Decree 218/2005. The one about rentals and properties for sale in Andalusia

Raymundo Larraín Nesbitt, August, 8. 2016

Regular legal-contributor Raymundo Larraín Nesbitt explains Andalusia’s Decree 218/2005 law that regulates the information real estate agencies and developers need to provide to consumers on renting or selling properties, before any deposit is paid, in the region of Andalusia.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of August 2016

Original article: 29th August 2.008

 
 
Photo credit: Idealpropertyspain.com

 

Introduction

This month’s article features a law that was passed in 2005. It acts as a gentle reminder of an article I published well over a decade ago. The reason I republish it this month is because sales are picking up again and we are at the peak of the rentals season.

The concept of Documento Informativo Abreviado (DIA, for short) pervades this law and is the cornerstone of this decree. It is the Spanish equivalent of the UK’s HPI, Home Purchase Information, or Seller’s pack.

DIAs will contain different information contingent on whether we are dealing with property for sale (off-plan or resale) or else a rental.

The idea behind Decree 218 is that when a consumer (tenant or buyer) walks into a developer’s sales office, or else a real estate agency (whoever is marketing the property), they are handed key legal information in the shape of a detailed booklet (DIA) before any deposit is paid, which proves most useful.

I have structured my article as a FAQ and use bullet points for ease of comprehension rather than list and comment its sections one by one which would be rather tedious and off-putting.

Where is it enforced?

Only in the region of Andalusia. All properties located in that region are subject to it.

What properties does it apply to?

Properties being rented or sold (whether off-plan or resales).

What does it rule on?

It rules on the documents and information that is mandatory to be supplied to prospective tenants and property purchasers (consumers) on the sale and let of properties located in the autonomous region of Andalusia.

Basically this law is part of the Consumer’s legislation which has been enacted to further protect and ensure the rights of all consumers in Andalusia. It complements the national Consumer Law embodiment.

Who does it apply to?

It applies to all professional intermediaries such as Real Estate Agencies, sole Estate Agents and developers on selling and letting properties located in Andalusia.

Exclusions

It does not apply in administrative, public or judicial property auctions.

It only applies to main homes. So plots of land and commercial properties are excluded.

Who is the beneficiary of this law?

Consumers at large and the broader real estate market ultimately. Would-be buyers and long-term tenants of properties in Andalusia will do so in a safer legal framework.

Where can I find a copy of this law in Spanish?

Here, just follow this link.

Sorry, no English version.

 

Brief Legal Overview of Decree 218/2005

 

 

It is a fairly short law of only 15 articles.

The information supplied must cover the following points

The following is shared amongst all three DIA classes.

  • Specify if the dwelling is under construction (off-plan) or else is a resale.
  • Dwelling’s exact location.
  • Developer’s identification details.
  • Number of dwellings built.
  • Number of bedrooms, detailing the usable surface each have.
  • If the sales price is mentioned then it is mandatory that all taxes and other expenses are included in a detailed breakdown alongside the sales price.
  • If the rental is mentioned then it is mandatory to supply as well the community fees for which the property is liable for. You can read further on Community of Owners in my article.
  • When buying off-plan property, and stage payments are involved, it is mandatory to include in the contract that said amounts will be secured under law, the name of the bank, number of the insurance policy or bank guarantee, the existence of a special bank account where the funds will be allocated and the client code. It must be specified if the funds are handed over as a stage payment or else as part of the price and as a deposit to strike the property off the market.

 

The Documento Informativo Abreviado (DIA, for short)

Developer’s or intermediaries, such as estate agents, are obliged to deliver free-of-charge in Andalusia a copy of a DIA for every property on their books.

DIA’s will include the following information:

  • Full name and social address of the developer as well as the company registrar details or that of any physical or company that is acting as an agent.
  • Details of the architect, and construction company.
  • Detailed and scaled plan of the development with a minimum scale of 1:100
  • Usable surface of the dwelling and its annexes (such as garage and store rooms).
  • Physical description of the dwelling and its annexes as well as that of the utility connections (water, electricity, gas, sewage grid etc.) and fire protection.
  • General description of the building and or development, the communal areas, and the available services.
  • Memorandum of Quality (memoria de calidades) which gives a detailed breakdown of the materials used in the construction.
  • Dwelling price as well as the associated expenses and applicable taxes, means of payment and deadlines to comply with them.
  • Breakdown of expenses and taxes available at the consumer´s sole request.
  • When stage payments are involved (applies only to off-plan or new-build property) it is mandatory to mention the existence of a bank guarantee.
  • Mention of the plot of land’s Title deed, of any leans and encumbrances on it and the Building Licence under which they are entitled to build on site.
  • Mention of the availability of a copy of the Building Licence at the sole request of a consumer.
  • Mention of the stage of construction of the development.
  • Mention of the expected delivery date of the property, it’s annexes (garages, store rooms) as well as those of the development’s communal areas. Said deadline must be referred to quarterly within a calendar year.
  • Mention of liens and charges on the dwelling or annexes or it’s access points (i.e. a Right of Way or Right of Views).
  • Mention that the consumer does not have to pay for not taking on the developer’s mortgage if he decides to take another. More on this in my article Abusive Mortgage Clauses.
  • Consumer’s right to elect a Notary on whom one cannot be imposed by the vendor. More on this in my article Abusive Mortgage Clauses.
  • The capacity for both parties to compel each other to complete the contract before a Notary Public.
  • The right of a consumer to be handed free-of-charge a draft of the Private Purchase Contract to be signed for their perusal (applies only on buying).
  • Place where all the documents included in this list are available for inspection at the Consumer’s sole request.
  • Place, date and signature.

 

  1. DIA for Off-Plan properties

Besides including all the above, a full mention of all the administrative licences available must be included, chiefly:

  • Building Licence (BL).
  • Licence of First Occupation (LFO). More on this in my detailed article Licence of First Occupation (I cannot understate the importance a LFO has to the point of advising buyers not to complete on an off-plan property without it).

Other ancillary documents that must be supplied alongside the key ones above are:

  • Property’s delivery date (contractually binding).
  • Land Registry details of the properties if available as well as mention of any liens and encumbrances.
  • Community By-laws (which further develop Spain’s Commonhold Act AKA as Horizontal Property Division Law). You can read further in my detailed article  Community of Owners in Spain.
  • Internal community rules (not to be confused with community by-laws).
  • Libro del Edificio (concrete specifications on the building itself).
  • Ten-Year Building Insurance (Seguro Decenal). You can read further on the matter in my detailed article Off-Plan Construction Guarantees.
  • Energy Performance Certificate.

 

  1. DIA for resale properties
  • Property address.
  • General property description.
  • Sales price.
  • Construction year.
  • Community of Owner’s quota (if applicable as not all properties are included within a Community of Owners).
  • Mention of community of owner´s insurance policies (if applicable).
  • Mention of utilities which are connected at the time.
  • Certificate proving vendor’s IBI tax compliance.
  • Energy Performance Certificate.

 

  1. DIA for Rentals
  • Name, social address and Company Registrar details of the landlord or estate agency acting as intermediary.
  • Total built surface of the dwelling and that of its annexes (i.e. garage and store rooms).
  • General description of the property to be let including available utilities as well as fire protection devices.
  • Furniture inventory, kitchen appliances etc. found within the dwelling.
  • General description of the building or development where the property is located.
  • Specific mention of the agreed rental as well as that of the annexes, payments terms etc.
  • Spain’s Rental Law (LAU) obliges the tenant to a one-month deposit as well as the inclusion of any other guarantees the landlord may deem fit. More on this in my detailed article Urban Rental Act in Spain.
  • Full disclosure of the Estate Agency’s commission for their professional service as intermediaries.
  • Mention the property complies fully with all administrative licences mandatory under law (i.e. BL, LFO).
  • Availability of the Community of Owner’s By-laws at the tenant’s sole request.
  • Mention on how the contract will be formalised.
  • Community of Owner’s administrator contact details
  • Internal community rules (not to be confused with Community by-laws)
  • Energy Performance Certificate.
  • Place, date and signature.

 

The Rental DIA can be supplied prior to formalising the rental contract at the consumer’s sole request free-of-charge and in any case it is compulsory to supply it simultaneous to the signing of a tenancy agreement.

Miscellaneous

Art 12.- All premises in which a professional activity of intermediation, on selling or renting property (i.e. Estate Agents or developers), must have a very visible sign with the following message in Spanish: Consumers have a right to be handed over a copy of their dwelling’s DIA. This sign will be placed alongside the one that informs consumers that a Claims & Complaints book is available on request.

Art 13.- All Private Purchase, Sale & Let Contracts must comply fully with Royal Decree 171/1989 of Consumer Protection regarding information that must be made available in conveyance & property lets.

Art 14.- Consumer bodies will enforce this law. The Junta de Andalusia’s Inspectors can, without prior warning and without any need of identifying themselves previously, verify that an establishment open to the public is complying fully with all the obligations set forth in this Decree 218/05.

Art 15.- Fines may be imposed on non-compliance.

The Decree’s Annexes

I won’t go into detail on these as it only affects intermediaries, not consumers. Basically the decree sets out six different annexes which must be used by developers and real estate agencies as templates on marketing a property. So for example annex 3 is the template dealing with new homes (nine pages long!) and annex 6 is the template on rentals (five pages long).

Professional intermediaries must populate these templates to produce a fact sheet which is then handed over to a consumer in his DIA or Home Information Pack.

Conclusion

A well-meaning law which unfortunately falls flat on its face as in practice it is snubbed by many because it adds considerable red tape.

I am not only referring to intermediaries but to owners themselves who must supply the former with a long list of documents so these can elaborate a ficha informativa or fact sheet on a property following the templates in the decree´s annexes. This ungrateful task can prove to be quite laborious and time-consuming (as it must be done for every property on their books).

Suffice is to say that this decree is widely held as unpopular.

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

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

 

Legal services Larraín Nesbitt Lawyers can offer you

 

Related articles

 

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

2.008 and 2.016 © Raymundo Larraín Nesbitt. All rights reserved.

... Read more

Law 20/2015: Important new bank-guarantee legislation explained for offplan buyers

Raymundo Larraín Nesbitt, September, 21. 2015

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

 

 

 

Introduction

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.

Novelties

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.

E.g. Buying Off-Plan Property in Spain

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.

 

Frequently Asked Questions

 

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.

Conclusion

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.

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

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

Legal services Larraín Nesbitt Lawyers can offer you

 

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.

2.015 © Raymundo Larraín Nesbitt. All rights reserved.

... Read more

How to Buy Property in Spain Safely

Raymundo Larraín Nesbitt, October, 10. 2014

Buying property in Spain safely, by solicitor Raymundo Larraín Nesbitt, is an article that provides a trove of information; it will help you clear the minefield and avoid the most common pitfalls. It acts as a compendium on his five-part series ‘How to Buy Property in Spain’. You may also be interested in reading Buying Resale in Spain, Buying Off-Plan Property in Spain, Buying Distressed Property in Spain, How to Buy Commercial Property in Spain or How to Buy Rural Property in Spain.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
10th of October 2014

 

Introduction

Over the last decade I have written a series of specialized articles featuring real estate conveyance that acted like jigsaw pieces. The purpose of this pretentiously-titled article is to collate part of my dispersed writings on the same topic and group them altogether acting as a backbone that binds and fleshes them out cohesively in a single document. The individual jigsaw pieces should now fall neatly into place forming, one hopes, the overall conveyance puzzle I had in mind.

Following on the above, for reasons of space constraint, I cannot reproduce in this article the hundreds of pages I have written on the matter over the course of years. The idea behind this article is to act as a placeholder repository that conveys basic information on a wide range of conveyance matters and most significantly provides the links to the focused articles which are the ones that really provide in-depth cover on any given subject. So please kindly bear with me and follow the external blue links to the dedicated articles when you want to delve deeper into a topic.

2014 Overview of Spain’s Real Estate Market – A Silver Lining

After seven years of recession I believe we may be almost out of the woods. 2014 in my opinion will be remembered as marking the inflection point where the market started to pick up again and a new property cycle began.

Granted there is still a huge oversupply of properties that will likely take several years to be absorbed by the market. Spain in the boom years built in frenzy more properties than France, Germany and the United Kingdom altogether. This irresponsible glut of properties is largely explained as a result of a combination of factors such as ultra-low interest rates which fostered widespread easy credit, unbridled lender ambition, bloated property valuations commingled with the Administration’s oversight. Properties with poor location and lack of amenities (particularly those found inland) will likely not sell as no one is interested in them irrespective of price. They should have never been built in the first place as they appeal neither to foreign nor domestic demand

What is holding back recovery to a large extent is the credit shortage or credit-crunch. Lenders are being over-conservative handing out mortgages and are enforcing strict lending criteria as many are still widely viewed by experts as undercapitalised. Fortunately the European Central Bank has in a surprising move lowered the base rate last September to a historical low of 0.05%. This is a welcome respite for mortgage borrowers (maybe not so much for Germany) which may in time help credit to flow back to families and society at large. Albeit being realistic this new base rate will not translate to an immediate availability of credit and is likely to take quite some time to permeate through. But it is most certainly a step in the right direction. This bold move by the ECB suggests interest rates across the Eurozone will remain at historical lows for some time allowing buyers of second homes to take advantage of competitive rates.

Credit is the lifeblood of the real estate market; without mortgage financing the market languishes and grinds to a halt relying heavily on cash-buyers which are obviously a minority. Encouraging signs of lenders willing to lend again, with reasonable terms, are beginning to hit the headlines. Affordable borrowing will play a major role in the rebound as it is a prerequisite to a solid housing market recovery.

The overall outlook is that there is still a massive glut of properties available but what’s important to note is that the market is multi-tiered and we are witnessing recovery at different speeds much the same as Europe offers countries with variable growth levels. The high-end of the spectrum, dominated by premium properties, is selling quickly once again. As in every recovery in Spain the rebound is kick started by well-heeled buyers acquiring high-end properties. The drive sparked by top-of-the-range real estate will eventually gain momentum to the point of pushing forward the mid-range market in a herd mentality. This is how every recovery in Spain has begun and I believe we are precisely at a cycle turning point with well-off clients seizing first-rate properties with the general market to follow trend in due course.

For the first time in several years reports are surfacing pointing to a fledgling house price recovery. Even Spain’s National Statistic Bureau (INE) has joined in reporting the first house price increase in a six-year period. What it is clear to my mind is that the market has indeed levelled off and we are now well on track on the road to recovery with well-located and smartly-priced properties gaining traction.

Any industry insider will tell you that we have witnessed in 2014 – for the first time in seven years – strong foreign demand mainly from north European countries (Nordics), Russians and to a lesser extent Arabs. Domestic demand remains depressed conditioned by all-time high borrowing costs with the exception of high-end property which has proved resilient with affluent Spaniards from Madrid and the Basque country (let alone wealthy foreigners) snatching up trophy properties at bargain prices in well-to-do locations.

A traditional indicator of recovery in Spain has been when savvy wealthy Spanish families buy into the market decisively which is indicative of a cycle end and the beginning of a new one as witnessed over the last two property cycles (eighties and nineties). Upbeat macro figures are pointing more and more that we could really be at the start of a new growth period. Whether this bourgeoning recovery holds up and translates into consistent growth remains to be seen as external geopolitical factors could easily derail it.

