Editor’s note: The Licence of First Occupation (LFO) is a crucial document in the Spanish conveyancing process. Lawyer Raymundo Larraín Nesbitt tells you everything you need to know about it here.
By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of April 2013
Overwhelmed by the sheer amount of client queries on what a Licence of First Occupation (LFO) was in the boom years, I decided to write a fact sheet back in 2005. Over time it evolved, as I added more and more FAQs, resulting in the extended revamped article you are now reading. A LFO is also commonly referred to as a First Occupancy Licence, First Occupation Licence, Cédula de Ocupación or Cédula de Habitabilidad.
Over the last years we have read in the press countless horror stories about people buying off plan properties in Spain which had not attained a Licence of First Occupation (LFO) at the time of completion, and all the woes they are now facing as a result of it. But what really is a LFO and what importance does it bear on an off plan purchase?
In this article I strive to demystify it, shedding light on the matter to cast away widespread misconceptions and highlight the basics.
What is a Licence of First Occupation?
Upon the granting by the developer’s architect of a Certificate of End of Construction (CEC) for newly-built property, a developer will apply for a Licence of First Occupancy. The Licence of First Occupation (LFO) is an administrative licence which the town hall, where the property is located, grants and verifies the development is in full compliance with the Building Licence (BL) and all associated Planning laws.
This is a legal concept applied only to new build property (also known as off plan); it does not apply to resale. A LFO allows the owner to dwell or rent the new build legally. Each newly built dwelling will have an individual LFO granted albeit in large developments the LFO are normally grouped for economies of scale. Resale properties will already have a LFO granted.
The attainment of a LFO is a major legal milestone in an off plan purchase as it marks the ‘legal birth’ of a property. I will analyse in depth these legal implications in my next article on Buying Off Plan Property in Spain.
No one can speed up the granting of a First Occupancy Licence, neither the developer nor us lawyers; its granting depends solely on the Spanish town hall’s civil servants. Town halls allow time for a developer to mend any planning irregularity or pending communal work which may push back the attainment of a LFO until these outstanding issues are settled (by several months or maybe even years in the more serious cases).
A Dissected and Demystified LFO
A Licence of First Occupation is basically a document consisting of one or more pages issued by a town hall and addressed to the developer who applied for the licence which states that the Licence of First Occupation has been granted for the property or group of properties in the application.
It normally has the following elements:
1. Logo of the town hall issuing the licence
2. Stamp with the date in which the document is issued and an accessions register number.
3. File Number
4. Plot of land planning reference
5. Developer’s name
6. Number and type of properties which are being granted licence
7. Date on which the LFO was attained
8. Name and signature of the town hall secretary who grants the licence and town hall’s stamp
Why do you need a LFO?
The LFO is critical for two reasons:
1. Its granting means the developer has built the dwelling complying fully with the original town hall’s Building Licence (BL) 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 the dwelling is in full compliance of Health, Access, Security, Planning and Construction Laws and is deemed as apt for human habitation.
2. It is also required by a property to have full unrestricted access to official utility companies (water, electricity, gas and telecommunications). Spanish law requires the granting of a LFO to hook up the dwelling to the grid supply. Although in some parts of Spain there have been cases of supply companies waiving this and connecting you without said licence. In such cases the only requirement was showing the application of having requested a LFO from the town hall. As I write, this is exceptional.
Lenders normally require a LFO before they consider granting a mortgage loan against a property. The only exception would be the developer’s bank which has already underwritten the whole development and is able to offer a mortgage loan without it because they are eager to spread the developer’s default risk. Also, taking on the mortgage developer’s mortgage has many advantages as it reduces the legal set-up expenses borne by the prospective purchaser. But it is not mandatory, you have may swap the developer’s mortgage to another lender of your own choice.
How Long Does a LFO Take on Average to be attained?
It depends. If the town hall’s technicians detect irregularities in a development or deviations from the original BL then the LFO will be delayed until the developer fixes these problems. In a smaller town you can reasonably expect the LFO to be issued within a few months of the developer having submitted the Certificate of End of Construction providing the development has no major irregularities. In large cities its granting may be pushed back by several months, or more, due to the work overload of town hall’s planning departments.
