Legal Guide to Buying Off-Plan Property in Spain

LoadingFavourite

An up-to-date legal guide to buying off-plan property in Spain by Raymundo Larraín Nesbitt, a solicitor qualified to practice in Spain and the UK

By Raymundo Larraín Nesbitt

Lawyer – Abogado
8th of June 2013

plans-planosThe following article is my third part on a five-part series focused on How to Buy Property in Spain Safely. You may also be interested in reading Buying Resale in Spain, Buying Distressed Property in Spain, How to Buy Commercial Property in Spain or How to Buy Rural Property in Spain.

Introduction to buying off-plan property in Spain

Not so long ago there was a time in which purchasers gleefully bought en masse their dream homes in Spain. A few on the prowl to make a quick profit, the majority just wanted a quiet place to settle down and retire leading the relaxed lifestyle for which Spain is renowned.

Unfortunately for some, their dream turned sour for a number of reasons and we are now witnessing the consequences of it in the aftermath of Spain´s property bubble collapse. The majority of these problems could have been avoided by doing some research yet in other cases purchasers, in despite of being careful and taking all the necessary precautions, still encountered difficulties.

This gloomy outlook will no doubt change in the future when we start a new property cycle. The million-dollar question is second-guessing when that will be! Don’t hold your breath.

Your guess is as good as mine.

The aim of this article is to do a brief rundown on the basic legal checks that ought to be done prior to committing yourself on buying Spanish off plan.

Tips on Buying Off-Plan Property in Spain

The following 14 useful tips will help you avoid the majority of off-plan hazards. You would do well to follow them.

1. Hire a Qualified Registered Lawyer

I will refer on this to my first point in my prior article Buying Resale property in Spain in which I elaborate it in more detail. And yes, it’s also a shameless plug to peddle my legal services!

Specifically on buying new build, it is highly advisable that you retain a registered lawyer before you commit yourself signing any document or else paying any amount. Initial down payments, such as security deposits which strike the property off the market, are non-refundable unless specifically agreed otherwise. If you pull out you will likely forfeit the deposit. Many legal problems may be easily avoided following this simple advice. So don’t be in a rush to hand over the money without having hired an independent lawyer first; do not allow yourself to be pressurized by estate agents. Rash decisions often turn out to be expensive mistakes.

Your home country’s consulate will hold a list of recommended independent English-speaking lawyers.

2. Is the Plot of Land Registered under the Developer’s Name?

In some cases developers marketed and sold on whole developments without even owning the land. This is what, for example, developer AIFOS used to do. They sold on entire off-plan developments without owning the land; they only had an option to purchase, within an agreed deadline, a plot of land.

One should not buy an off-plan unit in a land that is still not registered under the developer’s name. There are far too many associated risks to take a gamble with your hard-earned money.

The land should be appropriately classified to be built upon. Be very wary if you are being sold an off plan in a land that is still classified as rural. It may be a good idea to check with the local Planning Authorities that you are not buying in a land of special protection such as green belt land.

Naturally a lawyer will do the above checks for you as part of his conveyance due diligence. But it never hurts if you also have the time to spare and carry them out yourself.

3. Has the Developer Attained Planning Permission?

The basic recommendation would be not to sign a Reservation Contract or a Private Purchase Contract (PPC) unless the town hall where the property is located has issued a Building Licence (‘Licencia de Obras’ in Spanish) for the development.

Notwithstanding the latter, let us examine the nuances that spice up life.

I would, in general, recommend that a Building Licence (BL, for short) has not been obtained by means of what is known as the Administrative Silence Rule (ASR) as it may be successfully challenged should it have been attained breaching Planning laws, for example. Just to clarify, obtaining a BL through the ASR rule is perfectly valid in our legal system. However, if it has been obtained breaching planning laws it may be deemed void.

Additionally a BL must not have been challenged administratively e.g. imagine the case of a Building Licence issued by a town hall’s planning department. Someone may buy a property relying on the town hall’s licence. However, unbeknownst to this buyer, this may lead to an ongoing dispute between the local town hall and Regional Planning Authorities over the legality of the issued BL. Regional Authorities may actually override the town hall’s authority on planning issues so they are bound to win. Remember the Priors?

