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
23^rd 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?”

2. 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

• Power of Attorney
• Property Litigation
• Debt Recovery

Related articles

• Off-Plan Construction Guarantees – 8th November 2011
• Licence of First Occupation – 8th April 2013
• Bank Guarantees in Spain – 8th April 2013
• Buying Off-Plan Property in Spain – 8th of June 2013
• How to Buy Commercial Property in Spain – 4th July 2014
• How to Buy Rural Property in Spain – 8th August 2014
• How to Buy Property in Spain Safely – 10th October 2014
• Taxes on Selling Spanish Property – 8th December 2014
• Supreme Court Rulings on Bank Guarantees – 8th April 2015
• House Hunting in Spain – The New York Times. June 2015
• Taxes on Buying Spanish Property – 8th July 2015
• Law 20/2015: Important new bank-guarantee legislation explained for off-plan buyers – 8^th September 2015
• Resurgent Spain: Málaga Sees Strong Sales – Mansion Global (The Wall Street Journal). December 2015

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.

Blog post copyrighted © 2007. Plagiarism will be criminally prosecuted.

By Raymundo Larrain Nesbitt
17th of December 2007

Non-paying tenants have become a real problem for landlords who rent out their Spanish property, a problem which seems to have been aggravated after August’s credit crunch. While the first thought of a distressed landlord is to lock the tenant out, or shut off the utilities, this is considered illegal by the Spanish Authorities and may lead the landlord to face criminal charges plus the payment of compensation to the tenant. If trying to reach an amicable agreement with the tenant fails, the only feasible option left to a landlord is to start an eviction process through a Spanish Court of Justice. Although the Spanish authorities have promised to enact a new ruling next year which will reduce the eviction time to only two months, currently an eviction of a non paying tenant takes anything between 10 to 18 months (typically one year).

The loss of rental income during this period of time can leave the landlord in bad financial shape, and things may turn uglier if the rental is partly being used to pay off a mortgage: if the monthly payments are not met, the bank could repossess the property. A horror story that many a landlord can be faced with.

What to do

The first signs of warning should be triggered once you’ve verified your tenant is two or three weeks late in the rental payment. With no delay, the first step will be to send the tenant a registered letter (“burofax”) giving him a reasonable deadline to pay the rental due (two weeks suffices). A lawyer should be able to arrange this for you for a reasonable fee.

Trying to reach an amicable agreement.

We are still in the early stages where we are trying to reach an amicable agreement, as starting an eviction process through a Spanish court of justice should only be really used as a last resort. Eviction processes take long, and the tenant can remain (and will probably do so) in the property until the eviction order is issued. Landlords, therefore, should note that reaching an amicable agreement is in the best of their interest, even though this may involve, in many cases, relinquishing a few months rent. Not many landlords are happy with doing this, but it should be noted that the debt is rarely recovered (tenants usually declare themselves bankrupt after an eviction process), and the longer the tenant remains in the property, the bigger the financial loss is going to be.

Some unscrupulous tenants even request from the landlord an amount of money in order to vacate the property, which is in our opinion outrageous and should never be agreed upon.

If trying to reach an amicable agreement fails, there’s no other option but to initiate an eviction process.

Can’t I just lock them out or cut-off the utilities and force them out this way ?

The problem in cutting off the utilities, or changing the locks to the property is that the landlord may be subject of having a criminal proceeding being filed against him.

Changing the locks without the tenant’s permission can be considered either coercion (delito de coacciones) or unlawful entry (delito de allanamiento de morada), or both. These acts are punishable under the Spanish Penal Code. There is ample Jurisprudence on the matter, and as an example we can cite the Supreme Court ruling of the 28th February 2000 (rec 4642/1998).