Is Every Off-plan Development Issued a LFO?
Yes. As previously written, each dwelling has its own individual LFO granted, although in large developments they are normally grouped for simplicities’ sake. A detached villa will have its own individual LFO whereas large developments consisting of various phases will have grouped LFOs issued. Each of these phases normally has its own LFO. So for example in a huge development of 300 units grouped in 4 phases there could be four different building licences and you would have one all-inclusive LFO granted for each individual phase grouping 75 dwellings at a time.
This could well mean that, even within the same finished development, some properties may be ‘legal’ (a granted LFO) yet others are not legally deemed as habitable because they lack a LFO. Physically all of them may seem identically finished but legally only some can be dwelled in. You could only tell which are which by means of thorough legal analysis.
What are the Risks of not having a LFO Granted?
If a LFO has not been granted one year or more after the Certificate of End of Construction was submitted it usually means there is a serious underlying problem. The said problem can arise from a myriad of causes such as planning problems (e.g. the development had only been granted a building licence for two storeys and four have been built, the property has been built in an area zoned as green belt, or an archaeological site of interest has been uncovered), or could mean there might be a health hazard because there is a breach of Health laws (e.g. the sewage pipeline is incorrectly laid out).
One of the most recent cases has taken place in the peaceful town of Catral in Valencia, Costa Blanca, where several developments have been finished and the purchasers have completed on the properties without a LFO been granted. More than 1,000 houses are now deemed illegal. It turns out many of those dwellings were built within the perimeter of a National park zoned as green belt land. The Government has announced that it may pull down some of them.
I Have Read Online that Completion without a LFO is Illegal.
No, this is a widely spread misconception. Completion on a property, before a Spanish notary, without a LFO is legal in Spain and a property will be lodged under your name at the land registry.
However, it is not legal to occupy/live in a property without the mandatory administrative LFO. So basically you legally own a dwelling which you may not occupy nor rent from a legal point of view. Another matter is if local Authorities actually bother to pursue actively those who live in, or let properties which lack the mandatory LFO.
Many off-plan purchasers on having waited for years on end to attain a LFO, or with no prospects of it ever being granted due to planning issues, have decided to cancel the purchase contract and litigate to obtain a full refund of their stage payments. This contract cancellation has to be done by means of a lawyer and may require a judicial ruling.
What is the Difference between a Standard LFO and one Attained by the Administrative Silence Rule?
None, both LFOs are equally valid from a legal point of view. Under Law 30/92 if a town hall does not reply to a licence petition within three months it is automatically considered granted. This is known as the Administrative Silence Rule (ASR) and is a special administrative procedure which enables licences to be attained after a certain period of time has elapsed (currently 3 months), if no response has been obtained from a town hall. A LFO obtained through Administrative Silence it is just as valid as a standard one obtained expressly through a town hall under Spanish Administrative Law. It is pointless to challenge a licence obtained by Administrative Silence as it is perfectly legal in our system, provided it wasn’t obtained breaching any laws.
The latter is a fairly important point. Licences, in general, may not be attained ‘contra legem’, against the law. This is a long-standing legal principle enshrined by jurisprudence and doctrine i.e. STS 1051/2013 (Spain’s Supreme Court ruling). When disciplinary action is taking place for breach in planning laws one cannot attain a LFO by the ASR.
i) For example, an off plan development built on green belt land may not attain a LFO as it was done so breaching Planning laws.
ii) A town hall’s Master Urban Plan has a land zoned for individual detached dwellings and a developer builds instead a three-storey building to make more money.
A LFO applied for by ASR may be challenged successfully in such cases. The off plan purchase contract may be resolved and the would-be buyer is entitled to apply for a full refund of his stage payments. This, which may sound easy on paper, may entail years of protracted litigation. Litigation should never be entered into light-heartedly and you should always seek first an alternative solution – if possible – with a developer. Trust me, this will avoid you much aggravation over the following years.
What are the Associated Problems of Completing on a Property without a LFO?
Although it is legal to complete without a LFO, it entails numerous practical and legal drawbacks which ought to be carefully pondered. To name but a few:
1. You will not be able to take out a mortgage on the property or re-mortgage it by any lender other than the developer’s.
