Supreme Court Rulings on Bank Guarantees

Regular legal-contributor Raymundo Larraín Nesbitt explains the string of positive rulings from Spain’s Supreme Court on Law 57/1968, which deals with off-plan bank guarantees.

By Raymundo Larraín Nesbitt

Lawyer – Abogado
8th of April 2015


Example Spanish bank guarantee for off-plan property

Example Spanish bank guarantee for off-plan property


It has rained a lot since I first wrote my article on bank guarantees on the 12th of November 2008. At the time of writing it the property bubble had just collapsed and we were witnessing a tidal wave of litigation against failing developers. The property honeymoon, which lasted over eight years, had come to an abrupt end. Credit dried-up almost overnight with the banking crisis that originated in America’s sub-prime market leading us to an unprecedented global credit-crunch which aftermath we are still enduring.

When lenders pulled the plug they left property developers on free fall; reeling developers scrambled to makes ends meet and complete pending developments. Buyers, investors and property flippers in general frantically pulled out in baying hordes escaping a falling house of cards. The musical chairs game was over. Scores of off-plan buyers, which had purchased off-plan property in good faith, found themselves trapped in the ensuing mayhem. Most, not all, had their stage payments guaranteed by a safety net known as ‘Bank Guarantees’ which are ruled by Law 57/68 (for further in-depth information on what bank guarantees are, please read my revamped article Bank Guarantees in Spain Explained with an Example Document, from the 8th of April 2013).

Conveyance lawyers found themselves swamped left, right and centre by clients trying to execute bank guarantees as developers were teetering on the verge of bankruptcy with developments being stalled with no realistic hope of completion post-credit-crunch. However on trying to execute these, theoretically a straightforward matter, we found that we were forced to litigate against insurance companies and lenders which had guaranteed buyer’s new-build deposits despite Law’s 57/68 clear wording.

The legal outcome of these litigation cases in first hearings were a mixed bag, to say the least, although most were won at second hearings (on appeal). A few cases were appealed to the Supreme Court, which is Spain’s highest court of law. These appeals take on average several years to be heard (five plus). The Supreme Court’s rulings bind all lower courts in the land as they set jurisprudence when a string of two or more rulings rule on a particular matter in an identical manner.

Seven years on the Supreme Court has now had the opportunity to release very interesting pro-consumer rulings on bank guarantees that are both protective and positive to off-plan buyers’ interests. The purpose of this article is to update what I had previously written on the matter in light of the recent high court rulings which open up new venues for litigation to off-plan buyers, irrespective of whether they were handed or not a bank guarantee; it no longer matters as I explain below.

EDIT July 2016: It is advisable this article is read in tandem with this other one:

Off-Plan Bank Guarantees and Supreme Court Rulings – Payback Time – 8th June 2016

Bank Guarantees – Definition

Bank guarantees are a legal tool devised to secure off-plan buyer’s stage payments (including the initial reservation deposit that strikes the property off the market) should a property not be delivered on time or should a developer file for bankruptcy.

A bank guarantee may take the form of an insurance policy or an ad hoc bank guarantee to safeguard buyer’s anticipated deposits until a property is built and deemed to be legally completed and fit for human habitation (when the planning department of a town hall issues what is known as a Licence of First Occupation, LFO for short).

Following article 4 of Law 57/1968, bank guarantees only become null and void when two conditions are met:

1. As from the time a developer attains a Licence of First Occupation from the town hall’s planning department.

2. The developer makes the new-build property available to a buyer (as in physically handing it over to him).

Artículo cuarto

Expedida la cédula de habitabilidad por la Delegación Provincial del Ministerio de la Vivienda y acreditada por el promotor la entrega de la vivienda al comprador, se cancelarán las garantías otorgadas por la Entidad aseguradora o avalista.

Bank Guarantees – Legal Overview

It is compulsory for developers to hand out bank guarantees to off-plan buyers to safeguard their deposits acting as a safety net. These obligations derive from two regulations:

I.    Law 57/1968, of the 27th of July of Anticipated Deposits paid in the Construction and Sale of Properties (popularly dubbed as the “Bank Guarantee law”).

II.    First Final Disposition of Law 38/1999, of 5th of November of Construction (Spain’s Building Act). This law amends Law 57/68; a buyer can claim his full deposit plus legal interest (but not the 6% interest that Law 57/68 mentions; this has been overruled by this new law).


Supreme Court Rulings

The following Supreme Court rulings are relevant because they establish pointers that change and shape the way we have known bank guarantees to work in practice. These rulings set jurisprudence, meaning all lower courts are bound by them.

