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Reclaim of deposits for off-plan properties in Spain

For many who attempted to purchase property off-plan in Spain and who found that the property was not completed, it has been an uphill struggle to reclaim deposits paid to developers.  This year new hope emerged for those affected when the Spanish government applied a law to allow investors to reclaim deposits for unbuilt off-plan properties in Spain.  

Here we take you through the background to the law regulating deposits paid for off-plan properties in Spain.  We also analyse why some investors found themselves in difficulties following the economic downturn.  Finally we explain the current position when it comes to reclaiming deposits paid for unbuilt off-plan properties in Spain.  

The law in relation to deposits paid for off-plan properties in Spain

In January 2016 we witnessed an example par excellence of the Spanish Supreme Court upholding consumer protection rights by reinforcing and applying rules first created by a law passed 48 years before. The Court applied a law whereby the Spanish government legislated to protect deposit payments made by purchasers of property who were buying property off plan from developers. 

In 1968 a law was passed requiring that a developer who received a deposit payment in relation to a new build must hold that deposit in a designated account, use the funds deposited only in respect of expenses and capital purchases relating directly to the build, and provide a guarantee to the purchaser for the amount of the deposit, as well as for 6% interest on the amounts paid in the event that the build either ran over, or was not commenced at all.  

Developers and off-plan properties in the boom years

Conveniently for Spanish property developers, during the booms of the 90s and the noughties these rules were to a large degree honoured more in the breach than in the observance.  The result was that whereas developers sometimes provided guarantees for deposits, the funds paid were hardly ever paid into a designated account and no control was maintained over the way in which the funds were spent.  

Some developers used the deposits received to speculate with other properties, sometimes buying land that had been zoned for building immediately, or other plots of land still classified as farmland to this day, in the hope that the land would be rezoned and they would make fortunes overnight.  

Such speculative investments often had nothing whatsoever to do with the build that the purchaser was interested in completing.  Over a period of years a considerable number of developers amassed enormous fortunes.  Bribes were paid to mayors and other political appointees for planning consents that very often were unlawful themselves.  This is a practice that led in no small measure to the property crash from which some parts of Spain are still trying to recover.  

The effect of the economic downturn

As a result of the crash, many developments were not completed and even more were not even commenced.  In many cases considerable deposits had been received by developers without the land having been zoned for building and certainly prior to any specific planning permission being approved.

In the downturn those who had expected to complete their purchases and enjoy their dream homes were instead seeking to recover the deposits that they had paid.  Of course, those who had sold to them were nowhere to be seen, particularly as many of them were either middlemen no longer to be found, or development companies in liquidation.  Hence, the purchasers’ sights were set on the banks, which since 1968 had been bound by the obligation to keep deposit monies separate, to be used only for the development in question and not for any other purpose.  It is important to note that the Spanish civil justice system moves at a snail’s pace at the best of times, so it is only now that cases are being heard at Spain’s Supreme Court.

The current legal position in relation to reclaiming deposits for off-plan properties in Spain

The judgment of 1January in the Supreme Court is clear.  Banks and building societies that received funds for deposit payments will be liable to a purchaser for the total amount of the payments made by the purchaser into the developer’s bank account at the bank in question, provided the purchaser can show that the bank did not ensure that (i) the funds were transferred into a separate account, (ii) a bank guarantee was provided, and (iii) the funds were used only to fund expenses and materials directly relating to the development.  If the developer is solvent then it will have to shoulder the liability itself.  

It is important to stress that in order to make a successful claim, a purchaser will have to show that the deposit funds were used for a purpose other than the construction of the development in question, which may be a tough hurdle to negotiate.  Documentary evidence will be required to prove your claim and it may take some time to obtain this, supposing that it still exists.  Hence, each claim will certainly be decided on its merits.  

It follows that this new decision does not necessarily open the floodgates to a long series of successful claims against Spanish banks, but Spain’s Supreme Court has left the banks in no doubt that it is prepared to go a long way to ensuring that the consumer is not ultimately prejudiced by the unashamed recklessness of the banking sector in the past.

What to do if you want to reclaim a deposit paid for an off-plan property in Spain

If you paid funds to a developer in relation to an off-plan property that was never built, you may be able to reclaim your deposit from the Spanish bank that guaranteed the payment or from the developer.  

Contact us for a free initial consultation.  You can contact us by email at info@solicitorsinspain.com by telephone on 020 3478 1420 or by completing our contact form.  

Last updated: 27 September 2016

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