Bank guarantees for deposits and off-plan stage payments in Spain

When you buy property off-plan or under construction in Spain, and make payments to the developer in expectation of delivery, you need to make sure your deposit and stage payments are guaranteed so that you get your money back if the developer fails to deliver your home under the terms agreed.

Home building is a complex business, and 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.

This is not an issue when times are good, but when the going gets tough, bank guarantees can save your bacon. During the Spanish real estate boom between 2000 and 2008, many developers ignored the law requiring bank guarantees, and when the bubble burst in 2008, many off-plan buyers found themselves with nothing to show for their payments. Fortunes were lost, and lives were ruined. Many years later some of them managed to get their money back when the law was changed to make the banks of developers responsible for lost payments but it was an experience all would have rather avoided. You can read more about that drama in the articles below, but if you are buying Spanish property off-plan or under-construction today, just get your lawyer to make sure your deposit and stage-payments are guaranteed so that you get your money back quickly with interest if anything goes wrong.

What to look for in a bank guarantee for off-plan stage payments

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.

Not sure if you 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.

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.

These days in Spain, the developer’s bank is on the hook for returning your payments if the developer goes bust without a valid guarantee, so buyers have much less to worry about than they used to. That said, there are still examples of off-plan buyers losing their payments because of ‘exotic’ investment structures like the one sold by the By Nok promoter of La Boladilla Village Resort in Estepona.  So, even though the risks have been reduced massively, always make sure you have a valid bank guarantee for any payments you make to a developer in Spain for a new home off-plan or under-construction.

What if your bank guarantee has expired?

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