Article from lawyer about litigating BGs

Scottish buyers of Spanish property face a Herculean task to recover bank guarantee deposits

by Neil Morrison

Thousands of Scots have bought villas or apartments in the south of Spain, within the last few years. Many of them, perhaps inspired by TV shows like A Place in the Sun, intended to use the property as a long-term investment, holiday home or retirement home.

However the recent Spanish property boom has turned to bust in light of the global economic downturn, and many of Spain’s largest developers have gone into administration. Not many of the developer companies of our claimers have gone into administration. The majority of buyers who paid deposits on plots of land have been left with unfinished properties or have been told the property will not be delivered on time. As a result, most buyers are now seeking the return of their deposits, which can be as much as 50,000 or 100,000 euro, depending on the value of the property.

Guaranteed - or not?

The Spanish Government enacted a bank guarantee law (57/1968) to protect consumers in the event that ( a developer goes into administration) uncorrect: Law 57/68 protects buyers if houses are not started/finished on time  or breaches contract by missing the delivery deadline. The law places an obligation on the developer to ( return deposit plus legal interest and)  provide to the buyer a bank guarantee (aval bancario). The guarantee secures the buyer’s deposit and stage payments plus 6%  ( the General Building Act of 1999 changed this into legal interest rate) interest from the bank underwriting the guarantee. As the bank guarantee is an executive title, a fast-track executive court procedure (three months) can be enrolled to reclaim the deposit.

However, as there is no court procedure in Spain to force a developer to provide purchasers with their bank guarantee even if one has been issued, buyers are at the mercy of the developers. No contract should have been signed without it. That is the forcing tool. Also, a cancellation and refund is possible if the Bank gaurantee was not handed over and refunds can be performed without Bank Guarantees. I understand and agree that this might be no sufficient so the non delivery of these Guarantees it should be a crime as it was in the past. I would extent that criminial risponsability to Banks too. Many buyers requesting the return of their deposit are discovering to their horror that bank guarantees have never been issued by the developer, despite their private purchase contract (PPC) what were their lawyers doing?  stipulating that all payments are guaranteed by the bank.

Anyhow, out of law 57/68, money needs to be returmed even without Bank Guarantee.

Even if developers provide the bank guarantee, many buyers are subsequently finding their guarantee is invalid or has expired ( These Bank Guarantees do not expire by Law till the First Occupation License is granted and the house handed to the buyer).. Even those buyers with valid bank guarantees are being refused refunds by demoralised banks reeling from the credit crunch.  Judicial executive procedures against the Bank are often succesful.

The Bank of Spain has publicly stated in the Spanish daily newspaper El Pais that financial institutions underwriting the guarantees must pay out in full if developers are in breach of contract. However the banks have been instructing large legal firms to scrutinise the wording, and in some cases it has been found that the bank guarantee can only be reclaimed on completion of the property. Law is clear and a good petition based on it is very oftenly sucessful.

Where the bank guarantee can be reclaimed immediately, the banks have delayed paying out the deposits, for example by stating that they can’t pay out when a developer has gone into administration.  This can be opposed abd Banks will be forced to pay. It has no legal grounds.Yet even this stance by the banks is questionable, as Fernando Herrero, Vice President of Aidcae Association of Bank Users explained in El Pais: “The law is clear. If the conditions of the guarantee are satisfied, execution is obligatory, regardless of the situation of the developer”. This is absolutely correct.

The litigation option

So what can frustrated buyers do to reclaim their deposits? If negotiation with the developer or bank has failed, the last resort is to litigate. However Spanish law differs greatly from Scots law in relation to breach of contract and the judicial process. There are many pitfalls awaiting those buyers brave enough to pursue their deposit through the courts. 

First, buyers should change their Spanish lawyer. Their existing lawyer is likely to have been assigned to them by the developer’s agent. A conflict of interest arises, with the lawyer having duties to act in the interest of both the developer and client. In such circumstances, the lawyer is likely to act in the best interest of the property developer to ensure continued referrals. It is for this reason that many buyers have found their appointed lawyer to be disinterested in reclaiming their deposit, or even acting against their best interests by requesting they extend the delivery date. Buyers should take immediate steps to find a new lawyer and conduct a simple conflicts check to ensure their prospective lawyer has never been referred buying clients by a developers’ agent, developer or developer’s bank. Wise. Correct.