•    STS 499/2013

Establishes that handing a bank guarantee is regarded as an essential element in an off-plan purchase providing two elements are met:

i.- The property isn’t finished yet; still under construction.
ii.-The property is not apt to be handed over and dwelled i.e. no Licence of First Occupation has been attained.

Handing a bank guarantee is essential to the point that is considered as just cause to cancel a Private Purchase Contract in its own right on non-compliance ex article 1.124 of the Spanish Civil Code (SCC, for short). Failure of a lender or insurance company in not handing them out allows a buyer to legally withdraw from the contract by cancelling it and claiming back his deposit plus all interests due in full (accrued up until the time he is effectively refunded the anticipated deposits).

Before these rulings it was unclear on whether a bank guarantee was regarded as an essential element of the contract with enough entity unto itself to actually justify suing for cancellation exclusively on the grounds of a lack of bank guarantees.

In my litigation article (first published in 2008), Ten Reasons Why Your Case Against a Developer can be Thrown out of Court in Spain, I specifically mentioned as the sixth point not to litigate on grounds of a lack of bank guarantee as the case could be dismissed (based in litigation experience). In light of the recent Supreme Court rulings this advice no longer holds true and one can indeed litigate against a lender requesting a full refund of deposits despite there being no bank guarantee. Additionally one can terminate an off-plan purchase if no bank guarantees are supplied by a developer.

Other like-minded Supreme Court rulings: SSTS 25th of October 2011, rec. 588/2008, 10th of December 2012 2012, rec.1044/2010, 11th of April 2013, rec.1637/2010, and 7th of May 2014, rec. 828/2012.

•    STS 2391/2014

The insured amounts are the full amounts understood as the initial reservation deposit you pay at the estate agency plus all the anticipated funds prior to completion at the Notary Public. The reason on why this is relevant is because even if an insurance policy or a bank guarantee stipulate that the amount guaranteed is less than what was actually paid by the buyer the Supreme Court upholds that it is in fact the full anticipated amount paid up until the time of completion that is guaranteed; in other words, all the monies paid prior to completion at the Notary Public. This is a consumer right enshrined by article 7 of Law 57/68.

This is particularly relevant because often lenders or insurance companies actually guaranteed less than what was actually paid for by a buyer. So there were nagging doubts on whether the full amount could be claimed upon (plus legal interests) despite the restrictive wording of some bank guarantees. Moreover even if a buyer agrees, for whatever reason, to have insured an amount which is less than what he’s actually paid for the Supreme Court considers that a buyer cannot waive his consumer rights enshrined in Law 57/68 and regards any such agreement as null and void

Other like-minded rulings: SSTS of 3rd of July 476/2013, rec. 254/2011, and 25th of November 2014, rec.1176/2013.

•    STS 275/2015

Following article 2 of Law 57/68 it is the exclusive obligation of a developer to place all the anticipated funds received by off-plan purchasers in a special account that the developer must open ad hoc.

In accordance with article 7 of Law 57/68 it establishes that it cannot be imposed on a buyer to deposit these anticipated amounts in a special account. In other words the full refund of off-plan deposits to a buyer cannot be conditioned to the fact that a buyer has deposited said amounts in a special account as it is exclusively the developer’s obligation; not a buyer’s.

•    STS 426/2015

It makes it clear that a breach of article 1.2 of Law 57/68 (handing a bank guarantee to an off-the-plan buyer) has a statutory claim period of 15 years ex article 1.964 of the Spanish Civil Code. The limitation period used to be less.

The relevance of this is that buyers who purchased off-plan and were never given a bank guarantee can now claim their deposits from the lender where the monies were being paid into. Regardless of whether their developer is already under insolvency proceedings or not; it doesn’t matter. In other words, off-plan buyers would be claiming from a lender which – presumably – has money; not from a bankrupt developer. The timeline to do this is 15 years to be counted as from the time the deposits aren’t refunded on grounds of a lack of bank guarantee. I know for a fact many people are caught in this dire situation.

•    STS 429/2015

This ruling makes it clear that a buyer can sue a lender, or insurance company, first without having to sue a developer as a pre-requisite. They are all jointly and severally liable for the breach. The significance of this is that when we sued a lender or insurance company they would oppose at court that the developer had to be sued first. The Supreme Court now establishes that this is no longer needed and that litigation lawyers can sue lenders or insurance companies without any need to sue a developer first. This is relevant because most developers are on the brink of insolvency (if not bankrupted already) so what’s critical is to chase the party that has funds and is able to refund a buyer in full.

Other like-minded Supreme Court rulings: SSTS 3rd of July 2013, rec. 254/2011 and 2391/2014 of 7th of May 2014, rec. 828/2012.