Hire a Qualified Registered Lawyer

This is the single most important advice that can be given before you start house-hunting. If you only happen to follow this first tip the rest of the points mentioned in this article become redundant.

Hiring a lawyer is by no means mandatory on conveyance procedures. But I cannot stress enough the importance of retaining a Spanish lawyer, if you are a foreigner, to act on your behalf in a conveyance procedure, both on buying and selling property. This should be your starting point before signing any reservation agreements or paying any deposits.

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

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

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

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

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

Besides registered lawyers have the advantage of professional indemnity insurance in the event of negligence or malpractice. Bottom line; make sure your lawyer is registered to practice, for your own sake. Be wary of cold-calling from legal advisors, senior legal advisors, legal executives, legal assistants, paralegals and in general anyone who does not clearly identify himself/herself as a lawyer/abogado (and is therefore registered).

Unlike other countries such as the United Kingdom these fancy titles don’t mean anything in Spain – we have no paralegals. Or you are either a registered Spanish lawyer or you are not, period. It’s that simple. Someone who is not a trained registered lawyer is not qualified to give legal advice in any shape or form, cannot entertain to address himself/herself as a ‘lawyer’, cannot solicit clients for legal services – even if outsourced – nor practice law in Spain. You can easily check if your lawyer is registered to practice law on this registered Lawyer’s database. Beware of the increasing number of Spanish bogus law firms cold-calling requesting money upfront (particularly regarding timeshare). They are not law firms, they are boiler rooms (unlicensed, unregulated and unsupervised).

If the property you wish to buy is high-end you may want to seek advice beforehand so as to mitigate tax exposure, namely to Spanish Inheritance Tax. Often the best tax planning results are achieved prior to acquiring a property as they may require the incorporation of a string of holding companies to lock-up the asset. You can read further in my article: Buying and Owning Spanish Property through Companies: Pros and Cons.

Bottom line it is advisable to retain an independent lawyer in Spain both on buying and selling property.

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

NIE Number Requirement

One of the first steps on buying property in Spain, besides hiring a lawyer, is to apply for what is known as a Spanish NIE number which is a Tax Identification Number for foreigners enabling you to file and pay taxes into the Spanish Tax office. It will be required, for example, on all the following:

  • Buying or selling property.
  • Inheriting assets in Spain.
  • Opening a bank account.
  • Taking out insurance.
  • Buying a car.
  • Working in Spain.
  • Obtaining a mortgage.
  • Some private foreign schools require a NIE number from parents and/or new (foreign) pupils to enrol them!

 

Basically any activity involving paying taxes requires a NIE number. You cannot complete on a property in Spain without one, either on buying or selling, as the Notary will disallow it.

You may apply for a NIE number in person or else appoint a lawyer to do it on your behalf. Our law firm offers this service: NIE number service.

For the former, be ready to take time off work, allocate holidays, spend over €1,000 in booking flights and hotels to Spain all to wake up very early and make long queues under a scorching sun for hours on end. Did I mention your Spanish must be excellent as public servants will seldom speak in English let alone other languages?

Or alternatively you can cut to the chase using the most popular option which requires appointing a lawyer as a proxy by means of a limited Power of Attorney (P.O.A.) specific only to apply for a NIE number. Lawyers usually charge a reasonable fee of €100 – €150 for it. In under ten days you will have a new NIE number mailed (or e-mailed) to you to get you started on your property hunt.

 

Property Types

 

I distinguish broadly between five types of real estate property. The first four may be grouped under the generic term ‘resale’ property whereas the fifth is new-build or off-plan which requires a category all unto itself and for this reason I reserve it the last place below.

I go into the trouble of distinguishing these five categories or subclasses because they each sport their own nuances and idiosyncrasies which ought to be highlighted clearly to would-be buyers so they are fully aware of the differences. In most legal articles dealing with Spanish property conveyance you will find them all grouped together in a mixed bag making no distinction which I honestly believe is a crass mistake. The division is not merely academical but practical.

1. ‘Standard’ Urban Resale Property

Is hands down the most frequent property-type conveyed.

Please read my article Buying Resale Property in Spain.

2. Commercial Property

Is a type of property legally earmarked as commercial premises subject to special taxation and other particularities (i.e. opening licence).

Please read my article How to Buy Commercial Property in Spain.

3. Rural Property

Requires a (cautious) approach to it due to the myriad problems it has caused in the past.

Please read my article How to Buy Rural Property in Spain.

4. Distressed Assets (Fire Sales and Bank Repossessions)

This term refers to pre or post lender repossessions which are rife on the radio and press. The following two articles clearly explain how to profit from distressed real estate assets held by lenders or directly from private owners seeking a quick sale. Fire sales and foreclosures offer great value as they are heavily discounted.

Please read my articles Buying Distressed Property in Spain and Bank Repossessions in Spain.

5. Off-Plan or New-Build Property

As explained above, the fifth type of property cannot be labelled – by definition – as resale and requires a distinct category all unto itself. Off-the-plan or new-build property is when you sign a contract to buy a property that is yet to be built and is not expected to be finished until several years’ time. I strongly recommend reading my articles:

Buying Off-Plan Property in Spain
Off-Plan Construction Guarantees
Bank Guarantees in Spain
Supreme Court Rulings on Bank Guarantees
Licence of First Occupation

They provide an insightful account of the full off-plan buying procedure. Due to space constraints I am unable to reproduce the hoard of information available to them. These articles explain key concepts, such as Bank Guarantees and Licence of First Occupation, which are specific to off-plan and not shared by its resale cousins (with the exception of Catalonia where LFO’s are indeed required for resales).

The market has swerved from one extreme to another; from loving off-plan to having a major fallout. In time the market will find its equilibrium. Although nowadays you will find that off-plan is being almost demonised in the press the fact is that buying off-plan has many advantages as well as some associated drawbacks. Not that long ago it was normal to obtain a significant discount (premium) on buying off-plan as you took on a risk until the unit was ready to be delivered legally (with a Licence of First Occupation). The main risks were related to the uncertainty of the property ever being delivered as well as the time elapsed until completion which could easily take two years or more.

Many took advantage in the boom times selling on these properties for a sizeable profit prior to completion (also known as “flipping”) as it was basically a leveraged investment (ultra-low interest rates coupled with lenders’ lax lending criteria fuelled widespread easy credit) which only required a fraction of the funds paid up front. That same off-plan dwelling was significantly more expensive (i.e. 30%) if you purchased it key-ready as now there was no associated risk (uncertainty).

This, however, changed over time leading us onto today’s depressed market. Now that the dust has settled, purchasers are increasingly turning to resale property in lieu of off-plan as they judge it safer post-credit-crunch particularly out of fear of developers filing for creditor protection or not being capitalised enough to complete existing builds. Off-plan is being shunned as they believe the hazards nowadays frequently outweigh the rewards, making the resale and let market look altogether more appealing within the context of a grim financial environment.

This will no doubt change in the future with the upcoming of the next property cycle. The million-dollar question is of course second-guessing when that will be!

Your guess is as good as mine.

Financing

Most buyers require a mortgage set-up to finance their property purchase. Post-credit-crunch lenders in Spain have been understandably reluctant to finance properties and they have discouraged this activity by non-subtly raising the borrowing fees to all-time highs.

This however changed earlier on this year when Spain’s number one lender by market capitalisation, Bank Santander, decided to spearhead the change by leaving the door ajar on relaxing its mortgage terms. I am confident that, as in the past, smaller lenders will follow the market leader’s example and begin to facilitate credit by offering more competitive and affordable terms to borrowers which will pave the way to a full-blown recovery.

Spanish lenders are risk-averse nowadays so they expect a buyer to come up with a 30 to 40% deposit. This will however likely change in the near future, as credit begins to flow, requiring smaller down payments from borrowers.

I strongly recommend a buyer reads beforehand my mortgage-related articles:

Spanish Mortgage Loans: An Overview.
Spanish Mortgage Loans: Beware of Abusive Clauses.
Mortgage Collar Clauses Revisited (‘Cláusulas Suelo’).
Lifetime Loans or Reverse Mortgages in Spain Explained.

 

The Buying Process

 

The buying process differs between resale and off-plan property. This is explained because in the former the property is readily available, or key-ready, whereas in off-plan it is yet to be built and takes several years as a norm. I will explain separately both procedures as they each have their own particularities with some elements in common.

 

I. Resale Buying Process

 

The full buying procedure is explained step-by-step in my article How to Buy Commercial Property in Spain under the section “Profile on the Buying Process”. This three-step procedure applies to all four resale property types outlined below:

‘Standard’ urban resale.
Commercial.
Rural.
Distressed.

Please refer to said article for a full account of details as well as useful tips on common pitfalls to avoid on buying resale property. I won’t replicate the information here as it would elongate this article unnecessarily besides duplicating the information.

The first step is to sign a reservation contract or deposit agreement at a real estate agency which is normally non-refundable. This takes the listed property off the market (normally for the next 30 days). I strongly advise a buyer hires a lawyer before he commits to sign a reservation contract. Some of these deposit agreements are standard templates which may be poorly worded and can create serious obligations for a buyer that go against his best interests.

Examples:

a) As a buyer; by creating an obligation to buy. By setting an unrealistic completion date of only six weeks as from the time of signing the reservation contract when this short timeframe may exceed the time needed to set up a mortgage with a lender. This leads to a breach of the contract which may result in heavy losses for a buyer as he may be ‘forced’ to complete (can be compelled legally to do so by the seller’s lawyer). A buyer can be sued for specific performance by the seller compelling him judicially to buy the property.

b) As a seller; by creating an obligation to sell. Should the vendor opt out (because for example they have found a second buyer willing to pay more) they may be forced to pay double the amount of the down payment placed by the first buyer as a reservation deposit. Likewise a seller may be sued by the buyer for specific performance to try and compel a sale.

The above two examples highlight why it’s highly advisable to hire a lawyer from the outset so that he reviews the clauses set forth in the reservation contract carefully before you sign and pledge to anything. Do not act rashly signing away. Let a lawyer carry out the basic legal checks first.

Strictly speaking a First Occupancy Licence (LFO) is unrequired for resales and applies only to new-build or off-plan property. That said, in some parts of Spain, such as Valencia and Catalonia, a LFO is required for resales as an exception to the general rule. Additionally a trend has emerged over the last couple of years with risk-weary lenders demanding a LFO is produced for resales to cover their backs on granting a mortgage loan. Many transactions are being put on hold because of this ‘new’ requirement for resales which used to apply only to off-plan property as explained in the next section below in detail. The reason being is that lawyers must request from the local town hall copies of a LFO which may take several months.  In my personal opinion this is absurd as we have gone from one extreme to another; from lenders blissfully ignoring a LFO for off-plan in the boom days to now demand them for every resale which was never their purpose and defeats their logic. It is daft in my view to ask for a LFO on a twenty-year-old property that has all the utilities connected and has no legality problems of any kind. This simply adds an unnecessary new layer of red tape which may contribute to potentially jeopardize resale transactions constituting a deal-breaker in some cases without adding any legal safety to long-standing resales.

The second step will be to sign a Private Purchase Contract (PPC, for short). This step is optional for resales and at times it is merged with the first one for simplicities’ sake. You normally make a down payment of 10% of the property’s value setting a reasonable date for completion (particularly if you require mortgage financing). If movables are being sold along the property it is highly advisable an inventory is added to the PPC. This inventory should be drawn up with great detail to avoid misunderstandings. This inventory will likewise be added to the Title Deed at the Notary Public on completion. It is regarded as a contractual element which binds both parties. If the seller does not include something from within, it will be regarded as a breach of contract.

The third and final step is to pay the balance and complete before a Notary Public. You will require your NIE number and a valid copy of your passport. Your lawyer will ensure that Community of Owners’ fees, utility bills and IBI tax are all up to date. A new owner is held liable for all community fees from the current year he’s buying on a pro rata basis as well as all those dating back three years. This liability is extensive to what is known as ‘derramas‘ or unforeseen community expenses such as painting the building or fixing the lift. Which is why it is very important that at the time of completion your conveyance lawyer attains a certificate from the Community Of Owners signed jointly by the administrator and president stating that all community fees are up to date by the vendor. Should there be any payment outstanding, it goes against the property itself not against the former owner; your lawyer can always practice a retention at completion to offset this outstanding debt.

 

II. Off-Plan Buying Process

 

The procedure differs from resale property for the very reason that the property is yet to be built. It also follows a three-step procedure. I strongly advise reading my article Buying Off-Plan Property in Spain  for a full list of potential pitfalls associated to this property type. The major differences with resale property are the time elapsed between the stages, which will normally span a couple of years or more, as well as the stage payments.

The first step once you have chosen a development that suits you is to sign a reservation contract at an estate agency. This deposit is non-refundable. The same warnings highlighted above for resale apply here for off-plan.

The second step is to sign a Private Purchase Contract (PPC) and start making a series of stage payments. These stage payments, as a rule of thumb, equate to half of the properties’ sales value. Stage payments (and initial reservation deposit) should be covered by what is known as a bank guarantee.

Bank guarantees are essential and of utmost importance in the event a developer becomes insolvent or fails to complete a development within a reasonable timeframe for whatever reason. They act like safety nets for buyers on all the money paid. You should be able to keep receipts of all the stage payments (including the initial reservation deposit) as the Notary public will require at completion a detailed trail of paperwork that justifies each and every amount paid to the developer to comply with Spain’s anti-money laundering laws. If you happen to wire your funds to Spain using the services of a foreign currency broker (which in my experience saves thousands of euros) make sure they supply you with justification of all the moneys transferred over to a developer. The problem with off-plan is that stage payments are normally carried out years before completion so it is easy to misplace a receipt of one or more payments which may cause serious issues down the line with the Notary at completion who may even refuse point blank to witness a property conveyance unless all anti-money laundering provisions are strictly adhered to.

The third and final step is to complete before a Notary Public and make payment of the balance (remaining 50%). The third stage normally takes a couple of years after signing the PPC depending on how advanced the construction of the property is. I strongly advise to complete only with a Licence of First Occupation (LFO) in place. Completing without a LFO is legal in Spain but highly inadvisable (only justified in qualified exceptions such as a developer teetering on the brink of insolvency). For a full list of the serious legal associated risks on completing without the property attaining a LFO by the Town Hall’s Planning Department I refer to my article Licence of First Occupation. As from the moment a developer attains a LFO he can legally compel you to complete on the property. This is known as ‘forced completion’.

Before you complete it is strongly recommended you carry out what is known as a snagging list which will highlight any construction flaws i.e. mismatched tiles, damp patches, mould growths, leaking faucets, flaked painting, damaged appliances, unsuitable drainage. Normally I would hire a reputable chartered surveyor who will draft a complete report (to British standards) outlining any build defects or problems. I have never come across an off-plan property that doesn’t have one or more defects at least. Your appointed lawyer will then negotiate with the developer that he finishes or completes any pending works even withholding a pre-agreed amount at completion to guarantee the work will be done. Once you complete on a property, and hand over all the money to the developer, your negotiation position is severely undermined. So any outstanding problems should be fixed prior to completion not post-completion.