This is by far the biggest mistake that – unbeknownst to many – a buyer can possibly make. Many problems could easily be staved off on following it. The Building Licence will ensure that the building is above board and the property is not being built in green belt land, for example. Your lawyer will be able to verify the BL is not being challenged at court by anyone, including Regional Planning Authorities.

4. Do You Have a Bank Guarantee Securing your Stage Payments?

Once your lawyer has checked the plot of land is under the developer’s name and there is a valid Building Licence it’s time to sign the contract.

The instalments paid while the property is being built can be guaranteed by means of what is known generically as a ‘bank guarantee’. Please read for more information my detailed article on Bank Guarantees in Spain.

Bank Guarantees are a legal tool devised to secure the deposits of prospective off-plan purchasers should their properties not be delivered on time or their developers file for administration. Post credit crunch, all the bank guarantees we are executing are acting as safety nets for many stressed new-build purchasers who find themselves bogged down in mire out of no fault of their own i.e. developers filing for receivership.

Spanish bank guarantees may be a daunting legal minefield for many, albeit with the assistance of an independent lawyer acting on your side you will be able to dodge the pitfalls, both safely and successfully.

A Spanish Bank Guarantee may be either an Insurance Policy or Guarantee issued respectively by either an Insurance Company or Bank. Both types can be grouped under the generic term bank guarantee for simplicities’ sake. A bank guarantee’s purpose is to secure the full amount of deposits paid by off-plan purchasers. It secures the initial reservation deposit, which strikes the property off the market, the interim or stage payments as well as the applicable VAT paid on said amounts. On top of this you are also entitled to the legal interests on the amounts secured.

A bank guarantee is of critical importance acting as a safety net securing your full deposits should something go wrong. Bank Guarantees should have no expiration date as per Law 57/68. Bank Guarantees should expire only upon the developer attaining a Licence of First Occupation.

5. Has the Dwelling Attained a Licence of First Occupation (LFO)?

A Licence of First Occupation (or ‘Licencia de Primera Ocupación’ in Spanish) is a certificate issued by a town hall that confirms that a newly-built property fully complies with all planning and building regulations, and is ready to be used as a dwelling. A LFO allows off-plan purchasers to dwell in a property legally. You can read more on this subject in my detailed article on the Licence of First Occupation.

The LFO is important mainly for two reasons:

  1. It provides a check on the planning legality. A LFO means the developer has built the dwelling in compliance with the original town hall’s Building Licence as well as complying with all Planning laws. The inspection to grant this licence is carried out by town hall’s chartered technicians who certify that the dwelling complies fully with Health, Safety, Planning and Construction Laws and is deemed apt for human habitation.
  2. It is required by utility companies to have access to official supplies (water, electricity and gas). Spanish law requires the granting of the LFO to hook up the dwelling to the supply grid. Although in some parts of Spain there have been reported cases of supply companies waiving this and connecting you without the said licence. In such exceptional cases the only requirement was showing the application of having requested the LFO from the town hall.

I would advise, in general, to complete only once a Licence of First Occupation has been attained; however I must point out that completing without a LFO is legal in Spain and the property will be registered under your name at the Land Register. It is legal to sell properties without a LFO.

The following are just some of the drawbacks you may face if you happen to close on an off plan property lacking a LFO:

  • Primarily, you will not be able to take out a mortgage on the property or remortgage it – if needed be – by any lender other than the developer’s bank.
  • You will not be able to benefit from the official utility supplies; only from the developer’s supplies (water and electricity) with all the associated problems this has, namely that you may be cut off at any time as it is the developer who is paying for it and if they go into receivership you will be shut off. Besides, the site supply electricity doesn’t have the same strength and power surges are fairly common on simultaneously turning on various electrical appliances such as air conditioning. Until the LFO is attained, the developer has to pay, by law, for the utility supplies.
  • Any future prospective purchaser, or their lawyer, will haggle with you and require a steep discount if you lack a LFO. In a resale, the purchasers in turn will undergo the same problems to secure finance by means of a mortgage loan. A lack of a LFO tacitly implies that you are actually reducing the pool of potential purchasers for your resale.
  • If there are Planning issues, the town hall can set a charge against the property and you, as the new owner of an off-plan and not the developer, may be held liable to pay the fine for the planning illegality.
  • Needless to say, you cannot rent a dwelling without a LFO.

off-planThere may be nonetheless exceptional circumstances in which it may be advisable to complete without one. Specifically if there’s no bank guarantee securing your down payments and the developer is in risk of going into administration, provided that there’s no ruling or legal procedure affecting the Building Licence due to planning issues (as explained above in point three).