2. You will not be able to benefit from the services from utility companies; only from the builder’s supply (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, a builder’s supply is only intended for construction, not for domestic purposes. Site supply electricity (‘luz de obra’) has limited strength and power surges are commonplace on simultaneously turning on multiple electrical appliances such as air conditioning and a dishwasher.
3. You will have problems re-selling it. A prospective purchaser – or their lawyer – will haggle with you a steep discount if you lack a LFO in a newly built resale. In a resale, purchasers in turn will undergo the same problems to secure finance by means of a mortgage loan. A lack of a LFO implies that you are actually reducing the pool of potential buyers for your resale.
4. If there are planning issues, the town hall may set a charge against the property and you, as the new owner of a new build, may be held liable to pay the fine for the planning illegality (and not the developer).
5. You will not be able to let the property, at least legally.
Should I Complete Without a Licence of First Occupation?
I generally advise clients to complete on off-plans only if a LFO has been granted by a town hall. However there are qualified exceptions to this general rule which ought to be carefully considered.
For example, if a development complies fully with all the required planning permissions, you lack a bank guarantee, there’s no ruling affecting the building licence due to planning issues and there is a high risk of the developer going into administration in the near future, it would be highly advisable to complete. You would still have to wait until a LFO is granted before you can live or rent the property, but at least now there is no risk of you losing your funds if the developer becomes bankrupt.
It is very important to realise that until completion before a notary a property still belongs legally to the developer. So if you still have not closed and the developer goes into receivership in the interim, the property lodged under his name may be seized by the developers’ creditors. They will place a charge against it at the land registry. If you have no bank guarantee and the above scenario unfolds, it is very likely you will forfeit all your down payments as you will be regarded – by law – as a non-secured creditor (meaning you are almost piled at the bottom of the creditor’s ladder standing little to no chance of recovering your stage payments).
In such a particular scenario I encourage clients to complete on the off plan property ASAP even if it has not LFO. After four years elapse post-completion, authorities must grant a LFO providing no disciplinary action was taken. So if the worse comes to the worse and the developer goes under you will at least have a property lodged legally under your name (thus having secured your stage payments) and in four years’ time post-completion it will be fully legal.
Can I be forced to complete without a LFO?
Not in general. Now come into play the nuances or grey areas…
In an ideal legal world one shouldn’t complete on a newly-built property until the LFO is attained by a developer for all the associated practical problems I’ve highlighted above. That’s how it should work in theory and there should be a national law that rules on this. In practice only a handful of autonomous communities in Spain, such as Andalucía, have legislated on this matter.
However, in practice at times some Private Purchase Contracts (PPCs) have been drafted by developer’s lawyers with such devious wording that completion hinges on some document other than the granting of the LFO. This leaves the buyer in a tricky position at best as they leave the door ajar to litigation – and it is not clear cut who has the upper hand; it will pretty much depend on the judge’s take and can easily be argued both ways to be honest.
Some judges argue the buyer, or his lawyer, had – theoretically – the ‘freedom’ not to sign such a clause (abusive perhaps?). In practice developer’s contracts are identically and mass drafted for everyone (and not subject to individual negotiation or amendments) and this ‘theoretical’ freedom as seen in the eyes of some judges is, in practice, non-existent leaving purchaser’s lawyers treading in uneasy ground on having signed it.
Example of such wording: “completion will take place upon the granting of the Certificate of End of Construction (CEC)”. The CEC is actually signed by the architect who happens to be on the developer’s payroll! Not exactly unbiased, is it? The CEC as I explain at the beginning of this article is the document that is required by the developer to apply for a LFO. But the LFO itself is the licence that verifies that the development was built in accordance with the granted Building Licence and all planning laws. How can you possibly be expected to complete on a property which hasn’t even been inspected by the local planning authorities? There could be all sorts of problems and there usually are.
What the above entails is that completion is left at the discretion of the developer with this wording. When the developer thinks it is high time for completion he will urge the architect to issue the CEC. This of course doesn’t imply the development is anywhere finished or even within reasonable expectation of being granted a LFO any time soon.