At completion one must hand over all the bank guarantees to the developer’s legal representative. Bank guarantees are void as from the time the developer attains a LFO from the Town Hall where the new-build is located, well before completion. Up until the issuance of a LFO any community of owner’s fees are the responsibility of the developer. One is held liable for garbage collection tax as from the time the LFO is issued which normally takes place some two years after completion. You can expect however to receive a backdated billed from the Town Hall for the previous two years. The same applies to IBI tax.

I strongly advise you change all locks to the off-plan property you have just acquired, including storage rooms. Many people had copies of these keys during the construction phase. Your legal representative will change all the utilities over to your name. If you have purchased in a development make sure you acquaint yourself with the Community of Owners statutes and bylaws. Some buyers will try to defer completion until the communal facilities (swimming pool, lush tropical gardens, tennis court) or promised amenities (golf club, luxury hotel, private hospital) are finalised. Holding out completion on such grounds cannot be done (successfully) for legal reasons. Please read my litigation article on the matter: 10 Reasons why Your Case Against a Developer may be Thrown out of Court in Spain.

Associated Buying Expenses

As a rule of thumb purchase costs add 10 – 15% over and above the purchase price. In some regions of Spain, particularly in Valencia, this figure may be higher. Please take thorough legal advice to budget your purchase before you commit. You can read my article Taxes on Buying Spanish Property for more details.

Besides paying taxes (explained below), a buyer is bound to pay the following fees:

Notary fees (for the formalization of the deeds): approx. 0.1 – 2 %
Land Registry fees (for the inscription of the deeds): approx. 0.1 – 2 %
Mortgage & Gestoría fees (if finance is required): 1 – 2 %
Lawyer’s fees: 1 – 2 %
Estate Agent’s fees: 5 % (these are paid for by the vendor unless agreed otherwise)

Taxation

I will split the explanation between the taxes that are to be paid at completion and those borne post-completion (to be filed on an annual basis). The former (completion) is common to both residents and non-residents alike. The latter (post-completion) differs as explained below.

A. Completion

You can read my in-depth article Taxes on Buying Spanish Property.

Resale: is subject to Property Transfer Tax (or ITP in Spanish) which varies, depending on the Autonomous Community where the property is located, between 7 to 10%. As an exception to this general rule, on buying commercial property, from either a developer or a professional, 21% VAT is applied in lieu of Transfer Tax.

Off-plan: is subject to both VAT (currently set at 10% of the total property price) and Stamp Duty (ranging between 0.5 – 1.5% of the total property price; dependent on location as it varies from one Autonomous Community to the next).

B. Post-Completion: Taxes

You are liable to file and pay Income Tax on owning property in Spain for which you may need to appoint Fiscal Representation in Spain. These taxes differ between buyers holding resident status and those who do not.

i. Resident

Defined as spending in Spain more than 183 days in a calendar year or else have their main centre of interests and activities in Spain (i.e. spouse, children, main business). Residents are taxed on their worldwide income and assets.

ii. Non-Resident

Non-residents are liable for Non-Resident Income Tax and, additionally, may be liable for Wealth Tax on their Spanish assets. You can read further my in-depth article Non-Resident Property Taxes in Spain.

•    Resident in E.U. or E.E.A.: 20% (19% as from 2016).
•    Non-resident in E.U. or E.E.A. (rest of the world): 24%

Non-EU/EEA residents are taxed at a flat rate of 24 per cent on their Spanish-sourced income – for example, rental income from property in Spain, income from a business in Spain and interest on funds deposited with a Spanish bank. Those who own a Spanish property exclusively for their own personal use and have no other source of taxable income in Spain pay a version of income known as ‘imputed income tax’, which is calculated on the property’s cadastral value (rateable value). Spanish authorities take the view an owner derives a benefit in kind from owning property irrespective of whether it is true or not and taxes it accordingly.

Wealth Tax had been supressed but has recently been reintroduced as a consequence of the financial crisis. Please read my article, in collaboration with Blevins Franks, on Spanish Wealth Tax (Patrimonio) for more details.

Careful with the Tax Office on Buying or Selling at a Discounted Price – La Complementaria

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

This can be explained because the authorities use standard value tables (“bases de comprobación de valores”) to draw a comparison between the fiscal value of the property and the declared sales price at completion. These tables were reviewed every now and then following the upward trend in property price. This was fine so long as there was a continuous capital appreciation but when the market grinded to a halt seven years ago these tables froze in time and do not reflect accurately the overall 50% depreciation real estate assets have undergone (speaking in broad terms). So basically the rateable values that Tax Authorities zealously use are, at best, outdated showing in most cases top-of-the-range pre-crash valuations which are logically not in line with today’s market values.

If the Tax authority detects a statistical meaningful deviation they will exact the difference in what they deemed the buyer has ‘under-declared’. In most instances this is simply not the case. Buyers have only shrewdly taken advantage of the opportunities a crashed real estate market has to offer. Albeit unbeknownst to them this draws the attention of Regional Tax Authorities which will do their best to recoup what they (wrongly) see as an ‘under-declared’ sales price.

On buying distressed Spanish property you should pre-empt this by requesting beforehand an assessed property valuation specifically for tax purposes. This will be a legally binding report which your lawyer may use at a later date.

If you have already received this letter don’t panic, this is happening frequently. You can either pay the requested tax or else appeal it. Providing the difference is not deemed as ‘significant’, your chances of appealing it are fairly high.

If it the amount demanded is low I honestly believe it is not worthwhile the aggravation to appeal. The key decisive factor is that the difference between the fiscal value (the rateable values explained above) and the declared value (what is recorded in the Title Deed at completion before the Notary Public) should be high enough to attract a large tax bill; this will warrant paying a law firm for its legal services. Law firms charge typically between €800 up to €3,000 for this service (this is inclusive of a chartered surveyor’s valuation necessary to appraise the property). So basically any tax bill high enough that exceeds said amounts will easily offset both a lawyer’s and appraiser’s fees warranting an appeal. For high-end property lodging an appeal on a “complementaria” is worth every penny in my professional experience.

Post-Completion: Make Sure Your New Property is registered under Your Name

Once you’ve completed (or closed) on the property before a Notary Public you should ensure it has been registered under your name. A property normally takes two to three months to be registered at the Land Registry post-completion (if no mortgage finance is required).

You will be given the ‘original’ Title deed to the property a few days post-completion.  Losing the original Title deed (“Escritura”, in Spanish) is only a minor setback as you can easily request copies from the Notary before it was witnessed.

If you require mortgage financing you will have to sign additionally, besides a Title deed, a Mortgage deed. Your lender will be the one dealing with registering the property; expect at least a six-month delay – if not more – until you are returned the ‘original’ Title deed. Lenders withhold always the original Mortgage deed for their own records and will give you only an authorised copy. Once the property has been duly registered you can request the ‘original’ Title deed for your safekeeping.

The reason why it takes so long is that all taxes associated to the purchase must be paid first. Only then can the deed transferring ownership be lodged at the Land Registry. A buyer can ensure everything is above board on requesting a Nota Simple. I would advise requesting one only after two to three months have elapsed since completion. Law firms can provide you a copy of a Nota Simple translated into English for a reasonable fee.

Post-Completion Checklist

Once you have acquired your new property, you will now have to face all the associated running expenses besides the taxes I already explained in a previous section above. Make sure you have budgeted these expenses carefully so as to avoid unpleasant surprises! Some of the luxury gated communities with lush tropical gardens and beautiful infinity pools that dot the Spanish coastlines have pretty steep maintenance expenses (tallying several hundred euros a month!).

Any unpaid community bills will result in the Community of Owners placing a charge against your property which may lead to auctioning it off publicly to recoup the debt! This legal procedure in Spain works fairly efficiently (as in twelve months on average). Moreover unpaid communal debts can be chased by Spanish Community of Owners abroad against assets you hold in your home country (within the European Union). Please read my articles Bad Debtor’s List (“Fichero de Morosos”) and Spanish Creditors Pursuing Debts Abroad. I also advise hiring home insurance as it is notorious that properties built in Spain are not entirely waterproof (or at least not to the same standards as in the UK) and are prone to damp patches in the winter period.

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

•    Utility bills (invoiced quarterly in the case of water and monthly with electricity).
•    Rubbish collection tax. Paid twice or once a year depending on the town hall.
•    IBI tax. Paid annually (akin to the UK’s Council tax). I strongly urge this tax is set up as a direct debit; failure to pay it may lead the authorities to auction off your property in a procedure which is surprisingly expedient – as in months. Whoever is the owner of a property on the 1st of January of the current year is liable to pay for this tax.

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

On a positive note the European Court of Justice on the 3rd of September 2014 has put an end to discrimination between residents and non-residents on benefiting from regional tax allowances regarding Spain’s Inheritance Tax. This landmark ruling will now force the Spanish Government , as it cannot be appealed, to allow non-residents to benefit as well from the generous regional tax allowances which until now were (unfairly) reserved to those holding resident status only. Predictably non-residents will group seeking a refund on what they overpaid over the last four years (statutory time period). This was a contentious point that I had been criticizing for years in all my articles and blog posts on the matter as discrimination cannot be tolerated among fellow EU member states as it undermines the very principles on which a united Europe was built on.

How to Buy Property in Spain – Conclusion

The budding signs of recovery are abundant indicating a turn of the tide in 2014. It is an excellent time to buy property again in Spain taking advantage of today’s post-crash low prices. I must highlight that in the particular case of British the favourable exchange rate trend only makes things cheaper by reducing the average conveyance transaction by thousands if not tens of thousands as the pound is on a two-year high against the euro. Osborne’s bold pension reform also provides new opportunities to seize the moment.

The strengthening of the pound against the euro, record low interest rates and big discounts make three compelling arguments to seize the opportunity and buy now.

Make sure you are assisted on your house-hunting by reputable experts (such as a long-established real estate agency, a reliable mortgage broker or a seasoned lawyer) to benefit most from the wide range of available bargains – you will be spoilt for choice.

I would advise buying with a view to enjoy the property and Spain’s privileged mild weather rather than be on the prowl for a quick profit as I believe that it may still take a while before we see again consistent capital appreciation.

I would also strongly advise that you rent a property in the area you are interested in for a reasonable time before committing to buy just to test the waters and experience first-hand the effect of seasons and how they impact your property and surroundings. You will avoid nightmare scenarios such as buying a flat above a late-night bar that only springs to live in the summertime.

You could always go for a Rent-to-Buy contract which allows you the freedom of letting a property whilst simultaneously entitling you the right to exercise a purchase option if interested (at a pre-agreed heavy discount stipulated in the lease contract which is well below the current market value); a win-win for both landlord and tenant. For more information please read my article Let-to-Buy in Spain: The Smart Choice which explains the pros and cons in detail. Alternatively you may be interested in buying property with a view to rent it out. Please read my articles Letting in Spain: The Safe Way and Tenant Eviction in Spain.

That said if you are buying for the long-term on a well-located area you should do nicely over the next years as an investment provided you purchase now at a reasonable price while bargains are still available.

You never know what you have until you lose it” – Anonymous.

 

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

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

Legal services Larraín Nesbitt Lawyers can offer you

 

Related articles

 

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.

2.014 © Raymundo Larraín Nesbitt. All rights reserved.

 

... Read more

How to Buy Rural Property in Spain

Raymundo Larraín Nesbitt, August, 8. 2014

The following article is the fifth, and last, on my five-part series ‘How to Buy Property in Spain Safely‘. You may also be interested in reading Buying Resale in Spain, Buying Off-Plan Property in Spain, Buying Distressed Property in Spain or How to Buy Commercial Property in Spain.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of August 2014

 

 

Introduction

Rural property; to many these two words conjure idyllic visions of a bucolic lifestyle in a placid setting silhouetted against a dramatic dusk sky drop. To me they simply mean accident waiting to happen. Call me jaded.

Buying rural land in Spain is unlike anything in the United Kingdom; it is riddled with problems. Beware of anyone telling you the opposite; they are lying through their teeth. It accounts for well over half of the horror stories affecting expatriates we read in the press every now and then. The main reason behind this is that most people do not fully grasp the concept of rural land in Spain which differs from their home country. From this simple misunderstanding stem most of the problems i.e. buying on the wrong assumption you will be allowed to build a new property there.

I simply cannot stress enough the importance of appointing a conveyance lawyer from the outset on buying rural land in Spain. This is the single best advice I can give anyone.

 

Eight Useful Tips for Buyers of Rural Property in Spain

 

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

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

With rural property in particular it is often place the vendor is not the registered owner (specifically when buying from locals). This is because inland property may be passed several times from one generation to the next without anyone actually bothering to update the change of ownership at the Land Registry. After all, in a small village everyone knows each other and who owns what; so it’s fairly pointless (from their perspective) to lodge the new details. There are several legal ways to overcome this minor setback; such as an ‘Acta de Notoriedad’ or else following an ‘Expediente de Dominio’.

This will likely be the first check your appointed lawyer will carry out. You can actually request a Nota Simple yourself from the Land Registry where the property is located; either physically or online (you have to be a registered user for the latter).

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

2. Is the Title Deed Accurate? Moreover, does a Title Deed even exist?

It may come as a surprise, but do not take a Title deed for granted when it comes to rural land. Indeed, Title deeds may not even exist. As a rule-of-thumb I recommend walking away from a rural property that has no Title deed. The legal nightmare you are going to get yourself into is seriously not worth the aggravation.

Should a Title deed exist, it is frequently outdated and inaccurate. The golden rule is not to buy rustic property (in fact any type of property) until a vendor has fully updated all the missing details at the Land Registry (at their expense) to the buyer’s lawyer satisfaction. Unregistered extensions have legal repercussions on seeking finance that one ought to be fully aware of as I explain below in two examples; one from a buyer’s and one from an owner’s perspective.

From a buyer’s perspective that plans to use the rural property as collateral to secure a mortgage loan, let us think of a property which has undergone extensive refurbishment and extensions over the years to the point it is now a villa with a whole new wing plus a swimming pool. When a lender checks the Title deed only a one-bedroom campo house is mentioned with an orange grove; there is no trace of a villa. Consequently a lender will only volunteer a small fraction of the asking price as it considers the new extensions do not exist (legally). This may jeopardise the sale for lack of appropriate funding.

From an owner’s perspective, consider the case of an elderly couple owning rural property of substantial value with multiple unregistered extensions. They seek to improve their lifestyle by requesting a lifetime loan. A lender will examine the deeds of the rural property and will only offer them a mere fraction of what they could have achieved had these extensions been properly registered.

The lesson to be learnt here is that what is not legally registered at the Land Registry is as if it did not legally exist to a lender. For those seeking finance (either as a buyer or as the owner) a lender’s mortgage valuer is obliged by law to reduce the property’s valuation in line with any non-registered features meaning loan seekers stand to receive significantly less than what they would otherwise be entitled to i.e. a rural property with a market value of £500,000 which villa and outbuildings remain legally unregistered would only fetch a value of £100,000 in a lender’s eyes. Bottom line; lodge at the registry all extensions and refurbishments, it’s in your own best interests.

