Buying an Off-Plan Property from a Developer: How the Law Protects you
When thinking about purchasing a property off-plan it worth understanding that Spanish law has several good provisions that protect you. Your lawyer will advise you accordingly but for your general reference here are the following acts and provisions that have been created to protect your interests.
The Consumers Protection Act 1984
(Ley 26/1984 de 19 de Julio General para la defensa de los Consumidores y Usuarios), extended by General Contractual Conditions Act 1998 (Ley 7/1998, de 13 de Abril, sobre Condiciones Generales de la Contratación).
These acts state that the clauses and terms in a purchase contract should be:
1. Clear and directly understood,
2. Written in good faith and not unfair (e.g. conditions that rescind responsibility or create an unfair situation)
Any clause that contradicts the above requirements will be interpreted to the detriment of the drafter or will be considered null and void (by the Spanish courts) and as never having been inserted.
The Royal Decree 515/1989
This decree sets out specific requirements which must be included in the purchase contract provided by a developer such as, registration details of the developer in the Mercantile Registry, the plan of location of the property and plan of the unit itself, a reference to the materials used in the construction of the unit, details of registration of the building in the Land Registry, details of the bank guarantees and insurance policies, etc.
Spain’s Building Act
Article 19 stipulates that the developer and the contractor have to take out three insurance policies. The first covers minor defects that affect finishing or final details for the first year, the second covers damage to constructive elements and habitability conditions for the first three years and finally a ten year guarantee that covers serious structural damage that directly compromises the resistance and stability of the building.
Bank Guarantees 57/1968 Act
This is the most important protection that covers your deposit monies (normally held in an escrow account) while your property is being built. The 57/1968 Act was drafted to guarantee advanced payments paid over to building developers. These guarantees may be in the form of bank guarantees or insurance policies, which the developers should have ready at the signing of the purchase contract.
It is your right to demand this cover and your lawyer can make this request at the time of paying the reservation. It costs the developer around 1% of the purchase price of the property to initiate the policy or guarantee. It’s worth noting that there are in fact two guarantees involved in your protection, the first is the general guarantee on the building as a whole, and the second is the specific guarantee for your property which ties in with the ‘The Law of Horizontal Property’ (Law 49/1960 and amended by Law 8/1999) and is the most relevant to your protection. Get your lawyer to check that both are in place, that they are in accordance with each other and that you are not being charged.
As set out by the Royal Decree 515/1989, the standard purchase contract should include the following clauses to incorporate the protection imposed by the guarantee or policy:
1. The obligation of the developer to refund all payments paid in advance, plus 6% annual interest, in case the developer does not commence the works of the proposed property on schedule as per the contract signed with the consumer, or does not complete the construction of the proposed property on time, or the license allowing occupation of the property is not granted.
2. Defines the guarantee and its provisions and indentifys the guarantor (bank or insurance company).
3. Defines the account information where advanced payments are to be paid.
4. On signing of the purchase contract (coincides with payment of funds), the developer will be obliged to hand over the relevant guarantee documentation.
Should the developer default on the terms of the purchase contract you have two choices:
1. Demand refund of the monies added with an annual 6% interest increase
2. Grant the developer an extension to fulfill their commitments as per the contract.
Documentary evidence of the occurrence of any of the events mentioned, together with the original guarantee documentation enables you to execute the guarantee or insurance policy. Failure by the developer to adhere to any of the terms of the guarantee and their refusal to refund monies will be deemed as criminal misappropriation by the Spanish Courts. For further insight into buying off-plan read article: Toolbox Tips: Buying Off-Plan Property in Spain.
Back to top | Return to Table of Contents