Spain Property buyers, stuck with a deposit paid, but no property to show for it?

May 4, 2011

Thought you were covered by a bank guarantee, but are being told this isn’t the case?

Want to know what to do about it?

Some buyers of property in Spain find themselves in a tricky position. They may have paid a deposit for a property, but the developer hit financial difficulties and the development never got built, or only partially built.

Well, this is the position:

It is a legal requirement, as part of the buying process in Spain, to have an insurance policy or a bank guarantee, for a deposit on an off-plan property. This is designed to protect the off-plan buyer.

For new-build, or resale properties there is no legal requirement for this type of Guarantee.

Property Developers, who receive money from buyers before they start, or during the construction, must have an Insurance policy or a Bank Guarantee, provided by an entity listed in the Register of Insurers, Banks, or Saving Banks, to protect against the situation where construction is not commenced, or not finished, for any reason, by the agreed deadline. This has been enshrined in Law since 1968

It is the responsibility of banks, to ensure deposit amounts need to be placed in special accounts, separate from any other kind of funds belonging to the developer or promoter. It is in effect a developer´s Escrow account, controlled by the Bank.

Money is held in escrow by a third party until the purpose of the underlying agreement is accomplished, in this instance a finished building. When the condition specified in the escrow agreement is performed, the entity or individual holding the deposit funds (bank) gives it over to the party entitled to receive it (developer). This is known as the second delivery. The escrow agreement is a contract. The parties to such an agreement determine when the agreement should be released prior to making the deposit. After the escrow agreement has been entered, the terms for holding and releasing the document or money cannot be altered in the absence of an agreement by all the parties

So if Banks or Savings Banks have been accepting sums advanced by purchasers, highlighted as deposits for off-plan purchases into accounts, even if not classed as  ‘Special Accounts’ (Cuenta Especial ) and no Bank Guarantees/Insurance Policies were handed to the buyer,  the financial institution is, liable to refund those amounts to the buyers if, with a minimum level of due diligence they would have realised that the funds were deposits for off-plan purchases.

Banks in Spain are regulated by the Banco de Espana, (Bank of Spain) and must incorporate strict financial controls to prevent money laundering and fraud. These controls, together with their own due diligence, should result in the Bank or Savings Bank understanding that the funds were for off plan purchases and therefore subject to the legal requirements.

If this has not happened in your situation, what can you do about it?

  • You might want to negotiate and get the bank to offer a property at today´s price to those with a claim (credit) against them
  • Take individual legal action against the developer and the Bank with whom your money was placed. This can be an expensive option and not always recommended as a first port of call.
  • Take group or individual actions against the banks (which might be more cost-effective and an established group, which is bringing pressure to bear on Banks, may be noticed more)
  • If you used a solicitor during the purchase, and no Bank Guarantee was given to you, you can also claim against him/her (who should have professional liability Insurance).  If you do not know where your money was paid to, you can start by asking the solicitor to verify the account where money was deposited, so you can build an action against the Bank too. A Judge can also help you, by initiating  “ preliminary diligence” at your request, to know who is the liable party.

Please call if you want to discuss your situation 01932 849536

Co-written by Louise Reynolds of  Property Venture and Costa Luz Lawyers

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