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

Self-explanatory. Any debts go against the property itself, not against the owner i.e. an outstanding mortgage would be a financial lien against the property. Any debts or charges become the responsibility of the new owner. This is why it is the conveyancer’s duty of care to ensure a Title deed is passed over free and clear of charges, encumbrances and debts. Deed restrictions create limitations or obligations on the property use that a would-be buyer should be made aware of prior to acquiring the land.

Rural property abounds with easements unlike its urban counterpart due to its very nature. Common examples:

Right-of-way: adjoining plots of land may have a lien to facilitate access to a neighbour’s property. Another example; Shepard’s may have a right (consuetudinary law) to enter your property at certain times of the year to herd their flock (transhumance).

Hunting rights: your land may subject to cynegetic interests and turned into a hunting ground during the shooting season. Be at the ready to collect all those spent cartridges.

Right-of-view: this encumbrance caps the building height on the plot of land so as not to impede the views of an adjacent plot.

Right to extract water: from your private well or from a stream running through your property’s boundaries.

4. Is the Property Lodged Accurately at the Land & Cadastral Registries?

Rural property more often than not is inaccurately described at both the Land Registry and the town hall’s Cadastral Registry. Typical discrepancies include but are not limited to:

Plot size: frequently real-life measurements differ from what is reflected at both the Land Registry and ‘Catastro’. This is why on my eighth tip, further below, I strongly recommend a chartered Surveyor is commissioned to carry out a surveyor’s report where such discrepancies will come to light. This discrepancy can be explained because land over time may be extended to compromise adjoining plots which are bought or else may be reduced as a result of successive inheritance procedures that divide it. These changes may have gone unrecorded officially.

Inaccurate property description: as mentioned above in my second tip we can think of extensions or refurbishments made to the property which have gone unregistered by the owners to the point a dwelling’s footprint has been illegally increased.

Boundaries: rustic properties’ boundaries are hazy at best. Limiting the boundaries of a plot of land using the names of neighbours long deceased is not exactly ideal. This can be highly confusing. Another example is that rural land is frequently demarcated by white boundary stones (‘mojón’) or some iconic landmark (old tree). Needless to say boundary stones can be displaced (heavy rainfall) and a tree can always be chopped down. These blurred lines give rise to interesting legal disputes between adjoining plots of land.

The buyer’s lawyer should ideally insist a vendor corrects and updates the reality so it is reflected legally in both the Land and Cadastral Registries prior to the property being acquired. Any discrepancy will bring about legal and financial consequences such as those I have highlighted above in my second tip regarding seeking finance from a lender using the property as collateral. A buyer’s lawyer can always practice a retention at completion to safeguard the amendments will be carried out by the vendor but ultimately I advise not to complete until they are effectively carried out.

5. Is the Charming Rural Villa Built on the Land Legal? Specific Focus on ‘Casa de Aperos

I feel compelled to emphasise this point as it affects scores of rural landowners and may in fact lead to criminal prosecution by the state.

Some owners, either out of (inexcusable) ignorance or else purposefully, abuse the planning system using a legal loophole (‘casa de aperos‘) to circumvent planning restrictions to build on rural land. Traditionally Spanish Authorities were lenient in such cases to the point nothing was done for decades. However over the last years the Government has taken a firm stance clamping down on all who build on rural land earmarked as unfit for development.

The most common example is when an owner of rural property applied for a licence to build a tool shed (‘casa de aperos’) of 3*3 m² to store the tools to plough the fields. The landowner purposely exploits this legal ‘loophole’ to circumvent planning limitations and build a rustic villa instead. The reason a landowner would breach planning laws and risk prosecution is because a rural plot of land stands to appreciate significantly on building a villa.

This may lead local authorities to threaten with a demolition order, at the owner’s expense, besides imposing heavy fines and even face prosecution in the most serious cases. Almost every case we read on the newspapers of British having their rural property under threat of looming demolition relates to what I have just explained.

A buyer’s lawyer will determine if a rustic villa does have planning permission from the local town hall. If it doesn’t, then I strongly recommend a buyer walks away from it to avoid a legal quagmire. Beware of all those rural properties advertised “with planning permission”. Most are ‘web bait’.

6. Does the Property Comply with both Town Hall and Regional Planning Regulations?

This carries on from the previous point. It is essential your conveyance lawyer ensures the rural property complies with both local and regional planning authorities.

Remember the Prior’s? The impact on people’s lives on having two administrations squabbling over planning competencies simply cannot be understated. This is a real-life example on how a British couple’s dream to live a placid retirement inland was shattered. The Prior’s applied for a Building Licence at their local town hall’s planning department which was subsequently issued. Relying on its validity they went on to build a villa on their rural land; so far, so good. However, unbeknown to them the BL was challenged administratively by a third-party. This led to an ongoing dispute between the town hall and the Regional Planning Authorities over the legality of the issued BL. Regional Authorities are empowered to override planning decisions made by hierarchically lower administrations, such as a town hall, so they are bound to win. As a result their dream villa was demolished – at their cost.

Another example of the importance of double-checking everything is above board on planning issues is Valencia’s Land Grab Law. Admittedly this is a problem that only affects one of Spain’s seventeen Autonomous Communities but the international (negative) media repercussion it’s had has been huge.

7. Is the Property Connected to the Mains? Does it have Access to its own Running Water Supply & Utilities?

Spain is not a “dust bowl” (as one of my London friends enjoys teasing me). Spain’s climatology is diverse as it’s affected by both the Atlantic Ocean and the Mediterranean Sea. As a result north and north-west Spain has a cold and wet climate with heavy rainfall comparable to the UK. Whereas south and south-east Spain enjoys a privileged warm weather all year round. The practical impact this climatic diversity has on rural property cannot be underrated.

Whilst water may not be an issue in the north, southern Spain is a whole different story. It often suffers from severe bouts of draught lasting several months. Local Authorities will enforce severe water restrictions. Water shortage coupled with sweltering heat is a lethal combination that will kill off any tree or plant in your property. Rural landowners have devised countermeasures over time to offset draught’s effects such as digging up their own wells to secure access to water. However even such wells dry up from time to time as was the case of my clients who were baffled because they had basically been cut off from their water supply and were very much isolated in their campo house in the middle of nowhere.

A surveyor’s report will highlight for example if the property is connected to the mains drainage. Frequently rural properties are not connected to the mains sewarage and have their own septic tanks in use which leads to problems as these must be emptied every now and then to avoid ‘overflow’ and ‘seepage’ problems, not to mention health-related issues.

Additionally few rural properties are connected to the electric grid. It is very important a would-be owner fully understands what utility connections are available – if at all – and its limitations i.e. power surges. It is commonplace rural properties have their own generators which bears severe restrictions on the use of household appliances.

8. Hire a Chartered Surveyor

I have badgered relentlessly over the previous seven points, with practical examples, on the usefulness of hiring a surveyor. In my opinion it should be mandatory when it comes to purchasing rural property (in fact, any kind of property). The cost of a valuation survey will be largely offset by the problems that are picked up by a seasoned professional. This valuable report can be then used by a lawyer to know what weak points to watch out for and which are likely to give problems down the line. The lawyer will then use this insight to his client’s advantage knowing what should be negotiated and worded into a Private Purchase Contract, prior to completion, to better protect the buyer’s interests. Bear in mind that conveyance lawyers, under normal circumstances, do not visit properties; we only examine the associated legal paperwork.

Taxation

From a buyer’s perspective, rural property is subject to Property Transfer Tax (ITP) which varies, depending on the Autonomous Community where the property is located, between 7 to 10%. Rural property is a speciality of how to buy resale property.

Post-Completion Checklist

A property normally takes two to three months to be registered at the Land Registry. The reason being is that all taxes associated to the purchase must be paid first. Only then can the deed transferring ownership be lodged at the Land Registry. A buyer can ensure everything is above board on requesting a Nota Simple. I would advise requesting one only after three months have elapsed since completion.

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

IBI tax. Paid annually (akin to the UK’s Council tax).

Garbage collection. Paid twice or once a year depending on the town hall.

Utility bills (invoiced quarterly in the case of water and monthly with electricity) if applicable.

You are also liable to file Income Tax on owning property in Spain every year for which you may need to appoint Fiscal Representation in Spain.

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

How to Buy Rural Property in Spain – Conclusion

Buying rural land in Spain is normally fraught with problems; there is no other way around it. You really need to take on board a good conveyance lawyer from the outset to help you through. Good luck! You are going to need it.

“So, does that mean we can’t use our well?” Client on realising the two-thousand-year-old Roman well on his newly-acquired rural property dried up about the time Carthage was taken over during the Third Punic War (animus iocandi).

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

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

Legal services Larraín Nesbitt Lawyers can offer you

 

Related articles

 

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

2.014 © Raymundo Larraín Nesbitt. All rights reserved.

... Read more

How to Buy Commercial Property in Spain

Raymundo Larraín Nesbitt, July, 4. 2014

The following article is the fourth on my five-part series ‘How to Buy Property in Spain Safely‘. You may also be interested in reading Buying Resale in Spain, Buying Off-Plan Property in Spain, Buying Distressed Property in Spain or How to Buy Rural Property in Spain.

By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
4th of July 2014

 

 

Resale Similarities

Commercial properties share multiple common aspects on what I had already written on How to Buy Resale Property in Spain. In fact this whole article may be regarded as redundant but just for completion’s sake I’ve decided to go ahead and write it anyway. Most of the points raised for resale property hold true and can likewise be applied to commercial properties. After all commercial properties branch out from resale property and are but a part of it (same rings true for rural property).

Commercial Singularities

Due to the legal business nature of commercial premises a few nuances are introduced (specifically on taxation, opening licence and holding deposit) that a businessperson should be aware of as opposed to standard private property (resales).

Buyer’s Preliminary Checklist

This will be carried out routinely by the conveyance lawyer you appoint. The following list is open-ended and by no means exclusive:

  • Is the property under the vendor’s name?
  • Is it under a company’s name? A Due Diligence may be required
  • Does the vendor have the faculties (i.e. power of attorney) to sell on the property?
  • Is the vendor’s Title deed clean? Are there charges, encumbrances, liens or debts against the property? Specific focus on judicial embargoes against the property. If there are any one can negotiate the vendor cancels them prior to completion or even deduct money at completion stage to secure these are effectively removed
  • Verify the property’s Planning status with the local town hall. Is if fit for commercial use?
  • Check that local taxes (IBI) are up-to-date
  • Cross-check the cadastral record for inconsistencies
  • Check the Community of Owners’ fees are up-to-date
  • Check utilities are up-to-date

 

Examples of Commercial Property

  • This includes storage rooms (trastero) and car parks (plaza de garaje) sold individually and legally separate from a dwelling.
  • Commercial premises.

 

PROFILE ON THE BUYING PROCESS

 

The buying process can be outlined in three steps. A buyer can skip the first two stages and jump straight to completion.

Stage 1: Deposit Agreement (“Señal”)

You will be expected to pay an initial deposit to strike the property off the market. The amount typically ranges from €3,000 to €6,000. This is normally paid to the estate agency and accounts towards the final sales price of the property. Until you pay this initial deposit an estate agency is free to offer it to anyone else.

A reservation contract is very short, spanning normally only a couple of paragraphs at most, and should ideally outline the following bullet points briefly:

• Vendor’s details
• Succinct property description
• Price

The initial reservation fee is normally non-refundable. This reservation contract offers little to no legal protection as it’s very vague. This is why I strongly recommend you appoint a lawyer prior to signing and handing over the initial deposit. A lawyer will be able to carry out a minimum due diligence on the Title Deed before you pay the non-refundable deposit. Moreover, a lawyer can add protective clauses at this preliminary stage such as “subject to finance being granted”. This clause, for example, helps to offset the potential risk of forfeiting this deposit should finance be unattainable at a later stage. Securing finance from lenders should not be taken for granted in today’s market.

Stage 2: Exchange of Private Purchase Contracts (“Contrato Privado de Compraventa”)

The PPC or preliminary agreement reflects and collates all that’s been negotiated by the parties in detail prior to completion. Completion before a Notary Public will in fact be a mere transcript of what’s been agreed at this key stage. It should state amongst other things:

• Buyer’s details
• Vendor’s details
• Full property description
• Legal status of property
• Holding deposit or option to buy agreement
• Agreed price and its breakdown (stage payments)
• Expected completion date

Either a holding deposit or an option to buy can be agreed upon at this stage:

1. Holding Deposit. Normally amounts to 10% of the property’s asking price (this percentage varies hinging on the foreseen length of time to complete as well as other factors). This deposit is normally non-refundable. You may want to think carefully before committing yourself to sign on a PPC’s dotted line.

There is absolute freedom on deciding how to negotiate and draft such clauses. Bottom line, one should avoid acting rashly and must carefully take the time to decide on what’s been negotiated prior to handing over the deposit.

To put an example of what a lawyer can do for a buyer at this stage. In the case where a buyer relies on finance to close a deal a lawyer can add a clause whereby if the buyer fails to secure mortgage finance the withholding 10% deposit is refunded in full. Think for example of substantial commercial property (in the millions) on a high street in Madrid or Barcelona. The inclusion of such a clause could save a buyer several hundred thousand euros if the deal falls through for lack of finance.

A holding deposit usually takes two different forms depending on what’s agreed:

• “Arras confirmatorias”: The 10% down payment accounts towards the sales price and is deducted at completion. If a buyer decides to rescind the agreement he forfeits the down payment. A buyer has no right to claim it back. Likewise a vendor opting out will be forced to handover a sum of money equating to the deposit. This deposit is deducted in full at completion and forms part of the price.
• “Arras penitienciales”: the 10% down payment is likewise deducted from the sales price at completion. If the buyer opts out he forfeits the down payment in full. However should the vendor opt out he will be forced to pay double the holding deposit. This clause is applied restrictively and obviously benefits a buyer more than a vendor.

I strongly advise (understatement) that this money is paid only into a reputable law firm’s account (usually the vendor’s law firm). This will not technically be an escrow account, unlike in the United Kingdom, but nonetheless lawyers are legally bound to withhold the amounts safely until completion (at no extra cost to the parties).

2. Option to Buy Agreement: a buyer may be interested in having an option to buy the property. The option normally equates to 10 or 15% of the agreed sales price and only sets obligations for the vendor. A vendor, on agreeing, commits himself to sell the property within a pre-agreed time frame to the buyer. If the buyer exercises his option it is deducted from the sales figure at completion. Should the buyer decide not to go ahead with the purchase and exercise his option he forfeits in full the down payment he made.

Stage 3: Completion (“Escritura”)

The third and final phase is to complete before a Notary Public. The two previous steps have set the stage leading to this crucial moment. Once a Public Deed of sale – Escritura in Spanish – is signed, the buyer is given a copy of the Title deed to the property (“Escritura Pública de Compraventa”). All associated taxes (i.e. Stamp Duty, Transfer Tax and VAT) need to be paid first before being able to register a property. This goes to explain why a property takes several months to be registered. Post-completion the buyer’s lawyer will lodge the Title Deed at the Land Registry. Registration grants protection erga omnes (against third parties); the strongest type of public protection available.