There will always be time for the town hall to point out all the outstanding issues and thus push back on the granting of the LFO until all flaws are mended by the developer. But this could take months or even years!
Yet, in the meantime, the developer is legally compelling the off plan buyer to complete by means of a registered letter or notary communication as technically the CEC has already been granted as per the PPC’s wording (at his behest, by his own architect!). So technically the buyer is at contractual breach (!) if they fail to complete once legally compelled (ex art 1504 SCC). This is of course open to debate as there is no LFO in place. The developer could take years on end to attain one and yet you are deemed to be in breach of contract! It is ludicrous. As I write this is a grey area that developer’s lawyers will exploit to its fullest at the cost of buyers consumer rights.
In my humble opinion the law should be addressed asap at a national level to clearly and resolutely require, once and for all, the granting of a LFO to complete to plug this nefarious legal loophole in most autonomous communities. Only then will buyers (and their lawyers) play confidently on even ground. Until then the door is left ajar, open for abuse by one party, which happens to be the strongest and the one who actually worded the contract in the first place creating this imbalance to suit their interests. This does not create legal security for foreign buyers / investors and should be addressed at a national level to plug it.
Specific focus on Andalucía
Andalucía’s Decree 60/2010, of Andalucía’s Urbanistic Discipline, requires in its art 27 that a notary must request at completion both the Licence of First Occupation and the Certificate of End of Construction (CEC). This looks pretty clear, doesn’t it? Well it is not. It’s clear as mud from a legal point of view.
Before you crack open the champagne, the problem is that decree 60/2010 has a rank below that of a law. And the law itself, Andalucía’s Building Act (LOUA), is at best unclear and lax in its terms and at no point requires specifically a LFO to be granted for completion. A general legal principle in Spanish law is that a law of lower rank cannot contradict, or exceed the competence, of a higher ranked law. This is the problem at hand. The LOUA which is from 2002 does not clearly require a LFO for completion. But a lower-ranked law, such as decree 60 from 2010, does specifically require it. A notary in Andalucía could, depending solely on his criteria, require – or not – a LFO to complete. This is unacceptable in my opinion. Developers will always try to impose a notary of their own choice at completion…hence the importance of a buyer’s right to freely choose before which notary he wants to complete.
Moreover the DGRN (Dirección General de los Registros y del Notariado), which sets the nationwide guidelines for all notaries in Spain, specifies that there is no (national) law that requires a LFO as a prerequisite for completion in new builds – and they are unsurprisingly spot on. So in truth an able lawyer, or notary, could argue it both ways in the specific case of Andalucía.
Afore just highlights the problem in Andalucía, but there are sixteen other communities in Spain which are likewise empowered to enact their own laws on the matter compounding the problem furthermore creating a legal Tower of Babel – shades of grey.
Can I be forced to Complete when a LFO is attained by the Developer?
Yes, this is known as forced completion. As from the moment the developer attains it off-plan purchasers, regardless if they have completed or not, will be held liable for the outstanding Community fees.
The fact that a buyer has not completed on the property is not the fault of the developer and he cannot be held liable to pay for these Community fees, unless he specifically agrees otherwise.
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 (specifically read point three in the link supplied) for a refund as you are bound to lose at court. That is why it is known as a ‘forced completion.’
Even developers under Judicial Administration can force you to complete once the LFO is attained. The fact they are under an insolvency procedure does not stop them legally from being able to compel you to complete ex articles 1.124 and 1.504 of the Spanish Civil Code (SCC).
A LFO only applies to new builds or off plan property, not to resale. A LFO is important as it draws the line between a new build being legally fit – or not – for human habitation. A lack of a LFO may imply serious underlying problems. You need a LFO to be connected to utility companies.
As from the moment a developer attains a LFO they can legally compel you to complete by means of a registered letter / notary communication.
Bottom line, as rule of thumb do not complete without a LFO.
Qualified exceptions are few and far between. Individual cases differ and require a careful case-by-case study.
I strongly advise you to appoint a competent lawyer with enough experience in Spanish property law to ensure your interests are fully protected.
“Nothing in the world is black or white, forever shades of grey.” – C.B. One of a kind woman.
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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.
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