Special Focus on Off-Plan Buyer’s Cancellation Rights

Rulings 2391/2014 and fundamentally 429/2015 are pivotal as they introduce a major milestone regarding contract cancellation. They make it clear that any and all off-plan purchase contracts subject to Law 57/68 are out with the scope of article 1.124 of the Spanish Civil Code (which rules on contract cancellation due to breach of contract and applies to all civil contracts in general). These new rulings break the line of jurisprudence established by the Supreme Court (STS of 9th of June 1986) which construed article 3 of Law 57/1968 (new-build contract termination).

Article 1.124 of the Spanish Civil Code required in off-plan contracts that a contractual breach was studied carefully to ascertain whether a breach was regarded as important or not. If it actually frustrated the goal pursued in the contract itself (‘frustración del fin contractual’). This required that lawyers reasoned with great care why terminating a new-build contract was justified – this is no longer the case.

The Supreme Court has performed legal microsurgery extricating Law 57/68 from the sphere of action of article 1.124 of the SCC. The change is extraordinarily relevant from a legal point of view (nothing short of groundbreaking). Up until recently lawyers recommended that a buyer had to wait a ‘reasonable’ time after the date set in the Private Purchase Contract (PPC) to complete to sue for breach of contract. The Supreme Court’s jurisprudence establishes that off-plan purchase contracts subject to Law 57/68 now work as automatic contractual resolutions. There is no longer a need to justify in a lawsuit if the breach is relevant or not as it operates automatically. The most common breach is when a developer delivers a property late; after the date set in the PPC.

In my litigation article from 2012, Ten Reasons Why Your Case Against a Developer can be Thrown out of Court in Spain, I advised would-be litigants on my first point that they should wait prudently at least six to nine months after the contractually scheduled delivery date of a property to sue for breach of contract and demand a full refund of their deposits (plus interests). This was done so that a law court did not dismiss the case ab initio without even examining its merit, as was the case in 2008.

The relevance of this change in criteria by the Supreme Court, and other recent like-minded rulings, is that off-plan buyers are no longer required to wait a prudent timeline before terminating their off-plan contracts. They can in fact litigate as from the very next day set in the Private Purchase Contract to deliver the property. Providing they do so in good faith, which the Supreme Court regards as essential to balance the opposing interests of both parties to the contract.

E.g. an English couple buy a two-bedroom off-plan property in 2015 with a delivery date in the PPC set as the 4th of August 2017. If the property is not ready by the 4th of August 2017 they can terminate the contract and request a full refund of their deposit plus interests on the following day. Before this major change this couple would have had to wait to at least February/April 2018 before terminating their contract besides having to justify in great detail the contract cancellation so that a judge approved it.

Whilst this may seem rather one-sided in favour of buyers, it is in fact tempered by article 3 of Law 57/68 which allows developers to cancel a PPC and sue a buyer for non-performance when they skip or pay late just one stage payment in an off-plan purchase in tandem with article 1.504 of the SCC. The Supreme Court understands it is not lopsided as there is equilibrium to both opposing interests in Law 57/68; they can both resort to an automatic contractual resolution given the case.

Personally I would take this with a pinch of salt. The ‘good faith’ limitation on exercising a buyer’s automatic cancellation right introduces a grey area that is fairly relevant. Having acted on behalf of developers I can clearly see how a developer’s lawyer can drive a wedge, and latch onto it, modulating or exploiting it in a developer’s interest by creating a shadow of a doubt in a judge’s mind.

Bullet Points

The following pointers can be gleaned from the above Supreme Court rulings.

• Bank guarantees are regarded as an essential contractual element in off-plan purchases. If none are supplied by a developer, a buyer can resolve a contract and demand full refund of his stage payments plus interests.
A buyer can still sue a lender for his deposits even if no bank guarantee was handed over (joint liability of banks).
• Bank guarantees only expire upon meeting two conditions: when a Licence of First Occupation is attained by a developer and when the developer is able to hand over the property to the buyer. Expiration dates on bank guarantees are null and void.
• It is the exclusive obligation of a developer to open and set up a special account where all stage payments will be deposited for safekeeping interim the building process.
• 15-year limitation period to file a lawsuit (statute of limitations).
• The insured amounts are all the anticipated deposits (stage payments) paid by a buyer prior to completion (including the initial reservation deposit paid to the estate agent) regardless of the amounts secured in a bank guarantee’s wording (which may be less).
• An off-plan buyer cannot waive the consumer rights enshrined in Law 57/68. And even if he does agree to waive them, the agreement is considered null and void.
• Developers and lenders (or insurance companies) are jointly and severally liable for safeguarding a buyer’s anticipated deposits (stage payments). Meaning a buyer can sue a lender or insurance company first without any need to sue a developer beforehand and be forced to wait for the outcome (as most developers are bankrupt nowadays). This significantly cuts down litigation time and ensures a refund as lenders or insurance companies have liquidity or else they would not be trading (subject to supervision by regulatory bodies that ensure minimum liquidity ratios).
• Any extension to the scheduled delivery of a property set in the PPC requires a written addendum that a buyer must sign in agreement. It does not suffice that one is notified of the extension; it must be signed by the buyer.
• A buyer can terminate the contract on the following day stipulated in a PPC as the scheduled delivery date of the property (automatic contractual resolution) in the event of late delivery. The developer must be formally notified (by recorded delivery). It is imperative this is done in good faith; otherwise the cancellation may be dismissed by a law court.