Taxation

Spain is divided administratively into seventeen Autonomous Communities. The state has empowered communities by devolving tax competencies. Devolution implies communities hold full competence to rule on certain tax aspects and accounts for regional tax variations from one Autonomous Community to the next. Listing exhaustively all possible tax permutations in minutiae relating to Spain’s seventeen communities blatantly exceeds the goal of a divulgative article which is why I purposely keep it clean and simple and adopt a holistic approach. As a word of caution, sound legal and financial advice should be sought to obtain a tailored breakdown of all taxes (and expenses) incurred by a buyer given their own personal circumstances. The following is a simplification of the tax liability borne by a buyer on acquiring commercial property.

Tax Buying from Private Individual Buying from Developer or Professional
Property Transfer Tax (ITP) 7 – 10 %  
VAT (IVA)   21 %
Stamp Duty (AJD)   0.5 – 1.5 %

 

Additionally Plusvalía tax (municipal tax on the increase of value of the land) may be paid by a buyer. The law stipulates it’s the vendor that pays for it but it is commonplace to agree a buyer pays it.

Associated Buying Expenses

Besides paying the above taxes, a buyer is bound to pay the following fees:

• Notary fees: 0.1 – 2 %
• Land Registry fees: 0.1 – 2 %
• Lawyer’s fees: 1 – 2 %
• Gestoría fees (optional): 0.5 – 1 %
• Mortgage fees (optional): 1 – 2 %

Post-Completion Checklist

A property normally takes two to three months to be registered at the Land Registry. A buyer can ensure everything is above board on requesting a Nota Simple. I would advise requesting one only after three months have elapsed since completion.

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

• IBI tax set-up. Paid annually (akin to the UK’s Council tax)
• Garbage collection. Paid twice or once a year depending on the Town Hall
• Utility bills (invoiced quarterly in the case of water and monthly with electricity)
• Community fees (only if you’ve purchased in a Community of Owners). Usually quarterly but can vary

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

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

Conclusion on How to Buy Commercial Property in Spain

Commercial, Rural and Distressed property are all but specialities of buying Resale property in Spain. I write separate articles on all four because each one sports its own unique nuances which I reckon ought to be fully dissected and explained. I regard Off-Plan property as a different animal altogether that requires its own space as it introduces multiple unique key concepts which are not shared by its resale cousins.

Hiring a reputable lawyer is highly advisable to ensure, as much as possible, a smooth conveyance procedure. Property purchase can quickly turn into a minefield without someone qualified to guide you through the pitfalls safely.

“It often requires more courage to dare to do right than to fear to do wrong.”Abraham Lincoln

American 16th US President (1809 – 1865). From an impoverished humble background of corn farmers, this self-taught American lawyer, strategist and politician would rise to serve as the 16th US President. He resolutely ensured a pro-Union victory, strengthened the federal government, modernized the economy, brought about the emancipation of slaves and preserved the Union. During his tenure, he held presidential elections in 1864 to be re-elected, amid a devastating Civil War that threatened to tear his country apart and engulf it in a sea of darkness; yet he gave example in the face of adversity, holding steadfast to his ideals, steering the ship safely into port and acting as a beacon of Democracy which light shone with a fierce intensity the likes of which the world has never witnessed, since or after. Never again would a country hold presidential elections amidst a bloody civil war in what constitutes one of History’s greatest democratic feats to date. But most importantly, he went into great lengths to ensure the festering wounds left open during the fratricidal Civil War were healed; generously reconciling both sides in equal terms, as one nation, indivisible, under God. It is for this very reason, that more than two centuries on, he is widely regarded as the greatest American president to grace the White House; likely the greatest American of all time, towering above the rest. Through his courage and sacrifice, which ultimately would claim his own life, he laid the groundwork of what was to become the greatest and most powerful nation on earth over the next two centuries. A true statesman that would always put ahead of any consideration the best interests of his people, by tearing down divisive walls and fostering at every opportunity union.

 

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

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

 

Legal services Larraín Nesbitt Lawyers can offer you

 

Related articles

 

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. Plagiarising, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

2.014 © Raymundo Larraín Nesbitt. All rights reserved.

 

 

... Read more

Buying and Owning Spanish Property through Companies: Pros and Cons

Raymundo Larraín Nesbitt, March, 7. 2014

The pros and cons of buying and owning Spanish property through a company structure, off-shore or otherwise, by legal expert Raymundo Larraín Nesbitt.

By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
7th of March 2014

 

 

 

 

Introduction

There was a time in which not a single Spanish law firm that prided itself would pass on the opportunity to heartily recommend its affluent non-resident client base (and even foreign residents) to acquire and own property in Spain by means of corporate structures ranging from the simple to the overtly complex often involving a multijurisdictional approach.

It was commonplace in the not-so-distant past to hear socialites in exclusive summer soirées on the coast boasting on how their law firm had devised and set up ingenious structures to the point that tax payment was negated and only a paltry sum was ever paid to the Spanish taxman.

Times change and legislation has moved on both in Spain and internationally since the events that led up to the tragic events of the 11th of September 2001. The war against international terrorism, unwaveringly led by the US, has meant intense pressure is exerted on the sources that finance it. These heartrending events coupled with 2008s financial sub-prime meltdown, and the ensuing world-wide credit-crunch, which left western countries’ coffers bereft, has meant that the once all-powerful and buoyant off-shore industry, now under intense scrutiny, has been forced to maintain a low profile in order to survive and accommodate to today’s imposed trends.

But even more fundamentally we have collectively assisted over the last decade not only to a change in laws but to a ground-breaking paradigm shift in social and moral values that no longer hold these structures as socially admissible as they are widely held in contempt by society and media at large i.e. the recent tax campaigns targeting Amazon and Starbucks amongst other high-profile companies.

You won’t find nowadays many Spanish-based law firms or lawyers actively recommending this option, much less clients boasting of their use. In fact, you will find many are even reluctant to the very idea and will likely try to dissuade you. This of course doesn’t rule out that it is still done, far from it, but it is not as widespread and most certainly not as openly publicized as before.

It is mostly foreign companies (which are not even law firms or FSA-regulated finance advisers!), located outside Spain, who now peddle a bespoke legal service offering “100% protection” to beneficiaries against Spain’s inheritance tax.

Spanish law firms located in Spain have been forced to take a back seat when it comes to offering and soliciting these legal services after new stringent legislation has been passed and tough obligations and controls have been set up across the board for lawyers and other professionals involved in their set up and administration.

Due to the enormous complexity of the matter, this article endeavours only to give a broad unbiased overview on the overall state of affairs, with particular focus in Spain, weighing in the pros and cons, albeit making no attempt whatsoever to delve in its complexity and most certainly being careful not to take stance on the matter one way or another.

 

Spanish Property Ownership through Corporate Structures

Advantages

 

1. Concealing Ownership

Several reasons may lead owners to conceal who really owns, controls and disposes of assets. Broad examples of such needs:

  • privacy
  • high-net-worth individuals (HNWI) have their wealth managed through companies run by family offices
  • ongoing marital disputes which in time may lead to an eventual break-up and disposal of assets. Pre-empting such scenarios unfolding
  • security reasons
  • defaulting on contractual obligations abroad – avoiding asset-hunting through non-asset disclosure

 

2. Tax Mitigation

One of the traditional reasons that drive clients to seek incorporating structures is to lower their tax bill. From income and wealth tax to Spain’s cumbersome inheritance tax (ISD/IHT) corporate structures may allow at times the means to circumvent, in a legally accepted manner, footing hefty tax bills. The latter is particularly efficient when shareholders are non-residents.

These structures should ideally always be incorporated prior to acquiring the real estate asset, not after for optimum results. Careful forward planning is key from the outset on devising and incorporating them which should be tailored to each client’s particular needs. There are no magical one-size-fits-all schemes as clients’ needs differ widely from one another and even evolve in time with, for example, new family members or changes in their civil status (divorce).

Corporate structures range from the most basic ones to really ingenious ones that border on fiscal engineering. Law firms in Spain will have no qualms incorporating a Spanish or foreign company i.e. a UK limited liability company (as long as not offshore or located in tax haven). This is perfectly legal. They may even offer them off-the-shelf for a reasonable fee and additionally offer bookkeeping services. The company will then be placed on top of the Spanish real estate. They will however, following new legislation, be reluctant (understatement) when it comes to devising and incorporating more complex corporate structures, specifically offshore ones. This fine red line marks the difference between tax avoidance (legally acceptable tax planning) and tax evasion (criminally pursuable).

3. Asset Preservation

Affluent families have a mandate to preserve and accumulate wealth for future generations. Some corporate structures (i.e. trusts, which are not recognised in the Spanish legal system) help to achieve this by ‘protecting’ assets, even from their current beneficiaries, by legally separating the property’s legal ownership and control from its equitable ownership and benefits thus facilitating their transmission to future offspring. Trust dispositions may allow their use but will bar of their disposal as technically they no longer belong to their ‘owners’. We can imagine this as being particularly useful in the event of a divorce settlement (gold digger deterrent) as the assets are effectively locked-up in a corporate structure and cannot be disposed of being jealously guarded by the trustees in compliance with the trust’s dispositions. This is also useful over many generations as it allows keeping significant properties within the family’s control (i.e. Scottish ancestral castle).

 

Disadvantages

 

1. Concealing Ownership

New laws, most notably Law 10/2010 on Anti-Money Laundering and Finance of Terrorism, have created a vast array of new obligations for all those involved in the setting up of corporate structures, ranging from lawyers, civil servants (notaries), financial advisers to bank employees.

It is now mandatory that the ‘ultimate beneficiary’ of such structures is disclosed and clearly identified not only at the time of setting up new structures post 2010 but also – incredibly – on those that pre-date this 2010 law e.g. banks have been formally requesting to disclose beneficiaries as recently as January 2014 on structures incorporated a decade ago, long before these laws even existed.

So basically this law marked a turning point no longer allowing a fool-proof system that accommodated the warm mantle of anonymity i.e. bearer shares on multilayered off-shore structures. Anonymity is now achieved, yes, but to a certain extent only, at a basic level, as it limits the exposure to third-party information requests. So anyone requesting information from a Land Registry search will turn up with nothing (particularly if you’ve not made the mistake of appointing yourself as company director). However, it will remain glaringly visible to the Tax Office, or a judge, if needed be under this new law.

2. Tax Mitigation

Spanish lawyers and financial advisers are under great scrutiny and face stiff penalties, including severe jail terms, if found guilty on devising and collaborating in the set-up of tax avoidance structures. Every week we are treated with an unpleasant new story on how some prominent law firm or lawyer has been found guilty and charged.

For this reason alone Spanish lawyers and law firms in general are now highly reluctant to devise, assist, create or abet in any manner whatsoever such corporate structures. Much less to accept appointing themselves as administrators of said companies.

From a client’s perspective it is now debatable on whether such structures are able to mitigate or negate income or inheritance tax as efficiently as in the previous decade. It is open to debate.

New treaties, such as the Double-Taxation Agreement with Spain dating from 1976 has been recently amended in London on the 14th of March 2013 in an attempt to plug existing holes.

Additionally, and more worryingly, inspired by the US’s successful FATCA agreement, five European countries – including the United Kingdom and Spain – signed in April 2013 a pilot initiative enabling an automatic exchange of fiscal information which overall impact still remains to be seen. Traditionally European countries had the onus of undergoing protracted and expensive multijurisdictional investigations requesting information on a particular individual or company from other European countries to which not all complied with or the information supplied was often scant, incomplete and outdated. This pilot scheme no longer requires the signatory countries to actively pursue the information; it is actually fed back to them on a regular basis automatically on a wide range of companies and individuals falling within certain parameters. The possibilities this leads to on cross-referencing information are significant if done right.

Only this week we’ve learnt that the Spanish Tax office has approved that 40% of a tax inspector’s wage will be contingent upon results going forward. This creates a spectacular perverse incentive as now inspectors have truly a vested interested of their own in targeting tax avoiders. And corporate structures holding real estate assets is always a nice red flag in their eyes, whether true or not, as it has been traditionally considered a ‘wealth indicator’.

Some regions now incentivize and are more lenient, specifically on inheritance taxation, on having property under your own personal name rather than through structures which is being increasingly more taxed.
In the case of non-resident companies owning property in Spain and located in what the BoS lists as tax havens they attract a special annual tax equating to 3% of the property’s value. Art. 40 et seq. Spain’s Non-Resident Act 5, 2004.

In light of the ongoing recession and high levels of unemployment some European countries, i.e. Spain, are cash-strapped and have become increasingly more aggressive pursuing tax offenders. Not exactly the best of times to be setting up structures to mitigate taxes really.

3. Running Costs

Depending on the structure chosen this can range from several hundred euros a year for basic bookkeeping services to raking up dozens of thousands on more complex structures. You really have to ask yourself, given your wealth level and coupled with the value of the underlying asset, if you can actually afford or even if it is worth your while engaging in huge annual running costs on the long run that may even come to negate altogether any tax mitigation sought.

4. Who’s really in Control?

So many scary stories over the years it is hard to list them all. When you relinquish control of your asset through a power of attorney in favour of a physical person or a company abroad you better be sure of what you are doing and ensure you are fully aware of the risks this entails that may lead your beneficiaries to lose control of the asset upon your death.

 

Dispelling Spanish Inheritance Tax Myths

 

Scaremongering, a time-proven sales tactic. Car and insurance salesmen, in my experience, have always been top of the game at this because they know exactly what makes a customer tick. You will read plenty of scary stuff on ex-pat newspapers and internet on inheritance taxation in Spain which aims to prey on the gullible and harp on people’s inbred prejudices. I will try to cast away some of these widely held misconceptions.

Examples of such are:

1. “Spanish Inheritance tax legal fees can be at least 40 to 50%.”

False
Fact: On average inheritors pay in Spain 15% in inheritance tax. Only in the most extreme cases would you pay such a high amount. To give an idea, a single beneficiary that inherits over €800,000 would stand to pay 34%. Normally there are multiple beneficiaries to an estate; it’s not just one person that inherits all. Also the beneficiaries of the bulk of the estate are normally children, not non-relatives (which do not qualify for tax allowances). The significance this has is that the taxable base (the 800k) would then be split amongst the heirs dramatically reducing the IHT liability as it follows a sliding scale. To this you must also add the legal and family allowances (both national and regional) which reduce the percentage to be paid even further. Also worth mentioning is the fact that the taxable base for property is well-below the true market value.

I’ll put this in perspective with the most common example on British nationals inheriting in Spain. In my experience expatriates have second homes in Spain worth on average €400k. This property is normally owned in joint names meaning each spouse owns 50% of the property. On average couples have two children. So when one parent passes away, his 50% (the €200,000) is normally inherited by his two children. Therefore the taxable base of each child would be €100,000 (as the €200,000 is split equally between them). The surviving spouse naturally still owns his 50%. The state inheritance tax on a taxable base of 100k would be approximately €10,000 (10%). Children are classified in Group I for inheritance taxation purposes. The state tax-free allowance amounts to almost €16,000 for each child. In other words, the state allowance completely offsets the inheritance tax liability (meaning they pay nothing on inheriting in Spain in this example). Additionally children under 21 years old have further annual reductions with a maximum cap of €48,000. On top of this there are autonomous regional allowances that children may benefit from. So in this particular example, which in my professional experience I dare say is the most common, each children would stand to pay zero on inheriting a taxable base of €100,000 each. When the surviving spouse passes away the same result will unfold again providing the laws are not changed. So basically each child will have paid almost nothing on inheriting €200,000 each when both parents are dead.

