Bank Guarantees: All That You Ever Wanted to Know but Were Afraid to Ask.
LAWBIRD LEGAL SERVICES
Friday 27th June 2008
Brief Overview of Law 57/1968
Law 57/68 rules the protection of stage payments in off-plan properties. This very short law of only seven articles was enacted to secure the stage payments of purchasers
should a developer file for creditor protection. BGs are not applicable to resale properties, only to off-plan.
Article 1 of the said law establishes that developers will have to provide free of charge to the purchaser/s a Bank Guarantee or Insurance Policy (henceforth BG for either) to guarantee the refund of their stage payments plus 6% interest in the event of the developer becoming insolvent. The Building Act (Law 38/99) actually amends this percentage in its first additional disposition and it will be the legal interest set in the Budget Law published annually by Spain’s Law Gazette (Boletín Oficial del Estado). These legal interests are simple annual interests, not compounded.
In compliance with article 4, these guarantees will be cancelled upon the granting by the town hall of the
First Occupancy Licence. Normally at completion the lawyer appointed by the purchasers will hand back these guarantees to the developer’s representative.
Article 7 stipulates that the rights set forth in this law cannot be waived by the purchasing party meaning they cannot be renounced.
Who requests the BG?
It is the duty of the conveyance lawyer you appoint to request the BG from the developer. The developer in turn will arrange with the bank underwriting the whole development or with an insurance company the set-up of these BGs.
Normally in an off-plan property after having paid the initial security deposit which strikes the property off the market, you are typically required to make interim payments on 30% of the value of the property. These payments are normally made in regular instalments (i.e 3 or 4). Your lawyer will then request from the developer one BG at a time to cover each and every instalment including the initial security deposit. So normally your lawyer will one BG for each of your stage payments securing the full amount.
As per this law a developer cannot charge to issue a mandatory BG. Issuing a BG has high set-up fees for the developer as they must allocate an amount of money in a special bank account besides being a loss of cost of opportunity for them. This perhaps helps to explain why some developers may not be eager to hand them out unless the purchaser’s lawyer has requested it from them.
What does a BG cover?
It secures the full stage payment paid by yourself including the applicable VAT (currently at 7%) on said amounts. On top of this legal interests are applied.
When are the BGs issued?
BGs are issued normally 30 or 40 days after you have made the down payment they are securing. Naturally a bank cannot issue a BG if you have yet not paid the stage payment. In other words, a BG cannot be issued prior to handing over the stage payment to the developer.
What should a BG ideally include?
A BG should be individualised for each particular purchaser. It should include the following details:
1.- Name & surname of purchaser/s.
2.- Their nationality & passport number/s.
3.- Their address.
4.- The exact amount in Euros which is being guaranteed.
5.- The name and address of the development where they are purchasing.
6.- Developer’s name.
7.- The details of the residential unit they are purchasing. i.e. flat number seven, Block 3, second floor.
8.- Name & seal of the Bank or Insurance Company guaranteeing said stage payments.
9.- The number of the Registro Especial de Avales (if it’s a Bank Guarantee) as well as the bank account details where the secured amounts will be lodged.
Types of BG
As the Law 57/68 doesn’t specifically rule which type of BG should be issued by the developer, this allows for two types:
1.-
Ordinary BG.-This BG cannot be claimed upon immediately by the purchaser in case the developer defaults. Prior to executing it, it actually requires a judge’s ruling stating that the bank ought to refund –or not- the off-plan purchaser. This means that the purchaser will actually have to engage the services of a litigation lawyer who will claim upon said BG in a special executive procedure. The litigation expenses are borne initially by the purchaser albeit may normally be claimed back from the bank together with the full refund of the stage payments and legal interests. This is the most common type of BG which is set up and one cannot argue that it is illegal or unlawful, it is just less practical.
2.-
“Aval a primer requerimiento”.-This is just an ordinary BG which includes a special clause by which it can be claimed upon immediately by the conveyance lawyer without the need of a judge’s ruling. This is really the ideal BG to have because it saves the hassle, stress and additional expenses of having to go through a court procedure, even if it’s an executive one.
I am building my own dream-villa, should the constructor hand me a BG?
No. In this particular case in which a person has bought a plot of land and they are building their own detached villa the Building Act regards them as a self-developer. The constructor is hired by them and is acting on their behalf. In this particular case BGs are not applicable as the purchaser
is the developer. However, the law will require them to arrange the mandatory ten-year insurance (Seguro Decenal). A lack of compliance attaining this mandatory insurance will result in this self-developer being forbidden to sell their house within the next ten years.
Common BG Pitfalls
There are far too many to be included in this brief BG legal overview. Please take professional advise from your appointed lawyer on this matter.
To name a few:
1.
The BG has a wording that makes it subject to the granting of the Certificate of End of Construction (CEC) instead of the mandatory LFO. Law 57/68 sets forth in article 4 that the BG should be valid until the granting of the LFO. The problem is that a CEC, which is the prerequisite prior to the granting of the LFO, doesn’t mean the development is regarded as legal. In fact the CEC is issued by the arquitect in charge of the development who is actually on the developer’s payroll. Besides contradicting the specific wording of the said law this clause should not be accepted as a development in despite of having a CEC issued may not be legal. Moreover, for the CEC to be rendered valid it has to be signed by the architect, technical architect (aparejador) and must be approved and countersigned with the official seals of both the Arquitect’s regional College and Technical Arquitect’s regional College. So a CEC only signed by one of them would not be deemed valid.
2.
The LFO is conditioned to an Expiry Date. This is fairly common and contradicts blatantly both the Spirit and Wording of the law. The problem with expiry dates is that almost all developments are handed late for one reason or another. The danger in including expiry dates is that if the development isn’t finished on time as per the clauses in the Private Purchase Contract and the deadline is overrun the BG will cease to be valid. However this is a subject of hot controversy between lawyers and judges as there are many who believe that the inclusion of an expiry date is null and void as it goes against the law. This will remain contentious until there is a string of likeminded rulings. In the meantime, I would advise to renew your BGs to ensure your financial interests are secured at all times should the worst occur.
3.
Cowboy Insurance Companies. On the wake of the long-lasting property boom many such cases have been reported in the media. Invariably these Insurance Companies are companies incorporated abroad specifically to be outside the reach of the Spanish Jurisdiction. On doing this they waive Spain’s requirements and should the developer default, they are purposely unable to back up the BGs or Insurance Policies they have undersigned. The process to make them accountable for is long, winding, expensive and often fruitless. That is why it is most advisable that whichever Bank or Insurance Company that issues these BGs is located within Spanish territory as a precaution. The Spanish Government has a
list of unauthorised insurance companies in its website which it regularly updates that are not registered or authorised to operate in Spain.
4.
Group or Collective BG whose beneficiary is not the purchaser.- This happens typically when an entrepreneur buys from the developer at a discounted price the whole development or a large number of units to resell it abroad in the UK or Ireland at a higher price. The BG will be under the name of this company and not under the name of the final individualised purchaser as it ideally should. These BGs are normally for a very high amount of money (millions of Euros) as they group various residential units.
CONCLUSION
A BG is a very important document for the purchaser as it secures their stage payments should the developer file for bankruptcy.
We cannot stress enough the importance of attaining a BG. So even if you are requested to pay
a BG, which is unlawful, we would advise you to do so because it
will act as a safety net securing your financial interests should the developer go into receivership.