Spain’s Supreme Court Rulings on Bank Guarantees – Conclusion

The gist of this article is to highlight Spain’s Supreme Court sensitivity towards off-plan buyer’s plights. Its rulings are remarkably pro-consumer in off-plan purchases and are setting the stage for lower courts in future litigation. This is very promising and welcome news for new-build buyers wishing to litigate on grounds of a Law 57/68 breach. Even in cases where a bank guarantee was never supplied a buyer can still sue for a full refund of his deposit plus legal interest providing the 15-year statutory limitation has not elapsed.

Law 57/1968 is a pre-constitutional law that is now forty seven years old. It was widely held as ‘revolutionary’ at the time as it pioneered consumer rights in Spain when these were not regulated by law (Spain was still under a dictatorship). Five decades on it is undeniable that it is in urgent need of a reform given the importance the construction sector has in Spain’s overall economy and the widespread predominance of consumer rights which are prevalent in modern democratic societies.

Lawyers exist to protect us from other lawyers.


Related articles

How to Buy Property in Spain – Advice by the Foreign & Commonwealth Office
Buying Distressed Property in Spain – 8th August 2011
Off-Plan Construction Guarantees  – 8th November 2011
Rent-to-Buy in Spain: The Smart Choice – 8th April 2012
Buying Resale Property in Spain – 21st February 2013
Licence of First Occupation – 8th April 2013
Bank Guarantees in Spain – 8th April 2013
Buying Off-Plan Property in Spain – 8th of June 2013
Investor Guide to Spain’s Golden Visa Law – 8th November 2013
Bank Repossessions in Spain – 21st February 2014
Buying and Owning Spanish Property through Companies: Pros and Cons (Dispelling Spanish Inheritance Tax Myths) – 7th March 2014
How to Buy Commercial Property in Spain – 4th July 2014
How to Buy Rural Property in Spain – 8th August 2014
How to Buy Property in Spain Safely – 10th October 2014
Taxes on Selling Spanish Property – 8th December 2014

Off-Plan Bank Guarantees and Supreme Court Rulings – Payback Time – 8th June 2016

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

2015 © Raymundo Larraín Nesbitt. All rights reserved.



12 thoughts on “Supreme Court Rulings on Bank Guarantees”

  1. Jan Hoggarth

    A very interesting and thorough article. I am very keen to understand whether the nullification of a Licence of First Occupation by a court, if it is judged that the licence was issued incorrectly (and the properties were never in fact fully finished due to the fact that essential services were never finished), leaves the purchaser able to seek return of deposits as if the licence was never issued. It is useful to know that there is a 15 year statute of limitations.

      1. Ton Brouwer

        Muy Buenas Raymundo,

        Cristal clear article WELL DONE and I really would like to come to a bit more communication with you personally cos we ‘re about to share all these new developments Re: law & legislation (not Off Plan Props.) with the rest of the world (Europe mainly) to all people that fell victim to this.

        Hope to hear from you soon,
        Thanks and Fr. Regards,
        Ton Brouwer

      2. Jan Hoggarth

        Thank you for your reply, which unfortunately I have only just seen today. We are purchasers with a mortgage. At the moment we are named, along with a number of other owners, as ‘perjudicados’ in a criminal case against the developers and the town hall for issuing licences when the properties were not finished. We have been told that we will need to wait for the outcome of the criminal case before we can start any civil action to cancel our purchase contracts, mortgages and reclaim our deposits. At the same time, others who only placed deposits and did not complete the purchase have been able to reclaim their deposits on the same developments and the town hall have admitted in court that the property was not finished (water works not finished). The works have still not been completed. It seems unjust that we have to continue paying mortgages while others have already reclaimed their deposits. Can you comment? Thank you.