It is very important to realise that until completion the property still belongs to the developer. So if you still have not closed and the developer becomes insolvent in the interim, the property lodged under his name may be seized by the developers’ lender or any other creditor that places a charge on it at the land registry. If you have no bank guarantee and the above happens, it is very likely you will forfeit your down payments. However, cases differ and require a case-by-case study by your appointed solicitor.

The issuance of the LFO by a town hall is the major milestone in the off-plan procedure. In fact, from a legal point of view, it marks the turning point whereby the property is now deemed to have been delivered legally to the purchaser. Once the LFO has been attained and the developer has sent you a registered letter compelling you to complete within a deadline before a Notary public, you should no longer withdraw from the PPC and litigate for a refund as you are bound to lose at court (specifically read point three in my article 10 Reasons Why Your Case Against a Developer may be Thrown out of Court in Spain). This is known as ‘forced completion’.

Developers can actually pursue you abroad against your home country’s assets once they’ve obtained a favourable judgement from a Spanish court. Do not think for one moment you can walk away breaching an off-plan contract and that there will be no legal consequences arising from it. Some developers will be happy just withholding the stage payments as compensation and yet others will sue you on top demanding fulfillment i.e. that you close on the property.
Indulging in reckless litigation may leave you seriously out-of-pocket.

6. Ghost Developments

Some new communities remain largely unsold post credit crunch and you may find additionally that many common holders are not contributing to the communities´ expenses. This nasty surprise may create practical problems such as green swimming pools, lack of security, derelict gardens and even break-ins. It may be recommendable before buying into a community that you ask around first. This will no doubt change in the future when the market picks up again and moves to a new cycle.

7. Coastal Laws

On buying off plan, make sure it is not within the protected area of Public Domain or else you may risk your house being pulled down, at your expense, by the local Authorities. Spain’s Coastal Law was passed in 1988 but it hasn’t been until recently that the Government has decided to enforce it harshly. There have been significant amendments to the point there has been a de facto coastal law amnesty.

8. Buy-to-Let

If you are buying to rent the property out, either as short or long-term, make sure the region of Spain in which you are buying allows for this. Some regions, i.e. Balearic Islands, have stringent regulations whereby a special licence is required to rent. Failure to comply will result in the town hall fining you. Disgruntled neighbours always make apt whistle-blowers, so be warned. Other regions in Spain, such as Andalusia, do not require letting licences but do have their own regulation in place on letting out property i.e. Decree 218/2005.

Please read my article on Renting in Spain: Top 10 mistakes as well as Letting in Spain: The Safe Way for more information on this subject.

The Government, pressured by the hotel industry, has recently passed a new law which will effectively restrict touristic private rentals (short term leases). I will comment on this on a separate article.

And as a final word of caution, unless your property is in a prime location, do not rely on the let to offset the mortgage repayments – won’t happen.

9. You do have a NIE number, right?

A NIE number is a Fiscal Identification Number for foreigners and is required, among other things, to buy property in Spain. You can read this detailed FAQ on Spanish NIE numbers.

10. Applying for a Mortgage Loan

Most of off plan buyers will require a mortgage loan to secure a purchase. You can read my detailed articles on Spanish Mortgages Loans: An Overview and Spanish Mortgage Loans: Beware of Abusive Clauses to get you started with. The latter provides useful tips on the type of (abusive) mortgage clauses that Spanish lenders have a penchant for and you should be wary of signing. Spain’s Supreme Court has declared in 2013 (STS 241/2013) collar clauses as abusive; something which I had already been denouncing for years as they were clearly one-sided in favour of lenders.

11. Snagging List

Before you complete on a newly-built property you should always do a snagging of the property. You can either draw up a snagging list yourself or else appoint one of the many experienced companies that may carry it out on your behalf. It goes without saying that lawyers do not carry out snagging lists! This is why I strongly advise you hire a chartered surveyor.
On inspecting the property they will draw a list of all the flaws the property has i.e. mismatched tiles, damp patches, mould growths, leaking faucets, flaked painting, damaged appliances, unsuitable drainage etc.