Secondly, under Scots law if there has been a material breach such as non-delivery of a property after the date of delivery then the buyer would be entitled to raise court proceedings for damages. However under Spanish law, the party in breach is allowed a reasonable period of grace to deliver the property, which is generally 9-12 months.  Non correct. Automatic contract extensions are forbidden by Spanish Law. Once there is a delay, the buyer/consumer is entitled to cancelaltion or price reduction by his choice. If court proceedings are raised immediately after the delivery date, there is a high risk the Spanish judge will throw out the case because no period of grace has been given. This is true, unfortunately,as it is clear against Law. Appeal is needed. Appeal courts are more sensitive towards Consumers rights and many of those cases are reversed in the second instance ( Provintial Appeal Court)  The chances of this happening increase depending on how close the property is to being granted a certificate of occupancy by the local town hall (ayuntamiento). However if the developer has never started constructing the apartment and the site is still parched scrubland, then once the developer exceeds the delivery date, a buyer may pull out, terminate the contract and litigate for a full refund of the stage payments plus interest.

Events, events

A further pitfall may be found in the PPC, which could have a “force majeure” clause. This clause exists in various guises in the majority of legal systems, including Spain and Scotland. The clause excludes liability where unforeseen events beyond a party’s control prevent the performance of their contractual obligations.

Our Supreme Court has clearly stated already which is a force majeure in an off plan building process, excluding strikes, rains... Many events argued by developers as "force majeure" has been expressly classified as " commun events a good builder needs to take into account when valuating the timing of the work"

Generally such events include earthquakes, floods, terrorist acts, general strikes etc. However the scope of the clause could include failure of suppliers to provide building materials. Arguably, the global economic meltdown is an unforeseen event of significant magnitude to trigger the force majeure clause.

The Global Economic meltdown and the unpossibility to obtain financiation is a reason for contract cancellation by consumer and refund of deposit paid.

It is likely that Scottish courts would be reluctant to allow a force majeure clause except in exceptional cases where an “act of God” has occurred. However the approach taken by Spanish courts is less clear, and if the developer can successfully prove that a force majeure has taken place while the property was being constructed then the delivery date can be extended.  ( non correct: see comments above)

In addition, a buyer’s case can be jeopardised if a certificate of occupancy (certificado de habitación) has been granted by the local Spanish town hall stating that the property complies with the original building licence granted by the town hall. Once the certificate been granted, the property is deemed legally ready for human habitation. Therefore as the developer has fulfilled the main obligation of delivering the property, there is no breach and any snagging issues will not be deemed sufficiently material to warrant breach of contract. There will be sufficient material for breach of contract  if there are enough quality lacks such as a size difference of 10% between meters promised in the PPC and unit actually delivered. Or the lack of commun elements: pool, sport courts, gardens...

More legal snags

Many buyers may inadvertently damage their case by stalling on their regular stage payments to the developer. If buyers do not pay further instalments then they are in fundamental breach of their contractual obligation to pay regular stage payments and it is unlikely a judge will take a favourable view of their case when they themselves have breached the contract. No, if they can prove that the breach of the developer was prior to theirs.

Of course, buyers will not wish to give the developers any further payments, so what can they do?  Well, the buyer should pay all future payments into a Spanish notary or Spanish court bank account until the developer releases the bank guarantee deposit. The buyer cannot be viewed as breaching the contract, as the payments are continuing to be made, while at the same time the funds are secure because they are in an escrow account beyond the reach of the developer. That will depend on how serious the breach by developer is as in some  cases, the consumer can just notify irrefutably to developer that the payments are not being done due to previous breach by the developer.

Furthermore a buyer should be wary of litigating where there is a lack of documentary evidence supporting the claim. Buyers should ensure that the following documents are obtained prior to raising court proceedings: copy of villa/apartment PPC, original invoices of stage payments, bank statements proving the transfer of funds, and a copy of the bank guarantee certificate if one exists. Correct. I would add publicity material to that.

Under Scots law if an obligatory guarantee was not issued there would indeed be a legal avenue to claim damages, such as under unjustified enrichment. However under Spanish law there is no legal avenue to pursue on the grounds of failure to issue an obligatory bank guarantee. If a buyer were to raise a court action on this ground, it would very likely be dismissed. It is changing, some judges attribute the effect of contract cancelaltion to the lack of Bank Guarantees. Specially if the building process/ contrach history is in early stages.

