as there’s simply no rush because repossession already took place and it is done and over with. The property is now owned by the bank, not by the borrower.
  • You will need to have ready-at-hand a sizeable deposit to commit (normally a non-refundable security deposit) equating normally to 10-15% of the sales’ price to strike it off the market. Meaning you normally cannot rely entirely on a lender to finance the whole transaction, even more so if you are non-resident in Spain.
  • Frequently REAs can offer better prized properties than those offered by banks. In fact, banks’ properties can seldom be labeled as a “bargain”, and frequently, in my humble opinion, may not be the best choice, at least now in 2011. This may well change as from 2013, when sought-after repossessions are released en masse. I will go into more detail on this further below.

 

2. Bank Repossessions or Post-Auction Properties

These foreclosed properties, on which borrowers have defaulted, are subject of an ongoing repossession procedure with everything this entails from a legal standpoint. The lender is in the process of repossessing the property and has still not taken possession of it (whether physically or legally). If you want to delve further on the matter, you may want to read my in-depth article Bank Repossessions in Spain.

Advantage

  • The prime advantage is the extremely low price fetched in a Public Auction allowing banks to sell on these properties well-below their true market value (BMV). Public Auctions in Spain, following new regulation, mean a lender can withhold an auctioned property for as little as 60pc of its appraisal value if no one bids on a second round (this used to be 50pc early on this year). This means, for example, that a property that has been valued at say 100k, specifically for auction purposes (but whose real market value can be as high as 150k), the bank will get to keep it for only 60k (that is 60pc of 100k) when the auction is over (providing no one bids, the bank gets to keeps the property that was acting as collateral for the mortgage-backed loan). These appraisals, which are specifically for the purposes of a Public Auction, are already well-below the true market value. So, following with my example, this would translates into a 40% “discount” being applied to a base value (100k) which was already well-below the intrinsic market value (150k). In this case the bank has adjudicated itself, post auction, a property that is worth 150k for only 60k; I’ll do the Maths for you, that is a 60% profit on its real saleable value. Another matter, of course, is just at what price a bank will sell on the property for…The bank at this point in time, post auction, has now been declared as the formal legal owner to the property, but still has no material possession of the property, as the owner, and his family, need to be evicted now.So all in all, on buying an ongoing bank repossession, you are looking at discounts which amount, at the very least, to well and above 50%, as explained in my above example. On signing a mortgage-backed loan in Spain, a Mortgage deed will always include two valuations, one specific for the purposes of a Public Auction (which is well-below a standard market valuation) and a second one representing the loan-to-value (which is the valuation everyone is familiar with). The 40% “discount” a bank obtains on adjudicating itself a property in a Public Auction is applied on the lower valuation, the one specific for the Public Auction.

 

Disadvantages

  • Repossession procedures take long in Spain (years). This has been aggravated by law courts being clogged with procedural matters post credit-crunch. Meaning that at no time will you be able to take material possession of the property until the procedure is fully over with, years.
  • At no time will you be able to inspect the property prior to making up your mind, as the owner must still be vacated, by force, if necessary. You are buying the property as is. The reason being is because the bank does not have possession of the property. The borrower, the owner, is living in the property and is in the process of being evicted so they will naturally have no interest in showing a buyer the property. So basically you are blindly buying a property relying exclusively on the veracity and accuracy of the Land Registry, which as we know, is not always that accurate i.e. undeclared extensions undergone by rustic property.
  • It may fall on the buyer to legally vacate the owner, and his family, with the assistance of a lawyer and court agent, which may prove very stressing bringing all sort of undesirable surprises. Besides, this will entail additional legal disbursements (formal eviction procedure) and time. For more details on how eviction procedures work in Spain, please read my article “How to Evict a Tenant who is not Paying the Rent”, from 2007.
  • Banks may leave it up to the buyer to carry out all the necessary legal checks on the property i.e. Planning irregularities, existence of an issued Licence of First Occupation, undeclared extensions, outstanding fees owed to the Community of Owners, ongoing boundary disputes with neighbours etc. Do not think for one moment that only because you are buying a bank-owned repossession, the lender is guaranteeing it is fully legal unless they commit themselves, in writing, in a contract, to ensure its legality on a buyer’s behalf, and even then, you should still double-check its legality regardless. It normally falls onto the buyer, or more likely his appointed lawyer, to carry out the legal checks.
  • Borrowers can trash the property on being evicted legally to the point the damage seriously detracts from the assets’ worth. Neither the lender, nor the law court, nor your lawyer can be held responsible for this. It’s a chance you take on buying such distressed property and is entirely unforeseeable as you cannot inspect the property previously; it’s a calculated risk you are taking. You simply cannot take pre-emptive measures to avoid it. Naturally the ex-owner can be held accountable for their actions, but in practice it will be futile as they will normally be assetless, which is why they are being repossessed in the first place. So even on winning a case against them, you will not see a penny.
  • You will need to have ready-at-hand a sizeable deposit to commit (normally a non-refundable security deposit) equating normally to 10-15% of the sales’ price to strike the property off the market. Meaning you normally cannot rely entirely on a lender to finance the whole transaction, even more so if you are non-resident in Spain.
  • Frequently, post 2003/2005, mortgage-backed loans attached huge charges that outstripped the intrinsic property value, as a consequence of lax lending criteria and appallingly flawed valuation standards, which in practice negate any profit-taking. Meaning the asset is actually worth less than the attached loan defeating the whole purpose of investing in it as numbers will simply not stack-up. Hence the large number of public auctions in which no one is bidding in Spain; not even professional bidders (Subasteros) who are steering clear of them. Statistically, 9 out of 10 auctions in Spain remain without a bidder and it is basically because of the above reason (negative equity). To this you must add of course, the shortage of liquidity in Spain, as a mandatory deposit of 20% (it used to be 30%) is required to be lodged before the law court prior to the auction to qualify as a potential bidder.

 

Banks vs. Real Estate Agencies: It’s the Credit, Stupid!

As explained in the article’s introduction, banks are now competing against REAs and Developers to sell distressed assets. I will be grouping Developers and REAs within the same group for simplicities’ sake. There are significant advantages and disadvantages associated to choosing from one or the other. However it must be noted that banks lately, after having realized just how complicated it is for them to actually sell property to foreigners, are increasingly hiring or retaining the services of foreign realtors in-house or else outsourcing the sale process altogether to REAs so as to off-load their crammed property portfolios.

 

Acquiring Distressed Property from Banks

 

Advantages

  • The most significant –and unique– advantage is, without doubt, privileged lending terms, credit if you will. As I noted back in 2009, lenders were falling head over heels to offer the most attractive financial terms to investors willing to acquire bank-owned properties. The reason is obvious. Spanish Banks are desperate to shift their ever-growing property portfolio, even more so in the midst of rising interest rates and record-high unemployment levels, to investors so as to both transfer risk and ongoing maintenance expenses. These remarkable lending terms, reminiscent of the boom days, are unavailable for external properties not directly bank-controlled. Moreover, as the ECB will foreseeably be hiking the official interest rate for the Eurozone to stave off increasing inflation risks, Spanish lenders will be increasingly under pressure to shut off credit making it all the more inaccessible as they themselves will struggle to secure credit from foreign markets except, of course, the unrelenting ECB facility. This will widen the gap, furthermore, between offered finance on bank-owned properties and those which are freely-owned ones, making it increasingly appealing to buy the former solely from a credit-perspective. Estate Agencies and Developers, free-market companies, are bound to struggle facing tough competition from lenders’ State-subsidized (or even European-subsidized) superior lending terms.

 

Disadvantages

  • Properties offered by banks are, generally speaking, overpriced and you will be hard pressed to find a bargain.
  • Properties offered by banks are, generally, not well-located.
  • Properties offered by lenders are not usually properties that cater to foreigners’ tastes and in fact, generally speaking, appeal more to Spanish buyers.
  • Banks generally lack the professionalism, the know-how, which Real Estate Agencies have built upon over the years. Do not expect from a bank the same service level agreement (and in English!) that you have come to expect from a private realtor. For a bank employee, showing a prospective client a bank-owned property, is a tedious burocratic chore that detracts valuable time from their core tasks with no specific reward attached to it; for an Estate Agent, it’s their bread and butter with a possibility of making a commission. EAs will be genuinely interested in providing a good service (their commission depends on it!) whereas bank employees regard it as an unrewarded additional burden consequence of today’s market downturn.