I highly advise not to complete on an off plan until you have fully carried out a snagging list and also followed it up ensuring the developer has indeed repaired each and all of the problems highlighted by your inspection. Once you complete it will be very difficult to have these fixed as your bargaining position will be considerably weakened on handing over the money. So play your card rights and demand they are repaired always pre-completion, not post-completion. Once you are satisfied with the repairs you may then complete.

For post-completion flaws and their repair, please read my article on Off-Plan Construction Flaws: Know Your Rights so you learn what your rights are and how to defend yourself once you have completed on a new build property. Post-completion, flaws may become apparent which were either not picked up during the snagging list or else are new.

12. Post-Completion: Make sure the Property is Now Registered under Your Name

I refer you to my previous article on buying resale in Spain and registering your title deeds or escritura in the property register. You would do well to request what is known as a nota simple. Please read my FAQ on the nota simple for more details. It is highly advisable to check the title is clean and there are no charges, liens or encumbrances against the property (other than the mortgage you may have applied for given the case).

13. Post-Completion: Dealing with Property Taxes, Utilities and Community Fees

Once you have acquired your new property, you will now have to face all the associated running expenses. Make sure you have budgeted this carefully so as to avoid unpleasant surprises! Some of the luxury gated communities with lush tropical gardens and beautiful infinity pools that dot the Spanish coastlines may have pretty steep maintenance expenses. Any unpaid community bills will result in the Community of Owners placing a charge against your property which may lead to auctioning it off publicly to recoup the debt! This legal procedure in Spain works fairly efficiently (as in twelve months on average). Besides be warned that a hot legal industry has developed over the last years to pursue these community debts abroad, both in the UK and the RoI, against debtor’s home assets.

Post-boom many new build developments remain largely unsold. Developers or ailing owners have been forced to hand over their properties to lenders on slipping into arrears. These lenders in turn are some of the worst offenders on community payments which translate into an increase of the fees borne by the remaining community members to offset this loss. Only Spain’s most prominent lenders are actually paying the community fees on their properties. Spanish savings banks are particularly notorious for not being up-to-date with their community fees. This is creating a vicious spiral putting the properties at stake of those financially weaker community members as they themselves struggle to remain afloat because the supposedly financially ‘stronger’ EU-bailed-out lenders are not contributing to their fair share of community payments. Bringing a legal case against them will mean community members will have to hire a lawyer which entails additional expenses.

You should open a Spanish bank account if you haven’t done so already. Utility companies do not accept overseas payments and like setting invoices as standing orders against your Spanish account. You should set at least as standing orders all the following:

  • IBI tax. Paid once a year (akin to the UK’s Council tax).
  • Rubbish collection tax. Paid twice or once a year depending on the town hall.
  • Utility bills (invoiced quarterly in the case of water and monthly with electricity).
  • Community fees (only if you’ve purchased in a Commonhold). Usually quarterly but can vary.

The particularities on buying off-plan are for example that IBI tax will not be usually readily available to pay until two years after you’ve purchased the property, maybe even more. You will be nonetheless held liable for those two previous years on the backdated IBI tax. Failure to pay IBI tax may lead to your house being auctioned off to recoup the debt. More on these taxes in my article Non-Resident Property Taxes in Spain.

Regarding utilities, even when a LFO has been issued you may find yourself waiting for some time before you are officially connected to the supply grid with your own individual water and electrical meters. Regarding Community fees you are liable for them since the LFO was attained by the developer, not before.

On buying off plan you may become part of what is known as a Community of Owners. You should make yourself acquainted with your Community of Owners rules (‘Ley de Propiedad Horizontal’ in Spanish or simply Commonhlod law) as well as how to challenge Assembly resolutions if necessary (both AGMs and EGMs).

You are also liable to file Income tax on owning property in Spain every year for which you may need to appoint Fiscal Representation.

Finally I cannot stress enough how advisable it is that you make a Spanish will to dispose of your Spanish estate. This will not preclude any other made in your home country and is limited exclusively to your Spanish assets. It will save your beneficiaries time, money and hassle at a time of bereavement.