If the landlord decides to cut off the utility supply, either directly or indirectly (not paying the invoices), he may also be prosecuted for this act, as it is equally regarded as coercion

In addition to this, the landlord will be breaching the rental contract and this weakens his legal position before a court on claiming eviction.
In any case, the debtor before the utility companies is the owner of the property, never the tenant. Any unpaid utility invoices will go against the property. The landlord will have to pay for all the expenses associated to reconnecting his property to the utility services as well as paying the invoices and any delay interests. For all the reasons outlined, this is not a recommended option.

The eviction process

If you have failed to reach an amicable settlement, you will then have to hire a lawyer and initiate what is known as a “juicio de desahucio”, or simply put, an eviction process. The lawyer will have to wait in some cases 4 months of unpaid rental before being able to file a lawsuit. An eviction process is actually quite slow and takes anything from 10 to 18 months (typically one year) until the tenant is effectively vacated from the property by the law enforcement agents.

An eviction process requires a solicitor and the assistance of a procurador, who acts as a conveyor belt between the lawyer in charge of the matter and the law court, does not belong to any law firm and under Spanish law it is compulsory to employ his services on litigation. A lawyer will typically charge you around 1,500 € in legal fees, plus an extra charge of 700 € in Procurador fees. Other costs may involve those of a locksmith.

The law suit is filed by your lawyer in a court where the property is located.

The Debt

The priority for the landlord should be in many cases to recover the possession of the property and vacate the tenant, not to recover the lost rental income prior or simultaneous to the possession. The reason being is that the tenant may use to their advantage several legal mechanisms to delay such payment. These delay tactics allow the tenant to stay even longer in the property at the landlord’s expense. For this reason, the lawyer’s priority should be first to vacate the tenant, and only then to recover the lost rental. These are two separate and distinct legal actions from a procedural point of view.

The landlord can withhold the compulsory one month deposit, normally kept by the real estate agency until the end of the tenancy contract, to make up for the unpaid rental.

Strategies of the Tenant to Delay the Process

On letting properties in Spain, the landlord should be made aware of the numerous professional debtors there are which are very knowledgeable on Spanish Rental Law. These professional deadbeats profit on the biased Spanish laws which are devised to protect tenants, not landlords. They are very common on the coastal areas.

Tenants may choose to refuse to acknowledge all communications sent from the law court compelling them to pay the rental and interests due on the amounts owed. They can actually stall a process by alleging they were not notified in due form.

They can also carry out what is known as “enervación” by which the landlord has to forcefully grant them an opportunity to pay up before the judgment. Even if the landlord refuses payment they can deposit the amount owed at the court and the landlord is forced to continue the rental agreement. This forfeits the legal action taken. However, the tenant can resort to the “enervación” only once. Should they fail to pay a second time this will lead ultimately to an eviction.

The law court will issue an eviction order (lanzamiento) after the positive ruling from the judge sentence. The police will arrive at the property to force the tenant physically to vacate it along with all his personal belongings. You will then recover the possession of the property from that day and will be free to rent it out again.

How can I rent out my property safely?

The widespread fear of landlords not being able to vacate swiftly their defaulting tenants is justified. This helps to explain why there is a huge pool of empty properties in Spain which would be let if the laws were addressed efficiently.

On our next article, Landlord: Keys to Successful Rental Income, we deliver useful tips on how a property can be rented out safely securing your rental income.

What the future holds

There is a vast pool of properties in Spain which are not let due to landlord’s fear of unpaid rental, and the slowness of our eviction process. The good news is that the Government, having realized the importance of lets in our society as an effective alternative to purchasing property, has decided to take action. Plans to pass a new bill on eviction procedures sometime next year was announced on September 28th. This will prove most beneficial, as will speed up significantly the eviction process.

Also, as from 2008, ten new Juzgados de Primera Instancia (First Ruling Courts of Justice) will be created which will handle only eviction procedures. One of these will be located in the Málaga province and will cover all the Costa del Sol.

Do you have a tenant you need to evict from your property?

According to statistics, landlords take an average of 7 months to start an eviction process. Don’t wait any longer. Act now! 

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 & Tax services available from Larraín Nesbitt Lawyers:

Tenant Eviction Service