Regular legal-contributor Raymundo Larraín Nesbitt explains the recent changes to bank guarantee legislation (Law 20/2015) that will affect people buying off-plan or under-construction property in Spain.
By Raymundo Larraín Nesbitt
Lawyer – Abogado
21st of September 2015
Spain’s controversial law on bank guarantees, law 57/68, always the object of heated debates, will be abolished in 2016. This pivotal law in the off-plan buying procedure has been the focus of many of my articles:
Before anyone panics this pre-constitutional law has been replaced by a more modern law that is surprisingly almost identical with only a few tweaks that I care to highlight below.
The ironic in me cannot help but notice the convenience of its timing. As I highlighted in my above article, the Supreme Court rulings on bank guarantees were of late highly beneficial to consumers; to the point of awarding buyers astonishing automatic contractual resolutions. I believe a spanner may have been thrown in the works to curb the Supreme Court’s pro-consumer bias.
Only time will tell the tale.
Law 20/2015, of the Insurance Sector
Law 20/2015 amends, amongst other laws, Spain’s Building Act (Law 38/1999, Ley de la Ordenación y de la Edificación) which itself amended law 57/68.
In its third derogatory disposition it expressly abolishes law 57/1968. This new law will come into force as from the first of January 2016.
The ‘new’ law closely resembles its forty-seven-year-old predecessor. The main slew of changes are as follows:
• Law 57/1968 relating to off-plan bank guarantees is abolished and superseded by Law 20/2015.
• The new law comes into force on the first of January 2016. All off-plan contracts signed before will still be governed by law 57/68.
• Bank guarantees (or insurance policies) securing off-plan deposits are now only valid as from the time a developer has attained a Building Licence. This is a key point I had defended in all my articles advising new-build buyers to withhold payment until a developer had secured a valid Building Licence from a town hall’s planning department.
As can be gleaned from the above it stands to logic that a conveyance lawyer must advise his client not to pay any deposit before a Building Licence is issued to a developer. Any interim payment you make prior to its granting will be unsecured and you will be left financially exposed with a risk of losing your deposits. I stress, your deposits are NOT covered by a bank guarantee or insurance policy prior to attaining a Building Licence under this new legislation.
• The amounts secured will now include the client’s staged deposits, plus legal interest, plus all associated purchase taxes i.e. VAT
• The legal interest will be as from the time the stage deposits are handed over as to the scheduled delivery date of the property outlined in the Private Purchase Contract (PPC).
• The stage deposits will be deposited in a specific bank account that is ring-fenced for the sole purposes of financing a development. Much like an escrow account.
• Tailored bank guarantees. They will now be individualized for every buyer. Collective bank guarantees will cease to exist not being acceptable going forward; a contentious point I had defended in my bank guarantee articles, highlighting just how problematic collective bank guarantees were in practice to execute. The details of the property being bought will be specified on the bank guarantees as well as the buyer’s personal details.
• It is the developer’s onus to take out this insurance policy or bank guarantee and obviously at his own cost. The beneficiary is the off-plan buyer always. A buyer will not pay a penny for it. This has now become a moot point, having sparked much controversy under the old legislation.
• A bank guarantee will still hold valid even if a developer fails to continue servicing the insurance premiums. The lender or insurance company will be legally compelled to refund in full the guaranteed amounts.
• Bank guarantee: validity. A bank guarantee is valid as from the time a developer attains a Building Licence from the town hall’s planning department up to completion before a Notary Public.
• If a buyer gives an extension to a developer, in writing, because completion is running behind schedule then the bank guarantee must be likewise extended to match the new scheduled delivery date of the new-build property.
• Direct recourse. If the development is stalled or else the development is not finished on time by the contractual (read binding) scheduled delivery date a buyer can send by recorded delivery to a developer a letter requesting full repayment of all stage payments, plus legal interest plus associated buying taxes. The developer has a deadline of thirty days to pay back said amounts. After this deadline a buyer (his lawyer) can claim these amounts (direct recourse) from the insurance company or lender itself who guaranteed the stage payments. In other words an off-plan buyer can skip the developer altogether and go straight for a lender which – presumably – will be in a healthy financial position to repay it. The lender or insurance company has a deadline of thirty days to repay said amounts in full as from the time it is legally notified by the conveyance lawyer.