 

Acquiring Distressed Property from Real Estate Agencies

 

Advantages

  • REAs tend to have in their books better-priced property, genuine bargains, whether resale or distressed.
  • Offer a much wider selection of property. The reason being is because they are flexible, networking alongside other REAs to pool in databases, sharing offered properties, as well as those offered by banks. Banks, on the other hand, have their offer restricted solely to properties they own.
  • Offer generally well-located property.
  • Offer properties that appeal more to foreigner’s tastes.
  • Offer increased professionalism.
  • Can speak and write fluently in your own language.

 

Disadvantages

  • Are unable to compete with banks’ superior lending terms on acquiring their properties. This is obviously not a concern if you are a cash buyer.
  • Are financially weaker than a bank and may go under with your deposit. That is why I advise caution, dealing only with long-established agencies which you can trust. Security deposits should be paid always into law firm’s accounts, not into REAs accounts. Make sure the lawyers you hire or deal with are registered to practice and members of a Bar Association. Unregulated companies pretending to be law firms are sadly rife in Spain. Only registered lawyers have Professional Indemnity Insurance for negligence or malpractice. The same is true of genuine law firms, they also have insurance covers. If unsure, always contact the local Colegio de Abogados (Bar Association) and ask if a lawyer, or law firm, are indeed genuine and registered to practice.
  • At times, less serious outfits, do not offer genuine bargains. Some of the advertised so-called 'bank repossessions' are not genuine repossessions at all and are fairly overpriced in my opinion. They are in fact overpriced pre-auction properties, normally unsaleable off-plan, which mislead customers into thinking they are buying post-auction properties (repossessions) when it is simply not the case. To entice gullible would-be-investors, they will show overinflated bubble prices, at which these assets never sold in the first place, and offer a 50% discount on that unrealistic overinflated price tag, which still may be well-above the current market value, by the way. And they, misleadingly, label and market these as 50% discounted “bank repossessions”. Needless to say, this is no bank repossession, it’s a con. Over the last years there’s been a hyped flurry over Spanish repossessions and the much-vaunted 50% discounts which are explained in detail in my article on “Bank Repossessions in Spain”, from 2007.

 

Buying Distressed Property in Spain – Conclusion

As can be gleaned from all the above, there is a clear correlation between risk and reward.

Key-ready properties, NPLs, offer less reward, in terms of making money quickly, but in exchange offer legal and material security, besides being readily available. You surely won’t be able to brag to your friends on what a shrewd businessman/businesswoman you are. These distressed properties are advisable to small-time investors who are on the lookout for a relatively well-priced overseas holiday home rather than making a quick profit from an investment.

Ongoing bank repossessions offer the highest rewards (discounts above 50%) to the dauntless. But likewise, have the highest associated risks. I would advise these properties are acquired only by expert savvy investors who can bear the financial brunt of unexpected losses and will normally be buying units in bulk numbers at specially pre-agreed discounted prices from financial institutions.

As pointed above, in general terms, the best bargains to be found offering the best risk-reward ratio, are genuine key-ready bank repossessions or maybe even daciones en pago (handing back the keys to a lender) which both small-time and professional investors may buy. However, these properties are currently scarce and, as highlighted above, you must be wary of them not being in negative equity due to lenders’ placing huge charges on them in the boom times because they had unrealistic overinflated valuations to begin with.

While it’s true there are exceptional opportunities available now in the property market, you ought to ponder in your decision-making serious ongoing risks, such as currency fluctuation (i.e. sterling) which may bring losses in the long run when sterling recovers against the euro if you buy now, creeping interest rates in the Eurozone which will affect your ability to repay a loan, generalized deflation of real estate assets, credit shortage aggravated by rising interest rates, and last but not least, is Spain’s noteworthy ongoing sovereign debt problem which consequences still remains to be seen. But ironically, it is precisely because of all the aforementioned market uncertainties that unique bargains are to be found in today’s market, a buyers’ market, not apt for the faint of heart.

Finally, as per usual, I cannot stress how important it is to hire a lawyer to examine the transaction previously and advise accordingly.

“It was the best of times, it was the worst of times.” – Charles Dickens. A Tale of Two Cities.

English writer and social critic. He created some of the world’s best-known fictional characters and is regarded as the greatest novelist of the Victorian era.

 

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

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10 Useful Tips in Uncertain Financial Times

Raymundo Larraín Nesbitt, July, 8. 2011

The following article, unlike previous ones, is not subject-focused. Its purpose is to include in one text a loosely assorted recollection of tax and financial-related frequently asked questions by putting them all together in one text for simplicities’ sake. This will simplify people’s life on not having to skim through a myriad of legal texts in search for the right answer to their queries. In addition, I’ve also included a batch of associated legal novelties which make for significant amendments.

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

 

 

 

 

Photo credit: © Istockphoto

 

FAQ Related to the Ongoing Financial Crisis

 

1. In the event of bankruptcy, up to what amount do Spanish banks guarantee deposits? In the wake of Lehman’s financial meltdown, which threatened contagion to the entire financial system, the Bank of Spain raised in 2008 the protected amount to €100,000 per account holder. The ensuing widespread fear brought the spectacle of fellow European countries frantically raising national deposit guarantees in a clumsy competition to attract each other’s savings’ deposits. This unleashed an undeclared war of liquidity as was the case of Britain and Ireland, with British citizens flocking frantically to Irish banks as its Government had raised unexpectedly, amid growing public concern on the state of its banks, the safeguarded deposit limit to well above that of its UK counterpart.

Subsequently the EU, to thwart this budding deposit dickering, put an end to it by adopting the €100,000 cap as standard for all EU banks. This ensured that 95% of all deposits were now safeguarded under the protection of national deposit-guarantee schemes.

Any money you have exceeding said amount, will be forfeited in the event of you lender’s insolvency. Which is why, following the saying, you should not put all your eggs in the same basket. I would advise, depending on your wealth, to spread your risk opening accounts in different banks with a capped amount of 100k in each account. Just to be on the safe side. I’d rather err in the safe side than being overconfident in the wrong side, wouldn’t you agree? Better safe than sorry.

In Spain, there are three Public institutions tasked with guaranteeing saver’s deposits. The FGDEB oversees banks, the FGCDA savings banks and finally the FGDCC guarantees deposits at Credit Unions.

Spain’s weakest financial link is deemed to be its regional Savings Banks (Cajas de Ahorros, in Spanish) which have invested heavily in the real estate sector. For this reason, the FGCDA has been allocated with the highest amount of – taxpayer’s – funds in view of unexpected losses, or maybe not. The FGDEB comes close in second place with slightly over 3 billion euros (as of 2009) in provisioned funds.

Notwithstanding the above, the Bank of Spain, on the wake of EU and IMF recommendations, has fostered Spanish Savings Banks into a frenzy of merging and acquisitions with the idea of propping up their beleaguered coffers. The theory behind this is to create huge supra regional financial institutions with a healthy balance sheet that are deemed too big to fail by the market. Sounds familiar? A prominent example of this ongoing process would be Bankia. I’ll make a huge effort of self-restraint and bite my tongue – hard – so as not to make some witty criticism on the flawed logic behind this reasoning such as the ones we are regularly treated by the FT’s Alphaville blog and which make for some enjoyable reading for their ever ingenious sarcasm.

2. Should my Spanish lender default, how long does it take for them to pay me the guaranteed amount? This is an excellent question as in truth it doesn’t matter one iota how much is guaranteed if you simply do not know when you’ll be paid the safeguarded deposits. As they say, the Devil is in the detail.

Last month, concretely on Friday the 17th of June, EU member-countries unified the deadline and set it at only 20 days for reimbursement. This measure is yet to be ratified by all EU members. Brussels wanted to reduce it to only seven days but some countries opposed. In the US by comparison, the deadline is only 48 hours.

3. What is the statutory time limit for a mortgage-backed loan? The technical reply is 20 years. However, creditors at any point in time can interrupt this by requesting the debt be settled whether out-of-court or through a certified law court notification. In which case, the time limit resets itself to zero and the twenty year limit starts anew.