On the other side of the spectrum, we can imagine a parent passing away bequeathing a €3,000,000 property to a single child or to a friend. In this particular case the inheritance liability would indeed sky rocket (over a million). For this particular case I strongly advise obtaining an estimation on the inheritance tax the beneficiary stands to pay. In this example it is definitely worthwhile looking into corporate structures to mitigate exposure to ISD/IHT as much as possible.

2. “Heirs will be forced to sell the property in Spain to pay off Spain’s extreme inheritance tax”

False
Fact: Same as previous point. Selling a property would be exceptional. In fact I’ve never come across a single client in over a decade that has been forced to sell to pay Spain’s ISD/IHT on inheriting. Moreover, you cannot inherit anything until you have first paid inheritance tax. So no-one can sell the property they are inheriting to then pay off the tax as the property is technically not theirs to sell as it is still under the deceased’s name. Only once the tax duties have been settled and the property is lodged under the name of the beneficiary at the Land Registry is he free to sell on if he wishes as the property is now legally under his name to do with it as he pleases.

3. “The financial debt of your heirs is maybe as much as 50% of the value of your property”

False
Fact: Everyone inheriting in Spain would then be broke. Same as the previous two bullet points, on average inheritors (beneficiaries) pay 15% for IHT/ISD in Spain.

4. “Yours husband or wife will not be exempt from Spanish Inheritance Tax.”

Misleading
Fact: Spouses indeed are not exempt from paying inheritance tax in Spain but they qualify for legal tax allowances. If resident in Spain then the surviving spouse is entitled to further autonomous regional tax allowances. These allowances, both from the state and from the autonomous region where the property is located, may greatly reduce the burden. Additionally if the surviving spouse is resident in Spain they may qualify for a 95% reduction on the main home providing they have lived in it the previous two years and keep it the following ten years (with a maximum reduction of €122,000).

5. “Want to avoid up to 81% of Spanish Inheritance Tax?”

Misleading
Fact: Scaremongers love quoting the extreme 81.6% tax rate for IHT as if this were the norm on inheriting in Spain. While it’s true that Spain’s inheritance tax can be as high as 81.6 pc – in the most extreme case – this only applies to the following case:

a) the beneficiary inherits > €800,000
b) the beneficiary is already well-off (his pre-existing wealth before inheriting > €4,000,000 or £3,000,000)
c) is a non-relative of the deceased classified in Group IV (no family ties to him i.e. a friend)

Clearly a problem affecting only a privileged few. Not a problem that the vast majority of beneficiaries inheriting in Spain will have to contend with unless they are already multimillionaires.

6. “If you incorporate a UK Limited Liability company and place the Spanish real estate inside you will be 100% shielded against Spain’s ISD/IHT. After death, only the shares are reorganised, the company owns the asset, and so it doesn’t change hands. This falls outside Spanish inheritance tax. Win-win”

False
Fact: Resident beneficiaries are obliged to pay inheritance tax under article 17 of Spain’s Inheritance and Gift Tax Royal on inheriting real estate within Spanish territory; regardless on whether the property is locked up or not within a holding company structure and regardless of whether you inherit the property itself or the shares. Likewise non-resident beneficiaries of a property located in Spanish territory also stand to pay Spanish inheritance tax (ex art. 18 of same decree) regardless if it’s in a holding structure or not. Moreover, I believe in the latter you may even be liable to attract UKs IHT beside Spain’s if the beneficiary happens to be a UK national.

Additionally Spain’s Non-Resident Act 5, 2004 clearly states that any re-arrangement of company shares (regardless of company’s nationality) which main asset is real estate located in Spain is taxable in Spain (CGT).

Depending on how clumsily this tax avoidance scheme is carried out it may be labelled as tax evasion (criminally pursuable for defrauded amounts above €120,000 ex art. 305 et seq. Spanish Criminal Code).

And to close I would like to take the opportunity to dispel a malicious misunderstanding on misreading one of my articles: Non-residents – Six Advantages of Making a Spanish will. Making a Spanish will does not reduce or mitigate your beneficiaries’ inheritance tax bill in any way whatsoever (as highlighted in the article itself). But it is extremely useful to save your beneficiaries time, money and hassle at a time of bereavement.

Without a Spanish will a beneficiary will normally incur in penalties and surcharges for late payment on inheritance in Spain. The reason for this is because there’s a deadline of 6 months as from the time of the testator’s demise to file and pay Spanish Inheritance Tax. UK probate, in my professional experience, always exceeds the six months deadline if there is no Spanish will. In which case penalties and surcharges are accrued and added to the inheritance tax for late payment. So ‘in a way’, making a Spanish will helps to mitigate or reduce the inheritance tax bill by way of helping not to attract said surcharges and penalties as the beneficiary is able to pay in time within the six-month deadline thus avoiding a lengthy procedure. I hope this clarifies the misunderstanding.

Spain’s Statutory Four-Year Tax Limitation

Another matter is if Spanish authorities do not get wind on the death of an owner who holds company shares, property or other assets. The statutory limitation of 4 years on all taxes, including Spanish Inheritance Tax, may kick in timing out the obligation to pay inheritance tax altogether – there is nothing the Tax Office can do after said time has elapsed to claim payment of inheritance tax from the beneficiaries. It should be noted that – exceptionally – the statute of limitation for Spanish Inheritance Tax is 4 years, six months and one day. In the particular case of a non-resident in Spain it is extremely difficult for the Spanish Tax Office (understatement) to know if and when they have passed away; unless of course his beneficiaries take to pro-actively inform the Spanish tax authorities… (or for that matter their bank in Spain; which also has the legal obligation to disclose the death to the tax office).

Pros and Cons of Owning Property in Spain through Corporate Structures – Conclusion

Generalisations are often dangerous and even more so on this delicate matter. The only sound advice that can be given is that a case-by-case study is required before any decision can reasonably be taken. Each client has different needs which evolve over time so structures may need to be changed to accommodate their changing needs i.e. post-divorce, new heirs, change in tax laws.

Different experts will give you different amounts or thresholds based on different reasons on whether it’s worthwhile or not to incorporate a company (or string of companies) for tax mitigation purposes. I would generally recommend only looking into corporate structures, for tax mitigation purposes, on a taxable base of €600,000 or above (£500,000). Note the use of the term ‘taxable base’. It is not referring to the value of the underlying real estate, but the amount that each beneficiary stands to inherit from the estate. Also note that the taxable base, when referring to property itself, is normally well-below the current market value of the property; it is not an up-to-date property appraisal.

So, for example, on inheriting an estate of €800,000 located in one of Spain’s seventeen autonomous regions that actually do tax inheritance tax and there is only one inheritor (beneficiary) then in this particular case I think it may be worth looking at getting quotations on setting up a structure to mitigate exposure to ISD/IHT. In Catalonia for example you would pay €350 in taxes (as resident) and if this estate were located in Andalucía the beneficiary would pay €164,000. This whopping difference that makes a beneficiary pay 469 times more in one region than another on the same estate is explained because autonomous regions in Spain are empowered to rule on inheritance tax.

Following on the same example set above, if instead we had three children (three beneficiaries) to inherit the €800,000 estate my answer would change and I think it would no longer be worthwhile. Because the taxable base would now be split between the three of them, thus reducing the attraction of the IHT rate band which follows a sliding scale. After legal and family allowances kick in there will be very little IHT to pay by each beneficiary not making it really worthwhile to incorporate a structure and to pay annual running maintenance fees for bookkeeping services and tax compliance purposes.

Not to mention that potential buyers normally refuse buying real estate locked up in holding structures out of fear of non-disclosed debts and hidden liabilities. A due diligence must normally be carried out prior to acquiring a company holding real estate to rule off such legal risks. To sell on a property, the vendor is normally required to first unwind the holding company (inheritors stand to pay for this) at a great expense to actually sell the underlying real estate itself.

Non-resident beneficiaries unfortunately do not benefit as much as those holding resident status when it comes to legal allowances to reduce the IHT taxable base as the applicable law is the state law (which is less lenient than regional tax allowances available only to residents). Admittedly non-residents unfortunately, and unjustly, still do not qualify to opt for the full range of tax allowances that residents are entitled to. The EU is looking into this as it is tantamount to discrimination with fellow EU member nationals – unacceptable.

EDIT May 2015: The EU ruled on the 3rd September 2014 on the matter in favour of non-residents ending all tax discrimination on inheritance matters. You can read my in-depth article Changes To Spain’s Inheritance And Gift Tax Law.

Inheritance tax planning in Spain is a complex matter, so please seek legal advice from a qualified lawyer and be wary of anyone advocating property ownership through corporate structures is “always beneficial” – not the case and in fact may be even be counter-productive and a complete waste of money. Beware of companies offering bespoke one-trick ponies to circumvent Spanish inheritance tax by offering “100% protection” against it.

If you fear Spain’s inheritance tax (IHT/ISD) you should first ask for en estimation from a law firm (we offer a SITAR service) before you do anything rash such as setting up a Spanish company or UK limited company to place it on top of the Spanish real estate. Inheritance tax varies widely within Spain’s seventeen autonomous regions (in some it’s not even taxed!). Truth is that corporate structures are neither needed nor recommended for the vast majority of people.

We don’t pay taxes. Only the little people pay taxes” – Leona Helmsley.

US billionaire hotelier.

 

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

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

 

Legal services Larraín Nesbitt Lawyers can offer you

 

Related articles

 


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.

2.014 © Raymundo Larraín Nesbitt. All rights reserved.

... Read more

Dación en Pago or “Handing Back the Keys”

Raymundo Larraín Nesbitt, December, 8. 2013

A dación en pago procedure means handing the keys back to a lender. It involves signing a deed before a Notary public whereby a struggling borrower relinquishes ownership in exchange for being fully discharged of his mortgage liability.

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

 

 

 

Original article from 21st November 2.008

 

Introduction

For all those who’ve slipped into mortgage arrears in Spain, or are likely to, and are thinking of handing back the keys as a solution, there’s a formal legal procedure to do it known as dación en pago (‘datio pro soluto’). It is one of the proposed solutions I highlight in next month’s article on Bank Repossessions in Spain. Article 140 of Spain’s Mortgage Act allows a borrower to cancel a lenders’ debt by handing in exchange the encumbered asset.

Dación en Pago: Definition

In plain English, a ‘dación en pago’ (or dation in payment) means handing the keys back to a lender, and in exchange the lender will discharge in full the mortgage liability not holding a borrower liable in the future. They will renounce pursuing the debt in your home country or elsewhere against any other assets you may hold. This solution of last resort puts an end to many borrowers’ growing nightmare as the mortgage debt mounts up exponentially over time eventually becoming unbearable.

Why hand back the keys?

The reason why struggling borrowers follow a dación is because on being repossessed in Spain if the property slips into negative equity (meaning you owe more money than what the property is currently worth post-auction) a lender can actually pursue the borrower for the difference (art. 579 LEC). As I analyse in detail on next month’s article on Bank Repossessions in Spain it is extremely easy to slip into negative equity territory post-repossession. Hence why the last thing a Spanish family does is stop servicing their mortgage.

A dación is particularly interesting for those holding property, whether in Spain or abroad. What a mortgage borrower seeks on following a dación is to set a legal firewall that will avoid a lender jeopardising the remainder of his assets. It is basically safeguarding the family’s financial interests by (legally) drawing a line on the sand. If you hold no assets then you may wish to skip this article altogether.

Following article 1911 of the Spanish Civil Code a mortgage loan borrower’s liability is personal and unlimited with all their assets, both now and in the future. In other words, the debt goes personally against the borrower on the balance owed to a Spanish lender. The property itself, the collateral, is accessory and was only guaranteeing the bank loan, which is the principal.

Many defaulting borrowers realize with shock post-auction, that in despite of a lender having repossessed their Spanish property, they are still being chased in their home country or elsewhere for the outstanding debt. As they owe, in addition to the mortgage loan shortfall, the repossession associated expenses, lawyer’s fees, procurador’s fees and on top the mortgage default compound interest. The compound default interest on average is over 20% p.a. which only adds more pain on the long run as the overall debt builds exponentially over time.

That is why many defaulting borrowers in lieu of being repossessed, and face all the above legal and financial dire consequences, would rather sell the non-performing mortgage loan as a distressed asset or else follow a dación procedure if they are unable to find a buyer in time to avoid repossession.

Requirements

1. No negative equity rule: the property should not be in negative equity (in fact, I advise it should have at least over 20% equity)
2. No repossession procedure underway: it is critical a lender has not started repossession proceedings against the property

Procedure

The outline of how it works would be as follows:

1. A borrower must be on time with the repayments as well as with the Community fees and local taxes. The latter can actually be negotiated with the lender.

2. The borrower contacts his lender and proposes it to them.

3. The lender will typically require the property to be reappraised. You will be expected by your lender to pay this in advance. On average it amounts to 350€.

4. If on average the new valuation of a property covers the outstanding mortgage loan plus 12% of the associated legal expenses the lender will accept to take the possession of the apartment, cancelling your debt and will waive taking legal action both in Spain and abroad in your home country. As a rule-of-thumb I would personally advise the buffer of equity to amount to at least 20% of the property value for it to be successfully accepted. The higher the positive equity buffer, the more likely a lender is to accommodate to the idea of a dación.

5. The day of signing the deed at a Notary, the borrower will surrender the keys, and leave the property clear of furniture and tenants.

6. The property will now be lodged under the lender’s name.

Expenses Involved

A dación en pago works basically the same as a conveyance procedure only that instead of getting paid in exchange of signing away your property you are fully discharged of the mortgage liability being allowed to simply ‘walk away’ from the problem (without legal repercussions).

  • 7 to 10% Transfer tax depending on the autonomous region of Spain where the property is located
  • Plusvalía tax (Municipal Added Value tax)
  • Notary fees
  • Land Registry fees
  • Gestoría fees (may not apply)

 

All these expenses should ideally be negotiated to be paid for by the lender. A lender, on becoming the new owner, will contribute towards the Community fees just like any other commonholder in a Community of Owners. That is the reason why there must be sufficient equity in the property to offset, not only the associated completion expenses and taxes, but also the community ongoing maintenance costs and property taxes until a lender manages to sells on the property. Banks are not real estate agencies and do not cherish having large stocks of unsold properties on their books; that is not their core business.

Signing the Notary Deed

You can either sign a dation yourself or else appoint a lawyer to sign on your behalf. It is not compulsory to hire a lawyer for a dación en pago in Spain. What is compulsory is that you appoint a translator to act on your behalf should your command of Spanish not be high enough.

However, I just cannot stress enough how important it is to appoint a lawyer. He will act as a translator and also verify that indeed your debt with the lender is being fully discharged on you signing this deed relinquishing ownership. Besides, your lawyer will be able to negotiate with the lender on your behalf, as some lenders will try to make borrowers pay for some (or all) the associated expenses.

I have witnessed cases in which borrowers, acting without a lawyer, were misled into signing before a Notary what they thought was a dación but was in fact only an assignment of assets and rights without fully discharging the mortgage liability which remained very much outstanding.