It should also be borne in mind that if the buyer has purchased more than one property or an action is raised after waiting only a year, the judge might no longer consider that the Spanish consumer protection law applies, as the properties could be viewed as a commercial enterprise or the buyers ironically viewed as shrewd investors. Not always.

Damages and costs

The Spanish legal system is quite different from the Scottish legal system in many respects. A marked difference is that damages sought in a Spanish court action can be deemed excessive by a judge, who may then order the pursuer to pay the legal expenses of the other party even if the pursuer was successful. What? Never a succesful party pay legal costs in Spain. Had the damages sought been considered reasonable, the defender would have had to meet the expenses of both parties.The rule is to impose legal costs to the loser if he lose without enough legal grounds. If he actually fights with a reasonable approach but the Judge deems the other party to win, the Judge might impose each one his own legal costs.

However the judge can order the defender to pay additional “moral damages” to the pursuer, which is similar to the Scots’ “injury to feelings” award in respect of the uncertainty and mental anguish endured by the buyer as a result of the breach of contract. Correct, if they are asked by the claimer. In same or different action.

Legal costs in Spain are assessed by using a guidance table issued by the local college of lawyers and tend to be less than the market rates charged by lawyers. There may be a shortfall should the pursuer be successful. In addition to the lawyer’s fee, a fee must also be paid to a procurador, who is an independent legal professional instructed by lawyers to appear in court, somewhat analogous to an advocate in Scotland.

Where a valid guarantee exists, as mentioned earlier, the executive procedure can be enrolled to reclaim the deposit. Although the procedure is quite straightforward, buyers should be aware that all anticipated legal costs must be paid before the action commences, which can dissuade many buyers from proceeding with their claim. Just a provision of funds is needed to start with.  Then, the rest of the fee is actually paid by the Guarantoor which is generally imposed to pay both legal costs, so the claimer ends up recouping all the money spent in legal costs. Regrettably, as many of the developers are in administration there may be difficulties if the developer has no assets. It is vital, therefore, to check that the company has sufficient assets to cover the value of the bank guarantee deposit prior to litigation. If you act a Bank Gaurantee, the status of the developer is irrelevant as the claim is directed towards the Guarantoor ( Bank, Insurance company)

On raising a court action, the buyer’s lawyer must identify the developer’s assets and place a charge upon them (embargo preventivo), essentially freezing the assets to prevent them being sold off by the administrator. However it should be emphasised that the charge will not make the buyer a secured creditor; it will only place the buyer higher up the ranking of creditors. When a creditor´s meeting start, embargoes do not count any more. The good new is that Law per e, deffends those creditors arising from a cancellatory breach of contract by developers.

Recovering a Spanish bank guarantee might fairly be described as a Herculean task, but it can be done. However buyers should keep in mind that their court action ultimately could fail, litigation can be costly and Spanish court procedure tends to be somewhat slower than the Scottish courts, taking approximately two years to obtain a final judgment.

The secret is of a technically correct legal work being done in each case. Spanish Law covers the protection of buyers quite sufficiently. I am not saying a good reform is needed but we can play with what we currently have too.

Sue in Scotland?

Another option available to Scottish buyers is to raise a court action against the Spanish developers in Scotland. What? Usually those contracts have express jurisdiction being agreed in Spain and if not, the legal jurisdiction is wher the house is located ( was supposed to be located). I cannot see how these procedures can be acted in Scotland.  However the Scottish court judgment will require to be enforced against the developer in Spain, which will still be expensive and time consuming. If a buyer is considering this option, the overall cost implications should be weighed against the value of the judgment and the possibilities of enforcement. The main difficulty will be preventing the disposal of the developer´s assets before enforcement is granted.

However the enforcement of Scottish judgements in Spain has been greatly simplified since the implementation of the Brussels Convention on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters. In addition to enforcing the judgment, a power of attorney will be required to start proceedings in Spain, authorising a local lawyer and procurador, who will invariably ask for all fees and expenses to be paid in advance.

Scots contemplating buying property in Spain should consult a bilingual lawyer who can evaluate the PPC and title deed (escritura) prior to signing, and explain the content.  Yes, very important to choose a lawyer, independent from developers or agents.The lawyer should also make the necessary enquiries with the land register, notary public and local town hall. Above all, buyers should request an indemnity from the developer that a valid bank guarantee will exist on payment of the deposit, and that a copy guarantee clearly stating the expiry date will be issued to them. If the aforementioned steps are taken, there is less likelihood that a buyer’s Spanish property dream will turn into a nightmare.