In practice the reply is never, because Spanish creditors always make sure to contact debtors at periodical intervals, through law firms, so the claim remains always live and outstanding on their books. Unlike the UK, in Spain a defaulted mortgage-backed loan can haunt you for the remainder of your life and the interests will only roll over adding to the overall debt.

4. What amount does collateral (normally real estate), securing a defaulted mortgage loan, fetch in a Public Auction? The rules have changed recently. It used to be that in a second bid, lenders normally withheld the asset for 50% of its appraisal value for the specific purpose of a mortgage-backed loan. This has now been mercifully addressed by the Spanish Government after widespread public outcry and has been raised to 60% thus reducing the overall debt burden of the defaulted borrower. It’s not much, truth be said, but the changes are indeed in my opinion pointing in the correct direction. Hundreds of thousands of borrowers in Spain have defaulted since 2007 and are caught in an ever increasing financial snowball with not a chance of hope to rebuild their lives as the debt mounts exponentially over time eventually spiraling out of control if unchecked.

5. What is the required deposit to bid in a Public Auction? It used to be 30% of the appraisal value specific for auction purposes. This deposit is required, by law, to qualify as bidder and is lodged into a law court’s bank account prior to the auction taking place. The valuation can be found in the Mortgage deed. To delve further, please read my article Bank Repossessions in Spain.

The Government has now amended this figure and has brought it down to 20%. So anyone wanting to bid in a Public Auction “only” needs a down payment amounting to twenty per cent of the valuation specific for auction purposes. Should one be outbid, the deposit is refunded, in full, to the bidder.

The reasoning behind this amendment is because law courts are clogged by Public auctions as a direct consequence of unpaid mortgages coupled in by an endemic shortage of liquidity. As credit in Spain is almost shut off by lenders, few people are able to afford to bid as it is hard to raise a 30 or 20% cash deposit with such short notice.

The Government realizing the existing problem, has redrafted the procedural rules so they are more lenient in the hope of allowing more bidders to access auctions and thus offload lender’s cumbersome real estate portfolios. This measure will, hopefully, allow lenders to ease the glut of property from their books which only detract from their liquidity, lowering their credit-rating, as they have associated ongoing maintenance costs i.e. Community of Owner’s fees, property taxes etc.

6. Up to what amount of my wage is protected from being embargoed by creditors? Art 607 of Spain’s Civil Procedural Law rules this in detail. As a general rule-of-thumb, and not to get lost in the minefield of exceptions, the limit used to be Spain’s Minimum Legal Wage (SMI, in Spanish) with a 10% addition in the case of those borrowers who defaulted on their mortgage loans. The MLW was currently set for 2011 at €641. The MLW is adjusted annually, in line with inflation, on approving and publishing Spain’s Budget Law.

The Government attending to the plight of hundreds of thousands of Spanish families who’ve defaulted on their mortgage loans has raised the legal threshold by 150%. This translates to €960 as the new general threshold which cannot be seized by lenders on defaulting a mortgage-backed loan in Spain. However, here comes the small print, if the borrower has family members it takes care of, such as minors or other members of legal age which are out-of-work an extra 30%, taking the MLG as basis for all calculations, is added per member.

So as an example, a married father with a toddler and a wife, both jobless, would have a combined minimum threshold, which cannot be seized by lenders, of approximately €1,350. This almost doubles the afore cap which allows debt-laden families to at least make ends meet at the end of every month without having to resort to other family members or even charity in the worst cases. In Spain, traditionally, extended Family has always acted as safety nets when Government, Church or even Society at large, fail to help those in difficult times.

7. Is it true that Spain’s Tax Office is clamping down as of late in undeclared lets? I’m afraid so. Due to the much publicized downfall in property-related tax revenues the Spanish Tax Office, nudged by the Government which has recently replaced its General director by a more aggressively proactive one, has decided to offset its abundant losses by becoming creative and less lenient in its practices. And this of course means targeting undeclared lets which were traditionally rife in Spain. The Spanish Tax Office has a statutory time limit of four years to pursue unpaid taxes. To help in its crusade, it has struck an agreement with utility companies to cross-check tax declarations with household utility consumption. Where it detects that a second home has been fiscally declared as standing empty but the utility consumption clearly indicates otherwise, it will request from the Landlord a full explanation which, if proven unsatisfactory, will lead to payment of due taxes, interests and a possible fine by the tax offender.

8. Is it true that if I buy a below market value (BMV) property I can be fined by the Spanish Tax Office at a later date? Yes, it’s true. The Spanish Tax Office has in its books a valuation for every real estate asset in Spain which is related to its Cadastral value. The Cadastral value is a valuation that is taken as benchmark to calculate a number of property-related taxes in Spain, levied both by local and regional Authorities. So basically, if you snatch up a nice bargain under the sun, maybe 6 months down the line you will receive a nasty letter from the Tax Office that sets your heart throbbing looking to extricate a purported tax shortfall that you ‘under-declared’ at the Notary, whether knowingly or not; regardless. This can be either avoided altogether or else even challenged successfully, no strings attached. For more details, please read my dedicated article: La Complementaria or ‘Bargain Hunter Tax’.

To avoid it, All your conveyance lawyer needs do is request a binding valuation from the Tax Office on the value of a property prior to its purchase (exchange at the Notary Public). This valuation is normally only binding for the following 3 months after which it becomes void and a new one must be commanded. You know that if you buy below said valuation you will be taxed for the shortfall in taxes.

Additionally the Tax Office valuation for tax purposes can be in fact challenged administratively. These legal procedures are in fact very fast, as in months, not years, unlike Civil ones, with which we are all too familiar. The reason being is that a fair number can be challenged on technical grounds which are not reviewed by the court, they are simply taken as a fact and the case against you is thrown out of court and filed away with no further taxes to be paid. These cases are for the most part very affordable, in comparison to say Civil ones, as they do not imply a full blown out legal procedure. So you can be talking of being charged as little as €1,500 in legal fees (plus 18% VAT) by your lawyer plus the expenses of a new valuation carried out by a surveyor of your own choice (normally a chartered technical architect) to challenge that of the administration which tend to be flawed at best, if not downright skewed at worst, I dare say.

9. Is it true you can file for personal bankruptcy in Spain? Yes, it’s true. However, unlike the UK, where personal bankruptcy is not only an option but it’s even recommendable to cope with a fleeting financial downfall of which you can recover in some years’ time and get back on your own two feet. In Spain it is devious and not recommendable at all unless you are wealthy, which seems to defeat its own purpose if you come to think of it really. Personally, I don’t regard it as a viable option in most cases i.e. the typical mortgage loan default.

In Spain, out of hundreds of thousands of families which have defaulted on their mortgage loans over the last 4 years very few, in the hundreds, have applied for this legal figure. The reason being is that the process is both expensive for the average citizen, hence my comment that it’s only an option for affluent people looking to re-negotiate their financial commitments (meaning they actually have a leverage to negotiate with financial institutions due to their large estate), and time-consuming to the point it becomes a tedious chore. You will also become a financial pariah for the remainder of your lifetime.

The law court appoints an administrator to oversee your estate, who is paid a wage out of your own assets. You may find yourself (real case) queuing up and filing administrative papers for as much as ten hours just to withdraw a ten euro note from your own bank account, needing the compulsory administrator’s prior permission. Frankly, not worth the time.

Bottom line, less well-off borrowers need not apply. This really ought to be addressed by the Government to allow it to be a real option for the average borrower as in other European countries. Currently, it is not and should be avoided altogether.

10. Is it true that Spanish lenders can pursue you abroad for negative equity? Yes, it’s true.

In Conclusion

It is advisable you pay your debts in timely manner, especially in Spain, and more so if you own assets, whether in Spain or abroad (within the European Union they are easier to seize following EU Regulation, read above article). As always, seek legal advise from a lawyer before taking any – rash – decision. At least you will have a clear picture of what your legal options are. At times, you will be pleasantly surprised to find you have more options than what you initially bargained for. You won’t know, if you don’t ask.

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.

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Renting in Spain: Top 10 Mistakes

Raymundo Larraín Nesbitt, June, 8. 2011

As summertime draws lazily upon us, with its beckoning sunny days and even longer nights, the rental season in Spain reaches its peak. With this in mind, I thought it would be a good idea to summarise in a brief article the most common faults that both landlords and tenants stand to make on renting in Spain.

