Bank and Insurance Guarantees

Any buyer purchasing off-plan or handing over any money prior to completion, is entitled, by law, to receive a bank or insurance guarantee to protect them should the developer go bust.

In the current financial climate, with many developers going bust, it is essential you get a bank guarantee (aval) or an insurance guarantee (seguro) if buying off-plan or handing any money over prior to completion. These are important documents and will protect you if anything goes wrong. Spanish law states that any promoter or developer selling residential property and asking for any payment or on-account deposits prior to completion, must have in place bank or insurance guarantees. The guarantees provide protection should the developer collapse financially or fail to complete the building project.

A developer is obliged by law to lodge all deposits and stage payments into a separate specific bank account and not into their general business bank account and provide appropriate bank or insurance guarantees in respect of these amounts. A developer must return all deposits and stage payments plus statutory interest if the building work does not commence, finish, or if the developer is unable to obtain the first occupancy licence. The legislation governing the protection of advance payments by bank or insurance guarantee is regulated by Law 57/1968.  The purchase contract signed should indicate the bank or insurance company that is providing the guarantee and the number of the specific account to where the money will be deposited.

Avoiding the issue
Many developers try to escape their obligation to issue individual policies and simply produce a copy of a master policy or say that the individual policies will be issued in due course. Once deposits have been handed over then one’s negotiating position is significantly reduced.

A valid bank or insurance guarantee must contain the following:-

• Buyer’s name and passport/NIE number.
• Address of the property in question.
• The amount guaranteed – which should include all payments made or to be made including any reservation deposit already paid.
• The expiry date – which should be up until the first occupation licence is issued.
• Clauses clearly setting out how the guarantee can be executed.

The bank guarantee should also be registered at the Registro Especial de Avales. It is vitally important that the buyer has original signed paperwork (private contract, guarantee, receipts for deposits etc) as these may need to be produced before the courts.

It is important to ensure that the guarantee does not contain a fixed expiry date as it should run until the first occupation licence is granted.

Problems arise when the private contract is not specific on a completion date, making it difficult to argue breach of contract if the development is delayed. Also Judges might rule that some delays are reasonable or are not sufficient to claim breach of contract.

Any buyer wishing to make a claim should follow the standard claims procedure on the bank guarantee. Normally the buyer sends a burofax (recorded legal communication sent via the Spanish postal service) or notarised demand to the developer telling the developer that they wish to rescind the contract as there has been a breach of contract and stipulating the reasons and demanding a full refund of all payments made plus statutory interest. Should the developer not respond the guarantee must be enforced. This is done by demanding to the bank they honour the guarantee and attaching the claim already made to the developer. If the bank does not honour the guarantee, then the matter must be pursued through the courts according to LEC art. 517.

A developer going into receivership or liquidation does not have any bearing on the validity of the guarantee as this is one of the reasons the guarantee was issued in the first place. Providing the buyer has a properly worded private contract, a guarantee issued in their name and supporting documentation for all payments made the claimant will be successful in the long-run.

However a bank or insurance guarantees cannot be relied upon simply because the buyer does not wish to proceed or complete on a particular development and they do not provide any guarantee as to price or marketability of the property in question.

Article originally published in Spanish Homes magazine – August 2008

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