• Bank guarantees: expiry date. They will now expire two years as from the time a developer is in breach of contract without the buyer exercising his rights to terminate the contract and apply for a refund. This is a major novelty as bank guarantees before had no expiry date.
• Contractual reference. All off-plan contracts will now make express reference to bank guarantees specifically mentioning which lender or insurance company is being held responsible for the safeguarding of a buyer’s stage deposits supplying contractual details for identification purposes. The escrow account will now be detailed in the Private Purchase Contract itself.
• Bank guarantees: handing over. Upon signing an off-plan contract a developer will hand over the bank guarantees. This is also a major novelty as before buyers were expected to pay and would then be handed a bank guarantee, one at a time, which could take one or two months as from each stage payment. Not an ideal situation to be in as the developer could file for bankruptcy in the interim. This risk has now been eliminated as ALL stage payments will be guaranteed ab initio. No longer will a buyer have to wait patiently to be given a bank guarantee at a time for each and every stage payment they make.
• Bank guarantee: refund limitation. Related to the above, despite being the full stage payments (plus legal interest, plus taxes) guaranteed in block a buyer can expect to be refunded only what he actually paid. Which is why it is very important that buyers on making use of foreign currency brokers safe keep copies of all overseas transfers.
• Bank guarantee execution. If the development is not finished on time a buyer, at his own choice, can either request a full refund or else give the developer an extension – in writing –.
• Bank guarantee cancellation. Same as before, bank guarantees only become null and void when two conditions are met:
1. As from the time a developer attains a Licence of First Occupation from the town hall’s planning department.
2. The developer makes the new-build property available to a buyer (as in physically handing it over to him).
A new third condition has been added:
3. If a buyer refuses to complete before a Notary Public when legally compelled to do so.
• Bank guarantees: publicity. Developers are now forced in their sales publicity to make explicit reference to being compliant with this new law 20/2015 even mentioning the name of the lender or insurance company as well as the bank account details of the escrow account where all staged deposits will be paid into.
• Bank guarantees: non-compliance. Developers are subject on non-compliance with up to 25% of the total amounts that should have insured or else the amount set by the Autonomous Community where the new-build is located.
As this change will presumably elicit multiple queries I’ll do my best to address them in the below questions & answers section.
1. I have already signed an off-plan contract. How does this new legislation affect me?
It does not. This new law comes into force as from the first of January 2016. All off-plan contracts signed before said date are still ruled by law 57/68.
2. I plan to buy off-plan in 2016. Will my contract be ruled by the new law?
Yes. Every off-plan contract signed after the 01/01/2016 will be governed by law 20/2015.
3. I am litigating at present to recover my stage deposits. How does this new legislation affect me?
It does not. The law court will examine your case under the merit of the old law which is still in force.
4. If in 2016 I sign an off-plan contract and I’m handed a bank guarantee securing all my deposits but the Building Licence is delayed until 2018 am I still covered?
No. Under the new legislation you are only covered as from the moment a developer attains a Building Licence (BL).
Say, for example, you hand over the monies in 2016 and the BL is issued to the developer in April 2018. Should the developer file for bankruptcy any time before April 2018, even if you have a valid bank guarantee covering all your money, you would lose it all and have no recourse. The bank guarantee, even if legitimate, only becomes ‘active’ as from the time the BL is issued.
Bottom line, bank guarantees only secure your money going forward as from the time a Building Licence is issued by a town hall; not a moment before.
This new law addresses many of the criticisms that were leveled against its forty seven year old predecessor.
Law 57/68 needed a makeover. It had become outdated in many aspects. This new law leaves the door ajar to be detailed further in future regulation.
It is of paramount importance to restore confidence in overseas buyers by creating a clear steadfast legal frame in which to operate. The rules of the game must be known to all to level the playing field.
“Trust, like reputation, is hard to earn, but easy to lose.”
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