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

 

 

Introduction

Despite what poet Thomas Gray would have us believe, “Where ignorance is bliss, ’tis folly to be wise”, this line of thinking when it comes to renting in Spain can get you into trouble. Some of these slip-ups, besides being expensive, may even lead landlords to be criminally prosecuted by their own tenants in the most extreme cases.

Many problems can be traced to the fact that landlords remain largely unaware of the legal implications of renting out a property in Spain. What renting entails is actually losing possession of the property for a certain pre-agreed period of time in exchange of perceiving a regular income. This means you can no longer enter the property for the duration of the rental if it is not with the express permission, preferably in writing, of your tenant, regardless if he’s up-to-date or not with the rental; that is not an issue. Landlords cannot enter their own property even if it’s just for ‘inspection’ purposes without the said permission. This frequently overlooked blunder is single-handedly responsible for stemming most of the letting misunderstandings.

There are many more that I could have listed below, but for simplicities’ sake I’ve decided to weed them out to keep the article sharp and short. Read further to help avoid turning renting into ranting under the sun.

 

Landlord’s Top Five Mistakes

 

Many expat landlords are unaware of the different mechanisms in place to secure rental income and often fail to implement them in their rental agreements which can leave them unprotected if the tenant does not, or cannot, pay the rent. These mechanisms are explained in-depth in my article Letting in Spain: The Safe Way.

Most blunders made by landlords are related to their tenants becoming non-paying tenants. This can understandably exert great pressure on landlords, especially if they are relying on the rent to offset it against their mortgage repayments, which can easily lead them to take rash decisions that may come back to haunt them later on in life.

1. Shutting off utilities (water & electricity). Landlords often feel the urge of doing this on their tenant missing out on their rental. If you happen to do this your tenant can report you to the police. Doing this may be labelled as either coercion or harassment or even both. Your tenant can prosecute you criminally on doing this and you may find yourself being remanded in custody. So maybe you ought to think twice before walking down this path. If the utilities are in the name of the landlord and he stops paying them on purpose to mount pressure on the non-paying tenant he can equally be prosecuted as it’s equated to shut-off the utilities physically.

2. Changing the locks. Same as above, it may be regarded as either coercion or harassment or both and you may be prosecuted criminally for this.

3. Taking justice into their own hands. Evicting non-paying tenants with the assistance of newly-acquired “acquaintances”. Landlords may feel tempted to take justice in their own hands and break-in their own property assisting the decision-making by bringing in some ad hoc square-jawed tattooed acquaintance as backup. This is seldom a bright idea and may land you and your “friends” in a Spanish jail for unlawful entry (trespassing). The only – legal – way to evict your tenant is to hire a lawyer and initiate a formal eviction procedure through the Spanish law courts. New laws have been enacted to help speed-up the eviction procedure. But on average it is still taking 5-9 months depending on how clogged local law courts are.

4. Entering the property under the guise of a ‘routine check’. Although it may be highly tempting to take a quick peak from time to time, especially after a noisy summer party that’s kept the neighbourhood up all night, it is seldom a good idea.“It’s my property and I will enter it when I please.” I’ve often heard this line from disgruntled landlords who just cannot stand the fact they are forbidden from entering their own property in Spain if it’s not with the prior –written– permission from their tenant. You simply need their permission following Spain’s Tenancy Act regardless if they are paying the rent or not.

5. Eleven-month contracts are short-term and watertight. Erm, I’m afraid not. This single blunder is responsible of many legal problems at a later date. What qualifies a rent as either short or long-term is not the fact that it’s labelled one way or the other. What matters really is that the tenant and his family are not using the property as their main residence and this must be expressly built and worded into the Tenancy agreement so it’s truly a short-term tenancy. Tenants can successfully challenge at court short-term 11-month contracts morphing them into long-term ones (5 years). During the next 5 years you will be unable to recover possession of the property whilst the tenant pays being forced to rent it out. The new Express Eviction Law has now amended this and allows landlords to introduce clauses that waive the statutory long-term requirement of 5 years i.e. a clause whereby it is stipulated that the property will be needed for the landlord’s own use or for that of his family. However, if after 3 months’ time the landlord – or his family – has not taken possession of the property, he will be forced to re-install his ex-tenant and award him a suitable compensation to offset the expenses of the move.

Luxury rentals waive this protection as Spain’s Tenancy Act does not apply to them; luxury rentals are ruled by the will of the parties. EDIT: luxury rentals in legal terms no longer exist after an amendment to the Tenancy Act.

 

Tenant’s Top Five Mistakes

 

To be fair to landlords tenants also make their fair share of mistakes.

1. A verbal Tenancy contract is better than a written one. Not really, no. I honestly don’t know where tenants get this idea from. In Spain verbal contracts are equally valid as written ones. The problem lies when there are disagreements. It’s very difficult to prove what was actually agreed in a verbal contract i.e. landlord pays for the utilities. It’s in the best interests of both tenant and landlord that rental agreements are always put in writing. Tenants have a right to demand having a verbal contract put in writing by their landlord.

2. I can always offset the 2 months’ rental security deposit against my unpaid rental. No you cannot. That two month’s initial security deposit serves its own legal purpose and at no time can be used to compensate rental shortfalls.

3. I can always leave the property ahead giving 30 day’s notice. Yes you can but you will be held liable to pay for the remaining months you agreed to rent i.e. say you signed an 11-month contract and on the third month of the let you give notice that you will be leaving ahead of the expiration of the agreed rental. You may leave ahead but you will owe the let for the remaining 8 months despite you giving notice; it is unrelated. Some landlords will pursue you legally if you fail to pay the balance owed while others will rather turn a blind eye thinking it’s hardly worthwhile all the legal hassle. The sum owed will normally be the decisive factor on whether legal action is warranted. Whatever the case may be, you ought to know that legally you owe the outstanding months and if you decide not to pay them you are taking a legal gamble that may or may not payoff.

4. Deducting damages from the rent. All tenants feel tempted to fall for this one.

Classic examples of this would be:

i) After heavy rainfall I’ve had this terrible damp patch with an aggressive mold growth which has cost me €300 to be removed. Plus my new laptop got damaged as a result (€1,000). I’ll deduct the €1,300 from my let to make up for both.
ii) The washing machine broke down and cost me €150 to repair.
iii) My landlord is not paying the community fees and as a result I’m now being disallowed from using the complex’s facilities i.e. swimming pool. I’ll just pay €300 less a month to offset for this.

I could put more real-life examples of the queries I’ve received over the years but I think that will do for now. At no time can a tenant decide unilaterally to pay less rent or withhold part of the rent to offset against these unforeseen damages or expenses. First of all some damages have to be paid, under law, by the tenant himself; especially those relating to the normal wear and tear on renting out a property (Art 21 of the Urban Tenancy Act as well as Arts 1.563 and 1.564 of the Spanish Civil Code). It is seldom a good idea to practice a retention or withhold amounts when you feel it’s appropriate without having the landlord’s prior agreement in place, in writing. This may even be a cause for legal eviction as you are effectively breaching the signed Tenancy agreement.

5. The property is being repossessed and I’m being asked by the lender to vacate it. Actually you don’t have to in long-term tenancies (three plus years). Following Art 13 of Spain’s Tenancy Act it allows tenants to stay in the property until they complete 5 years providing it is truly a long-term tenancy (i.e. your usual place of abode). This is true for urban rentals signed after the 1st of January 1995. The bank after repossession takes on the role of landlord. Lenders on repossessing the property must respect by law outstanding tenancy agreements. The tenant must continue paying the rent to the new owner, the bank. Obviously both tenant and bank (now landlord) are free to reach an amicable settlement whereby it is agreed the former leaves the property ahead of the statutory five-year limit in exchange of a suitable compensation.

Renting in Spain: Top 10 Mistakes – In Conclusion

Spain’s Tenancy laws are biased towards tenants for historical reasons that need to be addressed immediately. Government, both at a national and regional level, has taken notice of this and are regularly passing new laws, i.e. Express Eviction Law, with the aim of streamlining rental procedures. There is still much to be accomplished if Spain’s rental market is to become as strong and relevant as that of fellow European countries.

Landlords and tenants should always seek legal advice on renting property, particularly prior to making rash decisions related to non-payment so as to avoid costly mistakes.