The Notary is not there to give you legal advice as they act impartially to either party.

If a Bank refuses it – Can I Challenge it?

Yes you can, but being practical I wouldn’t recommend it. Only if a lender had turned down the proposal unfairly when clearly there was more than enough equity to offset it against all the expenses would I consider it a viable option. What’s important to note is that a dación is not a borrower’s right. What many fail to understand is that on accepting a dación this entails ongoing maintenance costs and expenses for a lender. So it only makes financial sense for a bank to accept it if a property is significantly into positive equity territory so as to offset the expenses of running the property until the time a buyer is found.

It is pointless to challenge their refusal if it’s apparent you are in negative equity or close to it. It will be expensive, time-consuming and fruitless. Besides, lenders in general have shut the door on daciones en pago. The property must be significantly in positive equity territory for them to accept it.

In some borderline cases in which a lender may be reluctant to accept the dation en paiement because there’s a small shortfall of a few thousand Euros I advise a borrower to shoulder the difference so the dation is accepted. The alternative is a full-blown repossession procedure with all the legal and financial consequences this entails (unlimited personal liability).

Bad credit stands at a staggering 13% for Spanish banks. This helps to explain why lenders have been understandably reluctant to accept them over the last years (because of widespread negative equity due to bloated property appraisals; ironically commanded by lenders themselves for the purpose of securing a mortgage loan).

The Government realizing this was the case tried to pass a piecemeal law that ‘forced’ lenders to accept a borrower handing back the keys in restricted cases. So much so in fact that less than five hundred families have qualified to take advantage of it since the law was passed in March 2012. The Government is now working to lower the yardstick to allow yet more families to qualify and benefit from a dación en pago. For the time being this measure can be safely labelled as ineffective due to its negligible overall impact. You can read further in my updated article The Dación en Pago: Finally a Borrower’s Right.

Dación en Pago – Conclusion

A dación en pago is a win-win for both parties really.

A borrower is free at last having managed to successfully secure his assets, whether in Spain or abroad, from the lender or any law firm or debt collection agency hired to pursue the outstanding debt.

A lender on the other hand will now own the property outright and will have successfully waived a lengthy, protracted and expensive court procedure (bank repossession) without having to set aside the mandatory provisions before the Bank of Spain to make up for this dubious loan which affects its liquidity ratio. A repossession procedure lasts 2 years minimum and may easily entail for the bank expenses running up to 20% of the properties’ value. These provisions set aside by lenders are being looked upon closely by credit-rating agencies post credit-crunch as they hinder their borrowing ability and ultimately dent their share value.

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

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

 

Legal services Larraín Nesbitt Lawyers can offer you

 

Related articles

 

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

2.009 and 2.013 © Raymundo Larraín Nesbitt. All rights reserved.

 

 

... Read more

Home Insurance in Spain

Raymundo Larraín Nesbitt, November, 8. 2013

I would like to bring closure to the line of insurance articles I’ve been writing over this year with one focusing on what arguably is the most important affecting homeowners: Spanish home insurances.

 

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

 

Introduction

One cannot stress enough the importance of hiring home insurance in Spain regardless of whether you live in the country full-time or else live abroad. I have written this article to give a sweeping overview of what home insurance entails and what you reasonably may expect it to cover.

 

 

Defining Spanish insurance terms: ‘continente’ and ‘contenido

As a starting point on the subject it is important we first distinguish and define what is understood by the above two legal concepts.

a) Continente: refers to the physical property itself, the building and its fixtures
b) Contenido: makes reference to your personal belongings within the property, the contents

Typically, on choosing home insurance, you will be asked by your insurance broker on whether you are interested in a policy that covers one or the other or is comprehensive and includes both.

Naturally the more your cover insures, the more expensive the premium. As it stands to logic, there is a direct correlation. When it comes to insuring property and its contents I would always rather err on the safe side than trying to save a few dozen pounds. On the long run you are saver paying a more expensive premium. The silver lining, talking out of experience, is that home insurance in Spain is cheaper than its UK counterpart.

Building Insurance in Spain (‘continente’)

This includes both the building and its fixtures. It covers any and all of the following:

1. Fire, explosion, implosion
2. Smoke
3. Lightning strike or lighting-induced power surges
4. Adverse weather (i.e. strong winds, heavy rain, hailstorm, snow)
5. Open faucets, water leaks
6. Vehicle collision
7. Vandalic acts
8. Broken windows, glass

Contents cover (‘contenido’)

This basically refers to all your personal belongings. Anything that is not nailed down or bolted to the floor. The more ‘secure’ your property is deemed by an insurance company (location, shutters, bars, alarms, communal private security services etc.) the less you stand to pay.

It would cover any and all of the following in case of theft, for example:

1. Jewellery
2. Art, antiques
3. Furniture
4. Clothes
5. Electrical appliances

 

Spanish Home Insurance FAQs

 

Is it mandatory?

No, unless you have taken on a mortgage loan. In which case a lender may reasonably impose you have adequate home insurance and may even tag it on to the mortgage as an ancillary service.

Do I need to hire my own home insurance if my Community of Owners already has a cover in place?

Yes, they are completely unrelated. The former covers your home (building and or contents) and the latter covers (mainly) the community.

I would strongly recommend that you hire your own insurance to cover your home. The communal policy is geared normally to cover almost exclusively communal areas and facilities. Its purpose is not to cover the contents of your private home within a Community of Owners. On very few occasions will the communal policy actually cover an accident in your own home and it will only be indirectly at best i.e. water-related damages originating in communal areas, such as a badly sealed gutter in the rooftop, that results in water seeping through into your master bedroom.

By the same token you can also be held liable if your own home causes a flood that extends to adjacent neighbouring properties i.e. split internal pipes. This is not covered by communal insurance and you will have to pay for all related damages and repairs.

Far-fetched claims such as “there is no need to hire a home insurance for contents if your community already has an insurance policy in place” are grossly misleading and unfounded. They should be disregarded as ill-advice. If you want to be appropriately covered and insured hire and pay your own private home insurance policy. There is a wide array available to suit all pockets. Be advised that normally on taking on a mortgage to buy property in Spain lenders will throw in the deal some form of home insurance. This is a linked product to your mortgage and you normally have little choice over it. Please read section six in my article on Spanish Mortgage Loans: Beware of Abusive Clauses (January 2009).

What if I rent out my property?

There are special covers available specifically for this contingency. These for example go into fine details such as a tenant trashing your property or including legal representation in the event of tenant eviction. I advise you hire one if you plan to let your property.

Third-party liability insurance (‘seguro de responsabilidad civil a terceros’)

Not all home insurances include it. Please read the small print. Examples of this would be:

a) Underage children throwing an object over the balcony and landing on someone’s head in the street below.
b) A leak originating in one of your split internal pipes that spreads to an adjacent neighbouring property.

Arranging home insurance

This can be done in either of three ways, from cheaper to more expensive:

i) Through your lender (mandatory on taking on a mortgage loan). The cheapest option albeit not necessarily the most suitable.
ii) Through a local insurance broker. Many have foreigners working for them or may even be foreign-owned; so language shouldn’t be a problem.
iii) Arranging it in your home country. This has the advantage that you will always be dealing with professionals in your own language; but you will pay a higher premium for it. Many UK companies now offer comprehensive insurance covers for overseas properties. Make sure they are duly registered and supervised by the Financial Services Authority (FSA).

Home insurance in Spain – Conclusions

I close my article once again reiterating the importance of hiring an adequate insurance cover for your Spanish real estate.

I strongly recommend before signing anything that you first seek qualified advice from an expert, such as a lawyer or an experienced insurance broker, to assist you choosing the right cover for you. And the reason is because most people I know have the bad habit of never reading the small print – more so if it’s in a foreign language such as Spanish.

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

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

Legal services Larraín Nesbitt Lawyers can offer you

 

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.

2.013 © Raymundo Larraín Nesbitt. All rights reserved.

... Read more

Community of Owners' Insurance Policies

Raymundo Larraín Nesbitt, August, 8. 2013

Every community of owners in Spain should have an insurance policy. This article is an FAQ and sweeping overview of what a community of owners insurance policy (normally) entails.

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

 

Is community of owners insurance mandatory in Spain?

It depends where you live in Spain. Spain’s Horizontal Property Act in its article 9.1.f stipulates that Communities of Owners (C.O.) are free to take out an insurance policy to cover all damages. So from a national point of view there would be no obligation. However, as Spain is divided administratively into seventeen different autonomous regions, each act like mini-estates, these have their own powers to pass laws that affect matters within their territory. Some of these regions have made a C.O. policy mandatory i.e. Madrid and Valencian Comunity.

 

How is it funded?

It is mandatory that all C.O.s set aside 5% of the annual community budget to help build a communal reserve fund. The community insurance policy would be one of the expenses paid out from this fund. So basically all common-holders are actually pooling into this fund.

What does it normally cover?

This is a general question to which there is no specific answer. The correct reply is “it depends”. There is a broad range of policies available in the market with different price ranges. The difference in price is explained because the more expensive ones cover more accidents. So basically a community will tailor its insurance according to its own needs and circumstances. For example, it may not make much sense for a Community of Owners located in Marbella to pay a premium for additional cover against falling airplanes. However, this would make perfect sense in a Community that’s in the vicinity of a busy airport. So bottom line, you pay what you get. There is no general communal policy acting like a blueprint to match one and all Community of Owners. It’s left at the discretion of the Communities’ governing body to ensure what events require cover.

You would typically expect a Community of Owners policy to cover any and all of the following:

Fire-related damages
• Fire, explosion, lightning ray
• Smoke, acoustic noise, vandalism
• Faulty electric wiring
• Earthbound transport collision, aircraft collision
• Fire extinguishing expenses
• Rescue, demolition, debris cleaning, appraisal expenses
• Forced eviction or uninhabitable
• Rental loss
• Documents and archive replacement
• Automatic cover of insured capital

Water-related damages as well as those caused by adverse climatology
• Water-related damages in communal drains, gutters and waste pipes
• Faucets left accidentally running
• Leaks, damp patches and resulting mould growth
• Fire-proof installations
• Additional expenses borne by abusive use of community water
• Water damages caused in non-communal areas (privative)
• Plumbing expenses: localising the origin of the problem, repair of communal and non-communal areas
• Heavy rain, hailstone, snow and flooding. Mud-extraction (as a direct result of flooding in low areas such as underground garages and basements)

Further damages
• Broken communal crystals and floor tiling including skylights. Photovoltaic systems or solar panels
• Workmanship to have them mended or replaced

Additional guarantees
• Employee non-loyalty
• Faulty machinery and electrical equipment
• Health and Safety. Employee accidents within premises

Civil liability
• Of the Community, of the ‘Mancomunidad
• Of community employees
• Of individual owners blunders i.e. forget to turn off a water tap and cause a small flood

Legal assistance
• (Legal) advise over the telephone
• Representation and litigation before Spanish courts of Justice
• Litigation against non-paying community owners for outstanding community fees

Aesthetic repair
Aesthetic damages to building facade or interiors (communal areas)

24-hour emergency repair assistance
Handymen urgent services i.e. locksmith

Unforeseen events
• Consortium
• Total loss. Demolition-related expenses. Professional fees
• Frost-related damages

Theft
• Theft, petty larceny, hold-ups (of goods located in communal areas; not in private dwellings)
• Communal fund misappropriation and mismanagement
• Theft-induced damages (i.e. broken windows due to break-in) in communal areas

Do I need to hire home insurance policy if my Community already has one?

Yes, they are completely unrelated. The former covers your home contents and the latter covers (mainly) the community.

I would strongly recommend that you hire your own insurance to cover your home contents. The communal policy is geared normally to cover almost exclusively communal areas and facilities. Its purpose is not to cover the contents of your private home within a Community of Owners. On very few occasions will the communal policy actually cover an accident in your own home and it will only be indirectly at best i.e. water-related damages originating in communal areas, such as a badly sealed gutter in the rooftop, that result in water seeping through into your master bedroom.

By the same token you can also be held liable if your own home causes a flood that extends to adjacent neighbouring properties i.e. split internal pipes. This is not covered by communal insurance and you will have to pay for all related damages and repairs.

Far-fetched claims such as “there is no need to hire a home insurance for contents if your community already has an insurance policy in place” are grossly misleading and unfounded. They should be disregarded as ill-advice. If you want to be appropriately covered and insured hire and pay your own private home insurance policy. There is a wide array available to suit all pockets. Be advised that normally on taking on a mortgage to buy property in Spain lenders will throw in the deal some form of home insurance. This is a linked product to your mortgage and you normally have little choice over it. Please read section six in my article on Spanish Mortgage Loans: Beware of Abusive Clauses.

Conclusion

While it’s true that a communal insurance is only mandatory in some parts of Spain the fact is that it only makes common sense to have one hired. Its annual cost can be greatly reduced by eliminating many of the above-listed covers leaving only those deemed as ‘essential’.

While most of the events covered are related only to communal areas there will also be some instances, particularly those induced by heavy rainfall, where privative areas are also indirectly covered as a direct result of induced damages originating in communal areas. So private owners may indeed claim against the Community insurance in such cases. The insurance company will send its own ‘peritos’ (qualified experts) to assess the cause and extent of the damage to ascertain if the community is indeed liable. In which case it will have to pay for the repairs.

Rainfall-related water damages are typical of communities dotting the Spanish coastal areas as properties, in my experience, are in general built ill-equipped against heavy rainfalls resulting in damp patches and aggressive mould growths. If these are left unchecked by the owner, over the winter period, they will likely lead to unpleasant surprises when he comes to enjoy his overseas property during their holiday break. Which is why it is strongly recommended to leave the property keys to someone of trust (family, friend, neighbour, estate agent) who may regularly drop by and take a quick peek at your property in your absence during the rainy season to ensure everything is above board and raise the alarm if not.

The rain in Spain stays mainly in the plain” – Eliza Doolittle. My Fair Lady.

 

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

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

Legal services Larraín Nesbitt Lawyers can offer you

 

Related articles

 

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.

2.013 © Raymundo Larraín Nesbitt. All rights reserved.

... Read more

Buying Off-Plan Property in Spain

Raymundo Larraín Nesbitt, June, 8. 2013

An up-to-date legal guide to buying off-plan property in Spain by Raymundo Larraín Nesbitt, a solicitor qualified to practice in Spain.

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

By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
8th of June 2013

Original article from 18th April 2.010

 

Introduction to buying off-plan property in Spain

Not so long ago there was a time in which purchasers gleefully bought en masse their dream homes in Spain. A few on the prowl to make a quick profit, the majority just wanted a quiet place to settle down and retire leading the relaxed lifestyle for which Spain is renowned.

Unfortunately for some, their dream turned sour for a number of reasons and we are now witnessing the consequences of it in the aftermath of Spain´s property bubble collapse. The majority of these problems could have been avoided by doing some research yet in other cases purchasers, in despite of being careful and taking all the necessary precautions, still encountered difficulties.

This gloomy outlook will no doubt change in the future when we start a new property cycle. The million-dollar question is second-guessing when that will be! Don’t hold your breath.

Your guess is as good as mine.

The aim of this article is to do a brief rundown on the basic legal checks that ought to be done prior to committing yourself on buying Spanish off plan.