14. Careful with the Tax Office on Buying or Selling at a Discounted Price

And now that I’ve established it is a great time to buy property in Spain – the bad news. Due to Spain’s ongoing real estate depreciation many buyers are securing properties at such knockdown prices they are unwittingly drawing the attention of the Tax Office. So much so that over the last years many will have received a letter from Spain’s Inland Revenue some six months after completion demanding complementary tax is paid on the property. This is known as “la complementaria” in Spanish legal jargon and affects resale property. You can read further in my article La Complementaria or Bargain-Hunter Tax on how to pre-empt it and how to appeal one.

In the case of Andalusia, with which I’m more familiar, on buying distressed Spanish property you should pre-empt this by requesting beforehand an assessed property valuation specifically for tax purposes. This will be a legally binding report which your lawyer may use at a later date. Regional Tax Offices in charge of tax transfers will have a value on properties, from which they will not budge, and if you happen to buy below said value they will request tax on the difference as they will suspect you may have under-declared at completion – which I can assure in most cases is simply not the case; it is merely one more consequence of today’s depressed market.

If you have already received this letter you can either pay the requested tax or else appeal it. Providing the difference is not ‘significant’, your chances of appealing it may be fairly high. Obviously if it is a low amount it may not warrant the expense of hiring a lawyer to appeal it. But for high-end property it may be worth every penny.

Buying Off-Plan Property in Spain – Conclusion

Although off-plan property may have fallen foul of buyer’s tastes due to all the associated post-credit crunch problems featured in the press, it will no doubt claw its way back. This is likely to take place when we exit this gloomy deflationary environment and enter a new cycle of real estate appreciation. Property cycles in Spain take, on average, fifteen years from peak-to-trough. The last cycle has taken from 1993 to 2007 approximately. For a recovery to materialise we need foremost low interest rates coupled with banks willing to lend. With neither liquidity readily available nor lenders prone to take chances (lending in Spain is at a staggering fifty-year low!) the property market’s lifeblood is sapped away leading us onto a languished standstill.

As always it will be shrewd investors who, having second-guessed correctly the ailing property market, will snap up the most sought-after units at knockdown prices, profiting from today’s irrational fear; much like in a stock market rebound. Many will look back with everlasting regret on not having seized the buying opportunity of a decade grabbing themselves a bargain under the sun in a bottoming out market.

Or conversely you can always wait to catch the next train which is not due until another fifteen years’ time!

“Caminante, no hay camino, se hace camino al andar” – Antonio Machado. Proverbios y Cantares XXIX. Campos de Castilla (1912).

Wanderer, there is no path, the path is made by walking.

Brilliant Spanish poet and one of the leading figures of the Spanish literary movement known as the Generation of ’98.

Related articles

Buying property off-plan in Spain. Advice by the Foreign & Commonwealth Office, 12th of March 2013
Introduction to off plan property in Spain. SPI article from 2010
Advantages and disadvantages of off plan property SPI article from 2010
Buying Distressed Property in Spain – 8th August 2011
Community of Owners in Spain: Challenging Assembly Resolutions – 10th October 2011
Off-Plan Construction Guarantees – 8th November 2011
Rent-to-Buy in Spain: The Smart Choice – 8th April 2012
Making a Spanish Will – 8th August 2012
Community of Owners, or Comunidad de Propietarios – 8th July 2012
Buying Resale Property in Spain – 21st February 2013
Title Deed Explained – 8th April 2013
Nota Simple Explained – 8th April 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
Spanish Wills and Probate Law In Light Of European Regulation – 8th January 2015
Changes to Spain’s Inheritance and Gift Tax Law – 21st February 2015
Spain’s Holiday Rental Laws – Explaining the Latest Changes – 8th March 2015
Supreme Court Rulings on Bank Guarantees – 8th April 2015
La Complementaria or Bargain-Hunter Tax – 8th May 2015

House Hunting in Spain – 17th June 2015. The New York Times
Taxes on Buying Spanish Property – 8th July 2015
Non-Resident Taxes in Spain – 8th December 2015

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.

2010 and 2013 © Raymundo Larraín Nesbitt. All rights reserved.