Why did so many off-plan payment bank guarantees turn out to be worthless bits of paper?

Example Spanish bank guarantee for off-plan property
Example Spanish bank guarantee for off-plan property

Buying off-plan is risky unless your off-plan stage payments are protected, which is why Spanish consumer law requires developers to offer a bank guarantee or insurance policy to all off-plan buyers putting deposits and stage payments at risk until the property is delivered.

But, as so many buyers towards the end of the boom years (2006 to 2008) founded out to their terrible cost, many developers back then either didn’t bother to organise a guarantee, or the guarantees turned out to be worthless in practise.

If the law says your developer must take out an insurance policy or bank guarantee to protect your payments in case of breach of contract by the developer, and you have a copy of the insurance policy or bank guarantee, how come so many of those bits of paper turned out to be worthless?

Luis Cuervo, head of Spanish Legal Reclaims, a legal advisory firm specialising in recovering money for clients in Spain, explains.

“When the Spanish property bubble burst and the crash started, many off-plan investors found out they had a ‘General Guarantee’ for the whole development, rather than a personal or individual guarantee, which was easier to enforce. At the same time, some guarantees were limited in time, normally up to the delivery date in the contract, and expired if the developer didn’t deliver in time.”

As developers went bust in the crash, and buyers started asking for their money back, financial institutions refused to honour General Guarantees, or those that had expired. Some buyers went to court and lost because, at that time, the lower courts sided with the financial institutions. So buyers ended up throwing good money after bad on legal costs, and lost everything.

But some victims didn’t give up, and ended up taking their case to the Spanish Supreme Court, and in a series of decisions culminating in a catchall decision in December 2015, off-plan buyers won the right to claim back all their off-plan payments (with interest) from their developer’s bank, regardless of whether or not they had a guarantee. So it no longer matters whether buyers have a general or personal guarantee, and whether it has an expiry date, or even if they had a guarantee at all. All they have to prove now is that they have made off-plan payments to a specific bank, and the developer failed to deliver in the time stipulated in the contract.

Sadly for those people who took financial institutions to court and lost before the Supreme Court ruled that banks were on the hook for returning all off-plan payments, irrespective of any guarantee, they cannot try again in court, so will never get their money back (thanks to a type of ‘double jeopardy’ principle of law that says you can’t try the same person or legal entity twice for the same claim). But everyone else can now claim their money back. So off-plan investors today don’t strictly need a bank guarantee, though you are strongly advised to demand one when buying off-plan, as is your legal right, as it is much easier and quicker to get your money back with one than without.