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

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

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          Home Rental Taxation – Spain’s Tax Office Rental Advice in English (A.E.A.T. or Hacienda)

 

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

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Dissolution of Joint Property Ownership in Spain

Raymundo Larraín Nesbitt, May, 8. 2011

Properties in Spain can be jointly owned for a number of reasons i.e. spouses, friends, family, investors. A practical problem may arise when one of the joint owners wishes to terminate the community by either buying out the remaining quota or else selling up their outgoing quota to a fellow joint owner. This is known as Dissolution of Joint Property Ownership.

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

Original article from 14th of November 2.007

 

Introduction

Some owners may be unaware there is a special legal procedure that can be followed in Spain to re-arrange holdings which saves buyers a considerable amount in taxes. On buying resale property in Spain, a buyer is normally subject to 7% Property Transfer Tax (ITP) on the proceeds. However, on following what is known as a “Dissolution of Joint Property Ownership” (DJPO, for short) a buyer will only attract 1% tax. EDIT 2015: it is now 1.5% Stamp Duty.

EDIT September 2017: read my blog post for a shorter version Dissolution of Joint Property Ownership – 8th of September 2017.

Read further to find out in what cases this applies and just how this can be achieved legally.

Deed of Dissolution of Joint Property Ownership

Signing a deed of Dissolution of Joint Ownership follows the same legal procedure as if you were buying or selling a property. Therefore a DJPO has associated identical expenses as a standard conveyance except with the added boon that the tax borne by the buyer is significantly less, as in 86% less. The reason being is because the buyer instead of being subject to Property Transfer Tax, on following a DJPO, is now subject to Stamp Duty which is significantly lower. This procedure may however not be applicable in all cases.

A deed of DJPO is signed before a Spanish Notary Public who witnesses it, allowing joint owners to re-arrange their share on any property in a tax-efficient manner as it enables the outgoing joint owner to transfer his share to an existing co-owner legally waving the extreme 7% Property Transfer Tax and paying in lieu 1% Stamp Duty on the full property value (EDIT: in 2015 it is 1.5%). Please note Stamp Duty is paid on the full value of the property, not only on the outgoing share that is actually being transferred.

If the property is mortgaged, consent from a lender is required to approve a deed of dissolution.

DJPO Requirements

Foremost, both buyer and vendor need to be pre-existing owners of the property i.e. a married couple who owns a property in joint names. One of them wishes to terminate the situation and sell his share.

The buyer must also be an existing joint-owner i.e. in the above example the husband would buy out the outgoing 50% belonging to his spouse. He would now own 100% of the property.

If there is an outstanding mortgage on the property, a lender’s permission may be required to release the outgoing borrower/owner from his commitments.

Applicable Cases

A DJPO is most suitable in a number of cases involving joint property ownership:

1.- In a divorce or separation. Couples owning property jointly may decide to split up. Taking for granted they own a property in equal shares, one of them decides to sell their 50% to his ex-partner. The ex-partner will pay him/her his quota and this transaction will only attract 1% Stamp Duty on the full declared value instead of the usual 7% Transfer Tax on the 50% in addition to Land Registry, Notary and Lawyer’s fees.
2.- Re-arranging inheritances. Beneficiaries of an inheritance transferring their quota on a property to a fellow heir.
3.- Re-arranging property holdings between family and friends. Stakeholders such as family, friends or investors co-owning a property deciding to re-arrange their holdings.

Associated Taxes

Both buyer and vendor are subject to pay taxes on transferring ownership of the asset.

i) Buyer: will pay 1% Stamp Duty on the full property value. EDIT 2015: it is now 1.5% Stamp Duty. In some regions of Spain it is actually even lower.
E.g. following the above example, on a property worth €300,000, jointly owned by the couple, the husband would only pay 1% on the full property value or €3,000 in lieu of 7% Property Transfer Tax (that’s a tax reduction of 86%!).
ii) Vendor: pays Capital Gains Tax on the outgoing share. More on CGT in my article Taxes on Selling Spanish Property.

If the vendor is non-resident, 3% retention is practiced on the outgoing share. The CGT payable would amount to 19%.

E.g. continuing with the above example, if the wife is non-resident, 3% retention would be practiced on her 50% (€150,000). So the Notary Public would withhold in her case €4,500 which will be paid into the Tax Office on selling her share. The vendor, depending on whether she makes a profit or a loss, may be due a tax rebate on the withheld amount.

Other Expenses Incurred

As additional expenses, common to any sale or purchase, you will have to budget Notary’s fees (who witnesses the signing of the Public deed), Land Registry’s fees (to legally lodge the now re-arranged share in ownership of the property) and finally the Lawyer’s fee who negotiates with a lender if a mortgage is attached on the property, drafts the deed and organizes the signing of the deed at a Notary.

Forced Dissolution of Joint Property Ownership

What happens if one of the co-owners refuses to sell? This is when a contentious DJPO comes into play.

There may be cases in which one of the joint-owners may wish to terminate the joint ownership for good and sell the property. Fellow co-owners, for whatever reason, may turn down the proposal to sell the property as a whole and likewise may refuse to buy him out. This will result in a bitter gridlock that will erode personal relations. Refusal may be narrowed down to either lacking the necessary funds to buy the outgoing share outright or else due to the fact they reject altogether the idea of a sale.

To bypass the deadlock, any joint-owner is entitled to force a DJPO through a competent law court (Arts 406 and 1062 of the Spanish Civil Code). The court’s ruling will overrule any dissent and the asset will be disposed of regardless of opposition from fellow co-owners. The property will then be auctioned off publicly to the highest bidder. However, easy as it may sound, following a forced DJPO is far from it and there are three main downsides that ought to be pondered upon prior to taking this route.

The main drawback is that the asset will be sold in a Public auction which will fetch a value considerably below the current market value. It is unsurprising if the property is auctioned off for only 50%, or less, of its true market value. Another problem, given today’s grim financial environment, is actually finding a genuinely interested bidder; which in today’s market simply cannot be taken for granted. The reason being is that in a Public auction it is mandatory for a potential bidder to previously lodge before a law court 30% of the appraisal value (which is refundable if not won); not everyone has this kind of money nowadays. The credit-crunch has made a dent in Spanish lenders, who are no longer lenient with their lending criteria and have in fact raised the bar considerably for the average borrower requesting collateral. This has resulted in a shortage of bidders to the point that in 9 out of 10 auctions no one is bidding. And last but not least are the associated expenses to a contentious DJPO which are those of a litigation procedure which happen to be considerably higher than if it were just a standard conveyance procedure.

For the above three reasons, a forced dissolution through a law court is advisable only as last resort wherein the disagreement is serious resulting in a protracted stalemate; as all joint owners stand to lose significantly on following it. Sadly, at times, this may be the only legal solution to bring an end to an ongoing co-ownership problem.

In Conclusion

A Dissolution of Joint Property Ownership is optimal to mitigate a buyer’s tax burden. However, it may not be applicable in all cases. Seek legal advice on the matter.

A non-contentious DJPO is very straightforward and can be arranged within a few days without any need for you to fly over to Spain by way of granting your appointed Spanish lawyer a specific Power of Attorney. The new re-arranged ownership will then be lodged at the Land Registry after the associated taxes are settled.

 

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

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

 

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

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Advice to Struggling Mortgage Borrowers in Spain

Raymundo Larraín Nesbitt, March, 8. 2011

Ex-pat landlords are still struggling to remain afloat in 2011. This article provides them with some useful tips.

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

 

 

Introduction

From a global perspective, political instability in the Middle East has sparked tensions fueling oil prices to new record highs. The Japanese tragedy has set the stage for a further rise in commodity prices needed to re-build the country which were already at all-time highs due to China’s ongoing real estate bubble. This in turn has brought a surge in inflation (rise in the general level of prices of goods and services). As a result the European Central Bank is juggling on the one hand unchecked inflation and on the other the budding recovery of an ailing European economy straggled by peripheral economies which in turn are debt-laden. The ECB, de facto heir of the Deutsche Bundesbank, has a mandate to keep inflation at bay. As a result of this commitment it announced it will hike the official interest rate as of April with more hikes to follow along the year.

