Bank guarantees when buying property in Spain

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Buy off-plan and you risk losing your money, unless the right safeguards are in place.

Sunday Times Home Section, 26 March 2006

If you keep up your scheduled payments on your off-plan property, and stick to your contract with a reputable developer, you are protected if construction gets delayed or, even worse, cancelled. Right? Well, all too often, the answer is no, as British buyers on the Spanish Costas have found to their expense.

Buying off-plan from a developer is riskier than most people realise. All sorts of things can go wrong that result in delays or even no delivery at all. Buyers nearly always make their stage payments on time. If they don’t, they risk losing the money they have already sunk into the purchase. The behaviour of the developer, however, is harder to control.

Buyers are meant to be protected when they hand over substantial sums of money for a property that is not yet built. Spanish consumer protection laws oblige developers to insure all the stage payments they receive from buyers. So if the developer goes bust, the buyer should be refunded through the insurance.

But what the law says is one thing; what developers actually do is another. Securing stage payments with either an insurance policy or bank guarantee costs money, so many developers ignore the law if they can.

In northern Spain, developers rarely provide financial guarantees, and the predominantly Spanish buyers rarely ask for them. At the same time, buying off-plan is less risky in the north, where developers have a good delivery record. But even on Spain’s popular southern Mediterranean coasts, where new developments have a patchier delivery record, most British off-plan buyers still don’t obtain adequate financial guarantees to protect their stage payments.

“If buyers do not ask for and check their guarantees, then developers will be tempted to avoid the cost of providing one,” warns Michael Davies, a Spanish-practice solicitor based in Almeria. “If you don’t have a bank guarantee in your own name specifying the amount guaranteed, then your stage payments are at risk if the developer goes to the wall.”

Some British buyers have also been let down by their lawyers, who should always be on top of this issue. Even if you have a certificate from a financial institution that apparently guarantees your payments, this may not be enough. You have to look into the small print – written in Spanish – to find out how well covered you really are.

You also need to confirm that the guarantee is provided by a viable financial institution, as some developers have been known to provide worthless bits of paper from financial bucket shops with grand- sounding names.

Ian Overgage, a 42-year-old marketing consultant from London, ran into this expensive problem when buying off-plan on the Costa del Sol. In April 2002 he signed up for a  190,000 (£132,000), two-bed holiday flat in Calahonda, with completion expected at the end of 2003.

At the time of purchase he discussed bank guarantees with his lawyer, and was given assurances that everything was in order. “At the time I thought I was asking all the right questions and didn’t feel I was being ill-advised,” says Overgage. “Now I know different, but hindsight doesn’t help right past mistakes.”

The developer ran into financial problems and the project was seriously delayed, but Overgage wasn’t sent a copy of the bank guarantee until late 2005, only to find that the guarantee had expired in March 2004. To make matters worse, the guarantee was from a company called Compagnie des Garanties de Luxembourg SA, specifically listed by the Spanish government as unauthorised to offer financial guarantees in Spain. When the developer folded, Overgage and other buyers had no option but to pay off the developer’s debts, which in his case meant coughing up a further £11,100 to buy the property as it was and avoid losing all the money he had already committed.

What to look for in a bank guarantee
When making stage payments, you need a certificate from the financial institution providing the guarantee that names you as the beneficiary and details the exact sum you have paid.

Make sure you know exactly when the guarantee can be executed, and avoid long execution dates that make you wait a year or more before you can get your money back.

Check that the guarantee is provided by a financial institution authorised to operate in Spain before you commit to making any payments. And because there is often a delay between making your stage payments and receiving your certificate of guarantee, you should negotiate small but frequent payments with the developer, and include a clause in your purchase contract that enables you to withhold payments if any guarantee certificates are outstanding.
Never sign or pay anything to any developer until you have thoroughly investigated the bank guarantees it arranges, and don’t buy from developers who fail to provide adequate guarantees.

What to do if you don’t have a guarantee
If you have made stage payments but have never seen a certificate of guarantee, then don’t panic. As I’ve explained, the majority of buyers don’t have guarantees, and the majority don’t have problems, either. Like all insurance policies, the guarantee is only necessary if the developer fails to deliver. Nevertheless, you are much better off with a guarantee and are entitled to one at no extra cost, so the first step is to find out if a guarantee has been issued.

If not, you should initiate proceedings to have the developer arrange for one to be issued. In the unlikely event that a developer refuses, report the firm to the regional consumer protection office.

+ More information on Spanish bank guarantees and property in Spain

© Mark Stucklin (Spanish Property Insight)

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