Buying Off-Plan Property in Spain: An Increasingly Common Practice
In recent years, the real estate market has experienced several changes, such as the almost total disappearance of the huge turnkey housing developments. These have been replaced by a new type of purchase, which currently predominates in this market: the purchase of off-plan properties in Spain.
Today, most new developments are marketed and sold before construction has been completed. This purchasing model offers several advantages, including a more competitive purchase price, the possibility of customising certain aspects of the property, a more flexible payment schedule and, above all, a high level of legal protection for buyers.
These legal safeguards are precisely the focus of this article.
At Welex, your English-speaking, law and tax firm in Marbella specialising in Spanish real estate law, we explain the legal protection available to buyers of off-plan properties in Spain and how you can recover the advance payments you have made if the development is not completed as agreed.
What Happens If the Property Is Not Delivered on Time?
On many cases, when we purchase a property in Spain under construction, we commit ourselves to pay some amounts to the developer for the completion of the works.
But what happens if the time has come to hand over the property and it has not been built, or has not been completed within the period indicated in the contract?
In these circumstances, the buyer generally has two options:
- Grant a reasonable extension of time to the developer to complete the construction;
- To terminate the contract and ask for a refund of the amounts paid in advance.
In the event that we decide to terminate the contract and request a refund of the amounts previously paid, we may find ourselves faced with a developer who no longer holds these funds.
Legal Protection of Advance Payments
Spanish law expressly protects purchasers of off-plan properties.
Law 20/2015 of 14 July, on the regulation, supervision and solvency of insurance and reinsurance companies, ensures that these amounts paid to the developer by the buyer are guaranteed to cover the purchaser in the event that the work is not completed. In other words, if the off-plan property is not built, if it is not completed within the agreed period or if it does not obtain the First Occupancy Licence.
The Developer’s Obligations
To protect buyers, Spanish law imposes several obligations on developers.
Guaranteeing the Advance Payments
- Guarantee, as soon as the building permit is obtained, the repayment of the amounts paid plus legal interest, by means of a surety insurance contract or guarantee issued by a properly authorized credit institution.
- Receive the amounts advanced by the buyers through credit institutions in which they must be deposited in a special account, separate from any other type of funds belonging to the developer and which may only be used for the services deriving from the construction of the properties.
Opening a Special Bank Account
It is important to note that the credit institutions where these amounts will be placed are responsible for ensuring that the developers have issued the corresponding guarantees or insurance in order to proceed with the opening of the special accounts.
If, when the time comes to hand over the property, this is not possible, either because construction has not started, or it has not yet been completed, or because the First Occupancy Licence has not been obtained, the buyer may claim repayment of the advance payments.
There are several ways to do so:
1. Claim directly against the developer
The first and most common option is to contact the developer to terminate the contract, i in other words, to request the person with whom we have signed the purchase contract and to whom we have paid all the amounts paid in advance to return them to us. In the event that the promoter disposes of them, they will be returned and the purchase contract will be terminated.
If the developer has sufficient financial resources, it may refund the payments and both parties can terminate the contract.
In many cases, however, the developer no longer has the necessary funds, making it necessary to rely on the guarantee.
2. Claiming the guarantee or bank insurance. The guarantor
If the developer fails to refund the advance payments voluntarily, the buyer may bring a claim directly against the guarantor that issued the bank guarantee or guarantee insurance policy.
Before doing so, the buyer must first formally request repayment from the developer. If no repayment is made within thirty days, or the developer fails to respond, the buyer may proceed directly against the guarantor.
The guarantor will not be able to allege force majeure or unforeseen circumstances to justify the failure to hand over the property on time. It is simply a case of advance payments having been made to a special account of the promoter, which were guaranteed, and the agreed date for delivery of the property has arrived and it has not been possible to deliver it; so, the guarantor is under the obligation to return the sum of the advance payments.
What if no bank guarantee was ever issued?
In some developments, where the developer cannot return the amounts paid by the buyers and does not have a bank guarantee, the buyer may have lost everything. This usually occurs in cases where the developer has lost everything and has entered into insolvency proceedings.
Nevertheless, Spanish legislation and case law have developed additional legal remedies in these situations. Under certain circumstances, it may be possible to hold the financial institution involved in the development liable for the buyer’s losses.
We will discuss these situations and the available legal remedies in greater detail in a future article.
Welex Can Help You Recover Your Investment
If you have purchased an off-plan property in Spain and the development has not been completed or delivered under the agreed conditions, it is advisable to have the purchase documentation and the applicable guarantees reviewed as soon as possible.
At Welex, your team of lawyers and tax advisers specialises in Spanish real estate law and claims relating to off-plan property developments. We will assess your case and advise you on the most effective legal strategy to recover your advance payments and protect your rights.