The problem is that on doing so you run the risk of derailing the budding European recovery spearheaded by Germany tipping the economy into a full-fledged double-dip scenario. So it’s really a matter of balancing priorities in Europe. Peripheral economies vs. export-oriented countries. The former, saddled with debt, will be the ones bearing the brunt of a rise of interest rate while the latter will reap the benefits. Mind you, a sharp rise in interest rates would also hurt the latter. The choice, seemingly, has already been made by the ECB.

The Euribor rate (to which most Spanish mortgages are referred to) has already risen in anticipation of the foreseen hike. This will translate into higher mortgage repayments. With hundred of thousands of Spanish mortgages already underwater this could not come at a worst time.

From a national perspective, the Spanish Government is bent on closing the ever-widening deficit having decided to clampdown on black money in an effort to prop up its dwindling coffers. As a result the AEAT (Spain’s equivalent to HMRC) will be taking a number of new measures such as cross-referencing with utility companies household consumption as from March to detect undeclared rentals which are rife in Spain. The afore measure will have foreseeable side effects.

Landlords with undeclared lets will now be faced with the grim prospect of either disclosing the let (maybe even raising it so as to offset rental taxes) or else continue at large running the risk of getting caught and fined by the local tax authorities. The afore is compounded and aggravated by the fact that ex-pat landlords normally use the rental income to offset their Spanish mortgage repayments. At a time when rentals vastly outstrip demand in Spain, and good-paying tenants are increasingly hard to come by, this couldn’t come at a worst time. It is doubtful a tenant will cave in to a landlord’s demand to raise the let to offset the associated taxes. The tenant will probably opt to move elsewhere as nowadays they will be spoilt for choice.

All the above will bring about additional headaches to already struggling ex-pat landlords. British will be particularly worst off due to the strengthening of the Euro against Sterling over the last couple of years.

With the above in mind, I’ve written this article in anticipation of the financial problems that are to come for many borrowers in Spain.

 

Tips to Struggling Mortgage Borrowers

 

1. Swap to interest-only (“carencia”). This can be arranged whilst the property is put up for sale or just to weather off the storm meanwhile. This option has become increasingly difficult post credit-crunch as Spanish banks seldom grant interest-only and when they do, it’s really just as a teaser for two years at most.

2. Extending mortgage repayments an additional number of years. The drawback is that on doing so the amount of interests you pay on the long run are increased dramatically. So it’s only an option for those left with no other really. The Government is now allowing this change free of charge to struggling mortgage borrowers providing they are resident and the property is their permanent dwelling. Borrowers will not pay for Notary or Land Registry fees on following it.

3. Dación en pago. This is basically handing over the keys back to the lender and signing a deed at the Notary whereby the lender commits itself not to chase you for the outstanding debt and considers it discharged for good. Two things are required, the property must not have slipped into negative equity and ideally there should be, as rule-of-thumb, at least 20% equity so as to offset the lenders’ expenses on taking over the property. It doesn’t matter if you are already in arrears, what does matter is that the repossession procedure must not have been started by the lender. Should the property be in negative equity (you owe more than what the property is worth) a lender will be very reluctant to agree to a “dación en pago de deuda” because the collateral will have no equity left. Please read my article Dación en Pago or Handing Back the Keys for more details.

4. Selling the property as a distressed asset. If you have already run through the numbers and you are convinced that you will no longer be able to service your mortgage, rather than defaulting and being repossessed, you should very seriously consider selling the property as a distressed asset. The catch again is that the property should not be in negative equity. The more it is the least likelihood there will be anyone interested in it as they in turn are regarding the purchase as an investment and the numbers need to stack up to make it worthwhile for them.

5. Applying for debt consolidation. There are many financial companies offering this service. Basically what they do is group together all your existing debts with different lenders (ranging from credit card debt to personal loans) with one lender who then extends the loan repayments. The consequence this has is that your monthly repayments are cut down significantly making them more affordable. However the drawback once again is that on extending the financial commitments you will be paying more interest over time.

6. Swapping the mortgage to a new lender. Many lenders are now offering to take on existing mortgages going as far as paying all the transfer expenses. Lenders will normally require the property was bought prior to 2003. This is because properties purchased before this date are deemed as “safe” (not in risk of being in negative equity). In addition, for those who hold collar clauses (“cláusula suelo”), swapping over to another lender offers the opportunity to get rid of these bothersome clauses and take advantage of the low interest rates. Moreover, new rulings have declared collar clauses as abusive (something which incidentally I had already pointed out in my article on 10 Common Abusive Clauses in Spanish Mortgage Loans). These rulings are forcing lenders to scrape them off their existing mortgage contracts within the next two months of the ruling as well as not to include them in new contracts.

7. Filing for personal bankruptcy in Spain. This procedure is expensive albeit it allows those who can afford it to buy considerable time (years) with which to re-negotiate your financial commitments and even reduce the amount owed (up to 30%). A judicially-appointed administrator will be tasked to oversee and manage your day-to-day financial affairs in the interim. Meaning you lose control over all your assets needing to request permission. I would only recommend this option in exceptional cases as it will turn you into a lifetime financial pariah. This is not an option for most people.

In Conclusion

My advice is to draw the red line on a repossession procedure. You should try to avoid this scenario at all costs. As the debt goes personally against the borrower in Spain, you may live a nightmare with debt-collecting agencies, banks or lawyers knocking at your door for years to come. As the compound default interest is fairly high this will be rolled up to what you already owe creating a mounting debt spiral.

A lawyer can help a struggling borrower to achieve the above tips successfully averting a debt spiral drawing a line to protect your family assets.

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.

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

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Lifetime Loans in Spain Explained

Raymundo Larraín Nesbitt, February, 21. 2011

Lifetime Loans despite being relatively well-known and accepted in Anglosaxon countries for decades, are only just getting started in Spain. Back in 2006, acting on behalf of a foreign lender, I was one of the first lawyers to formally introduce them.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
21st of February 2011

 

 

 

 

Photo credit: Courtesy Daily Mail. © Alamy.

Introduction

It wasn’t until the fall of the following year, with the amendment brought about by Law 41/2007 to the all important Mortgage Act of 1981, in which for the first time a Spanish Law ruled on this “new” financial service. Even so, it brushed on it ever so lightly, almost in a shy fleeting manner, in its Additional Dispositions. Reserving the brunt of the regulation for future legislation. Here’s hoping.

What is a Lifetime Loan?

It works basically as a reverse mortgage. It is a special type of home equity loan for senior citizens. It allows owners to convert some of the equity in their homes to cash by placing a charge against their property (which acts as collateral). The loan does not have to be repaid during the homeowner’s lifetime.

The borrower retains full ownership of the home and can actually continue living in it until they or their surviving partner passes away. Once this takes place, the loan (plus accrued interests) must be settled by either selling the property or else by the appointed heirs who will repay it in full. The loan can be taken either as lump sum or periodically at the borrower’s choice. The older you are the larger the amount of money you can qualify for as it follows a sliding scale.

At no time will the borrower ever owe more than what the collateral is worth even if the resulting debt is higher. Meaning that at the time of passing away it suffices to either hand over the property to the lender or else to pay to settle the debt for good. The afore has huge legal implications as it implies that, unlike a normal Spanish mortgage loan, with a Lifetime Loan you cannot be pursued for negative equity. In other words, the valuation of the property for the purpose of requesting this loan facility is the threshold you can expect to owe a lender on signing on the dotted line.

Who qualifies for a Lifetime Loan?

In Spain, following Law 41/2007, those who qualify must be aged 65 and older or else have a medically certified serious disability.

A Lifetime Loan may not be suitable for everyone.