 

Tips on Buying Off-Plan Property in Spain

 

The following 14 useful tips will help you avoid the majority of off-plan hazards. You would do well to follow them.

1. Hire a Qualified Registered Lawyer

I will refer on this to my first point in my prior article Buying Resale property in Spain in which I elaborate it in more detail. And yes, it’s also a shameless plug to peddle my legal services! The advantages are summed up in my article Buying Property in Spain – 10 Reasons to Hire a Lawyer.

Specifically on buying new build, it is highly advisable that you retain a registered lawyer before you commit yourself signing any document or else paying any amount. Initial down payments, such as security deposits which strike the property off the market, are non-refundable unless specifically agreed otherwise. If you pull out you will likely forfeit the deposit. Many legal problems may be easily avoided following this simple advice. So don’t be in a rush to hand over the money without having hired an independent lawyer first; do not allow yourself to be pressurized by estate agents. Rash decisions often turn out to be expensive mistakes.

Your home country’s consulate will hold a list of recommended independent English-speaking lawyers.

2. Is the Plot of Land Registered under the Developer’s Name?

In some cases developers marketed and sold on whole developments without even owning the land. This is what, for example, developer AIFOS used to do. They sold on entire off-plan developments without owning the land; they only had an option to purchase, within an agreed deadline, a plot of land.

One should not buy an off-plan unit in a land that is still not registered under the developer’s name. There are far too many associated risks to take a gamble with your hard-earned money.

The land should be appropriately classified to be built upon. Be very wary if you are being sold an off plan in a land that is still classified as rural. It may be a good idea to check with the local Planning Authorities that you are not buying in a land of special protection such as green belt land.

Naturally a lawyer will do the above checks for you as part of his conveyance due diligence. But it never hurts if you also have the time to spare and carry them out yourself.

3. Has the Developer Attained Planning Permission?

The basic recommendation would be not to sign a Reservation Contract or a Private Purchase Contract (PPC) unless the town hall where the property is located has issued a Building Licence (‘Licencia de Obras’ in Spanish) for the development.

Notwithstanding the latter, let us examine the nuances that spice up life.

I would, in general, recommend that a Building Licence (BL, for short) has not been obtained by means of what is known as the Administrative Silence Rule (ASR) as it may be successfully challenged should it have been attained breaching Planning laws, for example. Just to clarify, obtaining a BL through the ASR rule is perfectly valid in our legal system. However, if it has been obtained breaching planning laws it may be deemed void.

Additionally a BL must not have been challenged administratively e.g. imagine the case of a Building Licence issued by a town hall’s planning department. Someone may buy a property relying on the town hall’s licence. However, unbeknownst to this buyer, this may lead to an ongoing dispute between the local town hall and Regional Planning Authorities over the legality of the issued BL. Regional Authorities may actually override the town hall’s authority on planning issues so they are bound to win. Remember the Priors?

This is by far the biggest mistake that – unbeknownst to many – a buyer can possibly make. Many problems could easily be staved off on following it. The Building Licence will ensure that the building is above board and the property is not being built in green belt land, for example. Your lawyer will be able to verify the BL is not being challenged at court by anyone, including Regional Planning Authorities.

4. Do You Have a Bank Guarantee Securing your Stage Payments?

Once your lawyer has checked the plot of land is under the developer’s name and there is a valid Building Licence it’s time to sign the contract.

The instalments paid while the property is being built can be guaranteed by means of what is known generically as a ‘bank guarantee’. Please read for more information my detailed article on Bank Guarantees in Spain.

Bank Guarantees are a legal tool devised to secure the deposits of prospective off-plan purchasers should their properties not be delivered on time or their developers file for administration. Post credit crunch, all the bank guarantees we are executing are acting as safety nets for many stressed new-build purchasers who find themselves bogged down in mire out of no fault of their own i.e. developers filing for receivership.

Spanish bank guarantees may be a daunting legal minefield for many, albeit with the assistance of an independent lawyer acting on your side you will be able to dodge the pitfalls, both safely and successfully.

A Spanish Bank Guarantee may be either an Insurance Policy or Guarantee issued respectively by either an Insurance Company or Bank. Both types can be grouped under the generic term bank guarantee for simplicities’ sake. A bank guarantee’s purpose is to secure the full amount of deposits paid by off-plan purchasers. It secures the initial reservation deposit, which strikes the property off the market, the interim or stage payments as well as the applicable VAT paid on said amounts. On top of this you are also entitled to the legal interests on the amounts secured.

A bank guarantee is of critical importance acting as a safety net securing your full deposits should something go wrong. Bank Guarantees should have no expiration date as per Law 57/68. Bank Guarantees should expire only upon the developer attaining a Licence of First Occupation.

5. Has the Dwelling Attained a Licence of First Occupation (LFO)?

A Licence of First Occupation (or ‘Licencia de Primera Ocupación’ in Spanish) is a certificate issued by a town hall that confirms that a newly-built property fully complies with all planning and building regulations, and is ready to be used as a dwelling. A LFO allows off-plan purchasers to dwell in a property legally. You can read more on this subject in my detailed article on the Licence of First Occupation.

The LFO is important mainly for two reasons:

  1. It provides a check on the planning legality. A LFO means the developer has built the dwelling in compliance with the original town hall’s Building Licence as well as complying with all Planning laws. The inspection to grant this licence is carried out by town hall’s chartered technicians who certify that the dwelling complies fully with Health, Safety, Planning and Construction Laws and is deemed apt for human habitation.
  2. It is required by utility companies to have access to official supplies (water, electricity and gas). Spanish law requires the granting of the LFO to hook up the dwelling to the supply grid. Although in some parts of Spain there have been reported cases of supply companies waiving this and connecting you without the said licence. In such exceptional cases the only requirement was showing the application of having requested the LFO from the town hall.

I would advise, in general, to complete only once a Licence of First Occupation has been attained; however I must point out that completing without a LFO is legal in Spain and the property will be registered under your name at the Land Register. It is legal to sell properties without a LFO.

The following are just some of the drawbacks you may face if you happen to close on an off plan property lacking a LFO:

  • Primarily, you will not be able to take out a mortgage on the property or remortgage it – if needed be – by any lender other than the developer’s bank.
  • You will not be able to benefit from the official utility supplies; only from the developer’s supplies (water and electricity) with all the associated problems this has, namely that you may be cut off at any time as it is the developer who is paying for it and if they go into receivership you will be shut off. Besides, the site supply electricity doesn’t have the same strength and power surges are fairly common on simultaneously turning on various electrical appliances such as air conditioning. Until the LFO is attained, the developer has to pay, by law, for the utility supplies.
  • Any future prospective purchaser, or their lawyer, will haggle with you and require a steep discount 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. A lack of a LFO tacitly implies that you are actually reducing the pool 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 of an off-plan and not the developer, may be held liable to pay the fine for the planning illegality.
  • Needless to say, you cannot rent a dwelling without a LFO.

 

off-plan

There may be nonetheless exceptional circumstances in which it may be advisable to complete without one. Specifically if there’s no bank guarantee securing your down payments and the developer is in risk of going into administration, provided that there’s no ruling or legal procedure affecting the Building Licence due to planning issues (as explained above in point three).

It is very important to realise that until completion the property still belongs to the developer. So if you still have not closed and the developer becomes insolvent in the interim, the property lodged under his name may be seized by the developers’ lender or any other creditor that places a charge on it at the land registry. If you have no bank guarantee and the above happens, it is very likely you will forfeit your down payments. However, cases differ and require a case-by-case study by your appointed solicitor.

The issuance of the LFO by a town hall is the major milestone in the off-plan procedure. In fact, from a legal point of view, it marks the turning point whereby the property is now deemed to have been delivered legally to the purchaser. Once the LFO has been attained and the developer has sent you a registered letter compelling you to complete within a deadline before a Notary public, you should no longer withdraw from the PPC and litigate for a refund as you are bound to lose at court (specifically read point three in my article 10 Reasons Why Your Case Against a Developer may be Thrown out of Court in Spain). This is known as ‘forced completion’.

Developers can actually pursue you abroad against your home country’s assets once they’ve obtained a favourable judgement from a Spanish court. Do not think for one moment you can walk away breaching an off-plan contract and that there will be no legal consequences arising from it. Some developers will be happy just withholding the stage payments as compensation and yet others will sue you on top demanding fulfillment i.e. that you close on the property.
Indulging in reckless litigation may leave you seriously out-of-pocket.

6. Ghost Developments

Some new communities remain largely unsold post credit crunch and you may find additionally that many common holders are not contributing to the communities´ expenses. This nasty surprise may create practical problems such as green swimming pools, lack of security, derelict gardens and even break-ins. It may be recommendable before buying into a community that you ask around first. This will no doubt change in the future when the market picks up again and moves to a new cycle.

7. Coastal Laws

On buying off plan, make sure it is not within the protected area of Public Domain or else you may risk your house being pulled down, at your expense, by the local Authorities. Spain’s Coastal Law was passed in 1988 but it hasn’t been until recently that the Government has decided to enforce it harshly. There have been significant amendments to the point there has been a de facto coastal law amnesty.

8. Buy-to-Let

If you are buying to rent the property out, either as short or long-term, make sure the region of Spain in which you are buying allows for this. Some regions, i.e. Balearic Islands, have stringent regulations whereby a special licence is required to rent. Failure to comply will result in the town hall fining you. Disgruntled neighbours always make apt whistle-blowers, so be warned. Other regions in Spain, such as Andalusia, do not require letting licences but do have their own regulation in place on letting out property i.e. Decree 218/2005.

Please read my article on Renting in Spain: Top 10 mistakes as well as Letting in Spain: The Safe Way for more information on this subject.

The Government, pressured by the hotel industry, has recently passed a new law which will effectively restrict touristic private rentals (short term leases). I will comment on this on a separate article.

And as a final word of caution, unless your property is in a prime location, do not rely on the let to offset the mortgage repayments – won’t happen.

9. You do have a NIE number, right?

A NIE number is a Fiscal Identification Number for foreigners and is required, among other things, to buy property in Spain. You can read this detailed FAQ on Spanish NIE numbers. More details in my article: NIE Number Explained.

10. Applying for a Mortgage Loan

Most of off plan buyers will require a mortgage loan to secure a purchase. You can read my detailed articles on Spanish Mortgages Loans: An Overview and Spanish Mortgage Loans: Beware of Abusive Clauses to get you started with. The latter provides useful tips on the type of (abusive) mortgage clauses that Spanish lenders have a penchant for and you should be wary of signing. Spain’s Supreme Court has declared in 2013 (STS 241/2013) collar clauses as abusive; something which I had already been denouncing for years as they were clearly one-sided in favour of lenders.

11. Snagging List

Before you complete on a newly-built property you should always do a snagging list of the property. You can either draw up a snagging list yourself or else appoint one of the many experienced companies that may carry it out on your behalf. It goes without saying that lawyers do not carry out snagging lists! This is why I strongly advise you hire a chartered surveyor.


On inspecting the property they will draw a list of all the flaws the property has i.e. mismatched tiles, damp patches, mould growths, leaking faucets, flaked painting, damaged appliances, unsuitable drainage etc.

I highly advise not to complete on an off plan until you have fully carried out a snagging list and also followed it up ensuring the developer has indeed repaired each and all of the problems highlighted by your inspection. Once you complete it will be very difficult to have these fixed as your bargaining position will be considerably weakened on handing over the money. So play your card rights and demand they are repaired always pre-completion, not post-completion. Once you are satisfied with the repairs you may then complete.

For post-completion flaws and their repair, please read my article on Off-Plan Construction Flaws: Know Your Rights so you learn what your rights are and how to defend yourself once you have completed on a new build property. Post-completion, flaws may become apparent which were either not picked up during the snagging list or else are new.

12. Post-Completion: Make sure the Property is Now Registered under Your Name

I refer you to my previous article on buying resale in Spain and registering your title deeds or escritura in the property register. You would do well to request what is known as a nota simple. Please read my FAQ on the nota simple for more details. It is highly advisable to check the title is clean and there are no charges, liens or encumbrances against the property (other than the mortgage you may have applied for given the case).

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

Once you have acquired your new property, you will now have to face all the associated running expenses. Make sure you have budgeted this carefully so as to avoid unpleasant surprises! Some of the luxury gated communities with lush tropical gardens and beautiful infinity pools that dot the Spanish coastlines may have pretty steep maintenance expenses. Any unpaid community bills will result in the Community of Owners placing a charge against your property which may lead to auctioning it off publicly to recoup the debt! This legal procedure in Spain works fairly efficiently (as in twelve months on average). Besides be warned that a hot legal industry has developed over the last years to pursue these community debts abroad, both in the UK and the RoI, against debtor’s home assets.

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

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

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

 

The particularities on buying off-plan are for example that IBI tax will not be usually readily available to pay until two years after you’ve purchased the property, maybe even more. You will be nonetheless held liable for those two previous years on the backdated IBI tax. Failure to pay IBI tax may lead to your house being auctioned off to recoup the debt. More on these taxes in my article Non-Resident Property Taxes in Spain.

Regarding utilities, even when a LFO has been issued you may find yourself waiting for some time before you are officially connected to the supply grid with your own individual water and electrical meters. Regarding Community fees you are liable for them since the LFO was attained by the developer, not before.

On buying off plan you may become part of what is known as a Community of Owners. You should make yourself acquainted with your Community of Owners rules (‘Ley de Propiedad Horizontal’ in Spanish or simply Commonhlod law) as well as how to challenge Assembly resolutions if necessary (both AGMs and EGMs).

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

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

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

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

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

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

Buying Off-Plan Property in Spain – Conclusion

Although off-plan property may have fallen foul of buyer’s tastes due to all the associated post-credit crunch problems featured in the press, it will no doubt claw its way back. This is likely to take place when we exit this gloomy deflationary environment and enter a new cycle of real estate appreciation. Property cycles in Spain take, on average, fifteen years from peak-to-trough. The last cycle has taken from 1993 to 2007 approximately. For a recovery to materialise we need foremost low interest rates coupled with banks willing to lend. With neither liquidity readily available nor lenders prone to take chances (lending in Spain is at a staggering fifty-year low!) the property market’s lifeblood is sapped away leading us onto a languished standstill.

As always it will be shrewd investors who, having second-guessed correctly the ailing property market, will snap up the most sought-after units at knockdown prices, profiting from today’s irrational fear; much like in a stock market rebound. Many will look back with everlasting regret on not having seized the buying opportunity of a decade grabbing themselves a bargain under the sun in a bottoming out market.

Or conversely you can always wait to catch the next train which is not due until another fifteen years’ time!

 

“Caminante, no hay camino, se hace camino al andar” – Antonio Machado. Proverbios y Cantares XXIX. Campos de Castilla (1912).

Translation: "Wanderer, there is no path, the path is made by walking."

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

 

Must-reads on the subject:

Buying property off-plan in Spain. Advice by the Foreign & Commonwealth Office, 12th of March 2013

Buying off plan. SPI article from 2010

Advantages and disadvantages of off plan property. SPI article from 2010

 

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

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

 

Legal services Larraín Nesbitt Lawyers can offer you

 

Related articles

 

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

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

 

 

 

... Read more
3