  2. Paul Regan

    Hi Raymundo, if a developer kept our off plan deposits in a client account ,then simply used the money for himself , had no bank guarantee, went bankrupt and is curently on bail, is there now any possibility of claiming the deposit back from the actual bank where the account was held [ ongoing case , 10 years now since purchase]

    1. Profile photo of Raymundo Larraín NesbittRaymundo Larraín Nesbitt Post Author

      Morning Paul,

      I ignore the details of your case. But as I write in my article above Spain’s Supreme Court, through a series of new rulings, has left the door ajar to litigate against lenders even in the event no bank guarantees were issued as it is mandatory by law.

      Five years ago this would not have been possible as law courts would have quashed such an attempt. It was vital that off-plan buyers secured bank guarantees to litigate successfully against lenders.

      This is no longer the case.

      An off-plan buyer can now take to court successfully the lender that dealt with his off-plan deposits despite their never being a bank guarantee issued. It is a laborious and protracted process, don’t get me wrong, but can be achieved as numerous recent cases attest to. The statutory limitation is 15 years as from the time the money was deposited with a lender. This limitation was also controversial as there were different theories on its duration but the Supreme Court has also recently made it clear it is indeed fifteen years. Many of these recent Supreme Court rulings are from 2015.

      If your case relates to an off-plan purchase of 2005 you should still be able to litigate to obtain a full refund of deposits plus interests. There is no point in pursuing bankrupt developers; you are not going to recoup your funds that way in my opinion.

      Hope that helps.


      1. Geoff Flint

        LHi Raymundo,

        Just read your article and very informative, and very interesting.
        I would just like to highlight what has happened to us on the suprem court rulings on bank guarantees, having spent 10 years taking Developer to court because of no Water/Electricity and first occupation signed or bank guarantee made.
        After four court hearings we won the court case where the judge said we should get a full refund, well to get this we had to then take the lender(reputable Spanish high street bank) to court. Now the bomb shell even though the judge agree regarding that no bank guarantees was written up, we lost the hearing because the judge said there was no proof that we made any payments. I said yes when asked did I have proof of payments in court, my solicitor never requested them from me. Now my solicitor says we should appeal, but saying we can not introduce these receipts as proof. Can this be right?

        Kind Regards
        Geoff Flint.

    1. Profile photo of Raymundo Larraín NesbittRaymundo Larraín Nesbitt Post Author

      Morning Tim,

      Unfortunately I have just moved over from the UK and not able to take any clients till next year. I need to set up my practice first.

      Any litigation lawyer can make use of this change in criteria from the Supreme Court. Lenders had a duty of care over off-plan deposits and as such they can be held accountable.

      As I write, nowadays it makes more sense to chase a lender, who still has money, than a bankrupt developer. There is no point in winning a case/s if the client is not refunded in full. This was previously not possible unless you had a bank guarantee securing your deposits or interim payments.

      This is no longer the case, following recent Supreme Court rulings, allowing solicitors to sue lenders where the new-build deposits were held despite their being no bg issued as in Paul’s case. It is a Civil procedure, not Criminal. Criminal procedures against developers are normally dismissed for technical reasons.


  3. Geoff Flint

    Hi Raymundo
    I’ve been told by my solicitor that being I payed my spanish solicitor funds to pay developer, the Spanish court as not except that payments was made because payments was not from my bank to developers bank. Can this be correct? Seems very one sided to me.

    Kind regards
    Geoff Flint

    1. Profile photo of Raymundo Larraín NesbittRaymundo Larraín Nesbitt Post Author

      Morning Geoff,

      I’m not sure I follow you. What a law court has to verify, in order to refund you, is that you did pay the developer the amounts you are now claiming back.

      The onus is on you, as plaintiff, to prove you paid the amounts you are claiming back in time. It is a very straightforward matter. By experience, on preparing a lawsuit, one of the first thing a litigation lawyer does is to collate all documents proving the amounts that were wired over to a developer (among other documents). It stands to logic that if you are claiming back, for example, 200k you must be able to prove first that you did in fact transfer to a developer the 200k.

      Some clients paid developers directly, others opted to use their law firm’s account. Either way the developer gets paid on your behalf. Makes no difference really.

      The only times law courts should pose a problem is when the developer has received funds but the sender is not clearly identified (name, surname etc.). I was aware that several years ago there were issues with some currency transfer brokers which failed systematically to identify a sender properly (other than with a code of numbers) on forwarding funds onto a developer This created huge problems to plaintiffs to demonstrate they had indeed paid a developer. As buyers almost relied on the developer to collaborate, identifying and singling out a transaction when clearly the developer had no interest in doing so as they were being sued in the first place.

      As far as I know these issues have been long solved.


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