 

Advantages

 

Financial turmoil on an unprecedented global scale entails continued Government budget cuts which affect Public Pension expenditure. Relying on a State pension is a one way ticket to a roller coaster ride with your own hard-earned money! Governments, for the foreseeable future, will continue to curtail public expenditure (i.e. Pensions) as well as adding more years on the retirement age. For example, Spain has just approved delaying by 2 years the age of retirement, bringing it to 67 besides reducing the amounts themselves. Furthermore, they’ve already hinted that in the near future they will set back retirement by a further 2 years; tallying a total of 69 years to retire. It is in such times that the benefits of a Lifetime Loan (LTL, for short) become self-evident:

  • You do not have to repay the loan during your lifetime as the interests are rolled up and added to the loan amount. Unlike a standard mortgage there are no monthly repayments (so you cannot fall into arrears). If you are a couple the loan is only due after the surviving partner dies. It is repaid or settled only after you’ve passed away by your heirs normally discounting it from the sales proceeds of the property.
  • You can choose to withdraw the facility either periodically or else in lump sum (cash). Or maybe even choose a combination of both.
  • The drawdown has no restrictions. Meaning you can use the drawdown facility for whatever pleases you. i.e. pamper yourself with a luxury holiday to New Zealand.
  • Neither you nor your heirs will ever be pursued for negative equity abroad (as would be the case of a standard Spanish mortgage) as the responsibility is not personal but limited to the asset itself. The maximum amount owed (accrued compound interests and expenses included) will never exceed the valuation of the property (collateral) by Law.
  • A LTL adds financial security supplementing nicely increasingly low State pensions. Not everyone can afford to subscribe a Private Pension scheme. So basically you will have more money to spend at the beginning of each month in your bank account.
  • Strengthening of the euro against sterling translates into diminished acquisition power by Expats living in Spain. The case of UK senior citizens has been particularly dramatic over the last years as they’ve lost over 30% in purchasing power on living in Spain which has forced many to change or even completely redefine their lifestyles. A LTL is released in euros against your existing Spanish property thus helping to offset any currency exchange fluctuations which may harm your pocket.
  • A LTL allows you to retain full ownership without taking away your home whilst you live which is a significant boon. So basically you now have more money available to spend in anything you like whilst being able to live in the property for the remainder of your life. You will never lose the property, by Law, as long as you live which is fairly reassuring.
  • A LTL is most helpful for those who are asset rich but cash poor. It helps you to unlock the hidden equity tied into your property. Many Expats who bought prior to the last boom have huge amounts of equity locked away in their properties.
  • A LTL is non-status, meaning there is no income requirement.
  • It goes without saying that a LTL helps to mitigate stress as you no longer have to worry for the remainder of your life to make ends meet.
  • The older you are the more money the Lender is willing to lend you.
  • LTL are ideal if you have no heirs or else they are already sufficiently provided for with other assets.
  • You can still sell the property but you will have to repay the loan in full.

 

Disadvantages

 

The main problem will be your heirs. Those who stand to inherit will be most reluctant in you hiring a LTL and will attempt to hack any budding ideas you may have on the matter. And the reason is simple. When you pass away, the outstanding debt will be deducted from the sales proceeds of the property. A heir therefore stands to inherit less (or even nothing at all) which helps explain why LTL are so unpopular with potential Spanish beneficiaries. In extreme cases the outstanding debt may eat away all the equity. In such cases a Lender will normally retain the collateral (your home) in return of settling the loan in full. A heir would much rather hand over a property (which no longer has any equity left) than paying the debt in full (which amounts maximum to the property itself).

  • The main disadvantage is the interest rate charged. If its high enough it may imply your heirs foregoing inheriting the property. So basically it’s as if you had mis-sold your home to a lender, on passing away, for a fraction of its true market value. This is particularly true the longer you live, as more compound interest will be accrued over time eroding the equity until none is left.
  • On applying for a LTL you will always be given less money for your home than if you applied for a standard mortgage.
  • The property must be free of charges, encumbrances and debts. If there’s already an outstanding mortgage on it, the application will most likely be turned down. A typical problem I found were mortgages which had been cancelled at the Notary but not at the Land Registrar so they showed up on requesting the properties legal status.
  • LTL have a positive correlation with the property cycle (this is bad). Meaning that when real estate outperforms Lenders will fall over themselves to offer you one. But when real estate slumbers Lenders are prone to pull away LTL or else make them less attractive by restricting their access as there is a shortage of liquidity. Oddly enough the latter (recessions) will be the time when potential clients will need LTL the most! There’s a great phrase of American author Mark Twain which coins it up: “A banker is a fellow who lends you his umbrella when the sun is shining and wants it back the minute it begins to rain”.
  • You need to be 65 or older to qualify (this may be revised upwards with the amendments to Spain’s retirement age).
  • The younger you are (closer to 65 y.o.) the less money you will receive.
  • You will have to pay the valuation of the property out of your own pocket (several hundred euros) before the Lender actually decides on whether they grant you -or not- a LTL. In fact, the valuation is pivotal to their decision-making.
  • The maximum amount of the facility will equate to the properties value and how old you are. This amount is normally only a fraction of the properties true value.
  • Once you have withdrawn the facility you can no longer request additional funds or remortgage the property if needed be (i.e. unexpected Health disbursements).
  • A LTL is taken on your permanent residence. So you actually need to live in the property all year round. The logic behind this is that the Lender wants the collateral to be in tip-top shape. A property with no one living in it will quickly fall in a state of disrepair and be subject to break-ins or vandalism which diminishes the collateral’s value.
  • For the reason above letting will normally be forbidden.
  • If you require to move away for long-term care the repayment may be due in full.
  • Taking on a LTL requires a charge is placed against the property which has associated expenses and taxes. Request beforehand a detailed breakdown of what the loan entails prior to making up your mind so as to avert unpleasant surprises in the form of unexpected disbursements.


In Conclusion

Retirement nowadays is akin to playing a soccer match in which the Government keeps moving the goal posts mid-play! Some people would rather not take chances with their retirement playing it safe.

A Lifetime Loan may be a good option that can help you and your partner achieve that extra income to help you get by more comfortably without changing your lifestyle (or even improving it!). I would however strongly recommend you to obtain independent legal advice prior to hiring a LTL so as to avoid rash decisions.

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.

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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. Voluntas omnia vincit.

2.011 © Raymundo Larraín Nesbitt. All rights reserved.

 

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Is Litigation Against Spanish Developers Worthwhile?

Raymundo Larraín Nesbitt, May, 23. 2008

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

By Raymundo Larraín Nesbitt
Lawyer – Abogado
23rd of May 2008

 

Original article from the 23rd May 2.008

 

Introduction

All those who purchased off-plan property in Spain and who unfortunately do not have a valid Bank Guarantee or Insurance Policy securing their stage payments stand to lose their funds if their developer files for bankruptcy. This potential threat of insolvency has soared at an alarming rate during the first quarter of 2008.

With many developers in breach of contract for not delivering properties in time (or with no hope of delivering them at all!), there’s an interesting debate on whether it’s a good idea to start a litigation process with the purpose of seeking the return of the deposits paid plus, perhaps, a possible compensation. Those that say it’s a bad idea to do so claim that developers are penniless, and will not be able to return the funds even if there’s a favourable court ruling. They even go as far as claiming that “no one has ever received their deposit back from a developer”. In this article we explain why these claims are false, and that litigating is not only a possibility but in many cases the only option left for many off-plan buyers who have not been able to complete on their property.

 

Litigation: A last Resort

Litigation should only be used always as last resort. Lawyers endeavour to negotiate on behalf of clients a reasonable settlement with the developer prior to going to court. This avoids lengthy and protracted legal proceedings thus saving both time and money. Unfortunately this is not always feasible, particularly with some developers.

Typical Cases

The following examples sum up what we encounter in our day-to-day legal practice:

  1. Mr White purchased an off-plan property. According to the contract’s clauses the developer was obliged to hand over the property in two years time. Five years on, the development remains unfinished because, due to planning illegalities, the developers have not attained either a Building Licence or a Licence of First Occupation which are granted by the local town hall. Mr White cannot complete on the property as no bank, other than the developer’s, is willing to grant him a mortgage because the development lacks the required administrative licences.

    Mr White is concerned on his interim payments which amount up to 50.000 GBP (almost his life savings) and he has no Bank guarantee securing his stage payments. Therefore, in the event that the developer folds-up, Mr White would be likely to lose his down payments in full.

    Mr White, after trying to negotiate a refund of his payments with the developer to no avail, is tempted to file a law suit against the developer. However, he has been told that the developer is undergoing serious cash flow problems and that even if he hired a litigation lawyer he wouldn’t recover any amount of money. So he thinks “Why put good money after bad paying litigation fees & expenses?”
  1. Mr Grey purchased what he thought was an off-plan property as an overseas summer home for his family. It has now turned out that unbeknownst to him, he was actually misled to purchase an aparthotel or an apartamento turístico".He has since found out that this type of property has its own laws governing it, making it altogether unsuitable as a summer home.

