Bank guarantees for off-plan purchases

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. Which is why 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, and even get paid interest on their money.

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 choose to ignore the law, including some of Spain’s leading developers listed on the stock exchange. Most off-plan buyers still don’t obtain adequate financial guarantees to protect their stage payments, which becomes a big issue when the market turns down, and developers start going bust.

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.

There is often a delay between making your stage payments and receiving your certificate of guarantee, so 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. You may have a valid bank guarantee without knowing it; check with your lawyer and developer.

If it turns out your stage payments are not guaranteed then you should demand that your developer arranges one immediately. Use a good lawyer to make sure the guarantee is in order.

Be warned that thanks to the severe downturn in the Spanish property market from mid-2008, bank guarantees are more important than ever. Many developers are going out of business, including some of Spain’s biggest, and those that remain are desperate to reduce costs.

Unfortunately, it is also harder than ever to get a bank guarantee when they are most needed, i.e. when the property market dives. Bank guarantees in Spain cost money to arrange, so developers try to avoid providing them when the going gets tough, regardless of what bank guarantee law says.

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 event that a developer refuses, report the firm to the regional consumer protection office.

What if your bank guarantee has expired?

The law says that bank guarantees are required to protect all stage payments until the property is delivered. Any clause in the contract or the bank guarantee stating an expiry date before the property is delivered is almost certain to be ruled as inadmissible by a court. So if you need to exercise a bank guarantee, but the bank tries to argue that it has expired, just threaten to take them to court, as you are very likely to win (and they know that). If they are sensible they will pay up, and if they don’t, take them to court.

For more advice you need to consult an independent, English-speaking lawyer in Spain