Buying real estate “off plan” or in the construction phase – How can down payments be secured?
In the past real estate crisis, there have been numerous reports of cases in which an apartment or house was bought off plan or during the construction phase. A deposit was made, but then because of the crisis was construction sometimes did not begin or, sometimes the shell of the building was left standing. Many families lost their down payments and unfortunately, this also affected the many tradesmen who were not able to be paid by the construction company involved. How could this happen? The Spanish law no. 57/1968 stipulates how deposits must be secured when buying “off plan,” and the buyers apparently did not seek legal advice before signing the contract.
The risks of buying “off plan”
As such risks were already acutely evident in the Spanish building industry in the 1900s, the Spanish legislator created – similar to the German developer regulation – Law No. 57/1968 of July 27, 1968 “regulating the receipt of advance payments in the construction and sale of apartments”, renewed by Law 20/2015 of July 14, 2015, which regulates in great detail how such advance payments are to be secured. According to Art. 1 No. 2 of this law, advance payments may only be paid into special accounts of the developer, the balance of which must be kept separate from other funds of the developer and which may be used exclusively for the purposes of housing construction.
Guarantees of the Developer
The banks or savings banks may only set up these special accounts if the developer can prove a bank guarantee, or insurance policies, that guarantee repayment of the deposited amounts plus interest. The developer must hand over the certificate of security to the buyer. The guarantee is valid until the Certificate of Habitability (Cedula de Habitabilidad) is issued. The buyer may not and cannot voluntarily waive this guarantee, it is mandatory by law. If the developer does not give the guarantee required by law, the developer’s manager is personally liable, as has been established by several courts.
Even if the developer has provided the prescribed guarantees on receipt of the down payments, there may be delays in the execution of the contract and the apartment may not be completed on time. To this end, the law stipulates that if construction does not begin on time, is not completed on time or the Certificate of Habitability is not presented, the buyer can withdraw from the contract without further ado and demand the deposit back.
In particular, he must -however- grant the seller an extension of the deadline for performance of the contract.
Liability of the Banks
The banks will also be held accountable: If the developer has set up an account with a bank, into which deposits are received, without the developer having presented the necessary guarantees from banks or insurance companies, the bank is also liable for repayment of the down payment, as well as interest and any legal fees of the buyer. Although the liability issues are thus comprehensively regulated by law, there are countless court decisions on this very complex subject area, which is why a person affected should always appoint an experienced lawyer to represent his interests.