 

5 Top Misconceptions about Litigating Against Spanish Developers

 

Both Mr White and Mr Grey are now desperately trying to find out what is their best course of action in order to find a solution to their problems. Therefore, they ask friends or acquaintances on what to do on their particular case, but the truth is that there is no substitute for professional independent legal advice.


I have gathered a list of the most common misconceptions that are widely spread.


1.    Instead of taking the developer to court, it’s better to just wait and do nothing.


This is really just burying your head in the sand and hoping that things will somehow sort themselves out. The risk is that, if there are no issued Bank Guarantees – or Insurance Policy – and time goes by there is an increased risk that eventually the developer may file for bankruptcy. Nowadays, all too frequently, you see newspaper headlines stating how developers are increasingly filing for bankruptcy.

Returning to our first example, if Mr White were to act as such in his case, he is likely to lose all of his stage payments.
What happens if a developer files for bankruptcy?

In accordance with Law 57/68 a purchaser can claim on their bank guarantee or insurance policy during the construction process, as they are executive titles which secure their interim payments. If they don’t have the guarantees or insurance they stand to lose all their down payments.

That is why if you do not have a bank guarantee, on filing a law suit, a litigation lawyer will request provisionally for a hold to be placed on the developer’s assets until the final ruling. This stops the developer from selling these assets and they act as a sort of guarantee (it isn’t really a guarantee in the sense of a bank guarantee) to recover the stage payments at a later date. The judge has to decide on whether they will allow it or not. The plaintiff’s lawyer will have to prove not only that his client has a case but also that the developer is undergoing a delicate financial situation which may lead him to insolvency in the future.

On seizing the developer’s assets the judge will request that you place an amount of funds in court as a guarantee for the developers’ frozen assets. This amount varies for a standard off-plan purchase in proportion to the value of the assets requested to be frozen. The aforementioned amount is refunded to yourself when the final ruling is published, which puts an end to litigation (long before the assets are sold off in a public auction). However, if your lawyer loses the case these funds may be used by the defendant as guarantee. A further non-refundable amount of approximately €2,500 will have to be paid as well as associated expenses on executing the developer’s assets (auction appraisal, execution procedure, barrister fees etc).

However, in many cases the developer’s bank accounts are frozen (with funds in them) or out-of-court settlements are reached before the ruling, so there is no need to provide the guarantee on the developers’ frozen assets because the stage payments may be obtained by other means.


It is important to understand and distinguish two different concepts: cash flow and assets.


Although a developer may be experiencing a cash flow problem due to the recent credit crunch, one must not forego the fact that they normally own a sizeable portfolio of real estate assets.

On filing a law suit against the developer, the litigation lawyer will request that some of these assets are frozen on behalf of his client, to secure his financial interests. This allows the creditor to be positioned higher up in the creditor’s ladder in the event of a receivership although he will not be regarded as a privileged or secured creditor under Spanish law. In the event of the developer filing for bankruptcy for whatever reason, if some of his assets have already been frozen, they help to position you higher on the creditor’s list. This means that even if the developer enters into liquidation, Mr White will be able to recover his money or part of it at a later date. However, this can take many years depending on the complexity of the receivership.


2.    Completion without a LFO is illegal.


This is a common misconception. Completion on a property, before a Spanish Notary Public without a LFO is legal in Spain and the property will be lodged under your name at the land registry. However, it is not legal to occupy/live in a property without the mandatory administrative LFO. So basically you legally own a dwelling which is uninhabitable legally until the LFO is granted by the town hall.

This discussion about the LFO is not directly linked to the litigation process, but it has to do with determining whether you should complete on a finished property without a LFO or, on the contrary, litigate.


What exactly is a Licence of First Occupation and why is it so important?


Upon the granting of the Certificate of End of Construction, the Developer may apply for a Licence of First Occupation (LFO). The LFO is a document which the Town Hall grants and states that the development fully complies with the original Building Licence that was granted by the Town Hall, as well as complying fully with all Planning laws. The inspection to grant this Licence is carried out by Town Hall technicians that certify that the dwelling fully complies with health, access, security, planning and construction laws and is deemed fully fit for human dwelling. No one can speed up the granting of a LFO; attainting it depends solely on the Town Hall’s civil servants.


What are the associated problems of completing on a property without a LFO?


Although it is legal to complete in such a case, it has numerous legal and practical drawbacks which ought to be highlighted by your lawyer to aid you in making an informed decision. To name a few:


•    Primarily, you will not be able to take out a mortgage on the property or remortgage it - if needed be - by any bank other than the developers.
•    You will not be able to benefit from the official utility supplies; only from the developers supplies (water and electricity) with all the associated problems this has, namely that you may be cut off at any time as it’s the developer who is paying for it and if they go into receivership you will be cut off. Besides this, the developers’ electrical supply doesn’t have the same strength and power surges are fairly common if simultaneously turning on various electrical appliances.
•    Any future prospective purchaser, or their lawyer, will haggle with you and only pay a lower purchase price if you lack a LFO. In a resale, the purchasers in turn will undergo the same problems to secure finance by means of a mortgage loan. Lack of a LFO implies that you are actually reducing the base of potential purchasers for your resale.
•    If there are planning issues, the town hall can set a charge against the property and you as the new owner –and not the developer- may be held liable to pay the fine for the planning illegality.


So, should I complete without a LFO if I lack a Bank Guarantee?


Generally it is not advisable to do so. However, there are some exceptions to this general rule. Until completion the property belongs to the developer. So if you still have not completed and the developer becomes insolvent the property lodged under his name may be seized by the developers’ bank or any other creditor that places a charge on it at the land registry. If you have no Bank Guarantee and afore happens it is then very likely you will forfeit your down payments.

In cases in which there is a significant delay in granting the LFO, the development complies fully with all the required planning permissions, there’s no ruling affecting the building licences due to planning problems, and there is a high risk of the developer filing for bankruptcy, the short answer would be yes. In this particular scenario, litigating is not recommended. The property will be now lodged under your name at the land registry. You will still have to wait until the LFO is granted but at least now there is no risk of you losing your funds if the developer becomes bankrupt.

However, cases differ and require a case by case study by your lawyer.

 

3.    Litigation fees are very expensive in Spain and that you need at least £15,000 to litigate.


This is untrue. Litigation, in a court of First Ruling (Primera Instancia) often averages less than half the said amount. These fees already include the procuradors’ fees (Barrister).


4.    Litigation takes on average 20 years in Spain until you obtain the final ruling.

This is also untrue. The timescale for the first ruling ranges typically between 12 and 15 months. Depending on whether this ruling is appealed, this would set back the whole process approximately a further 9 months until the second hearing. On obtaining this final ruling, in the event that the seized developer’s assets need to be executed to obtain a refund a new procedure will be started. This is not always the case. The total legal procedure, from the time of filing the law suit until the stage payments are actually refunded, may last approximately three and a half years if execution is involved, if not then much less. The legal system in Spain is slow so patience is required.

In some cases, out-of-court-settlements are reached with the developer, thus avoiding lengthy procedures.

5.    Hearsay has it that no one has had their deposit returned from developers by means of litigation.


This is untrue. We confirm that our law firm has recovered client's deposits from various developers, in many cases by means of litigation. Often these rumours are spread by people who have vested interests in others not litigating for various reasons.


Conclusion


A lack of Bank Guarantee coupled in with no Building Licence or LFO attained due to serious planning issues is the scenario in which purchasers are potentially more likely to lose their full deposits. Developers are increasingly more reluctant to refund deposits regardless if they are in a clear breach of contract quite simply because they do not have the funds. In such cases in which developers are very late in delivering properties as per the Private Purchase Contract’s clause, litigation is often the only means to recover the deposits, even in a scenario in which the developer is likely to file for bankruptcy (*according to statistics, there has been a rise of 78.6% in Spanish bankruptcies during the first quarter of 2008 of which 45.7% are from the construction and property industry).


*. Source: Daily Financial newspaper Cinco Días (06-05-2008)

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

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

Legal services Larraín Nesbitt Lawyers can offer you

 

Related articles

 

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

2.008 © Raymundo Larraín Nesbitt. All rights reserved.

 

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