Please note that the information
provided in this article is of a general interest nature and intended
as a basic outline only. You are well advised to contact a professional
for advice specific to your circumstances. Nothing contained in this
article should be seen or taken as the writer or publisher providing
legal or financial advice.
A number of clients and contacts have asked us to expand our comments made earlier in the year in our “Off
Plan – Time To Complete”
article. We have been very active in this sector for a number of months
and hope that any pearls of wisdom that we have can be passed on to you
with the aim of easing your dealings in the Spanish property market.
For many it’s an eagerly awaited time when a family’s dreams of
owning a Place in the Sun are finally realised. We have heard many
romantic tales of clients; “Just looking” by attending a property show
in the UK. Turning a misty afternoon at Aintree Racecourse or a balmy
summer’s evening at Sandown Park into the start of a love affair with a
beautifully presented property overlooking the crystal Mediterranean.
Taking an attractively priced inspection trip to their chosen
destination and consummating their new found passion by placing a
deposit to buy their property “off plan”.
Trust me, for many, the experience was and is a pure pleasure. With
generations of the buyer’s family and friends flocking to soak up some
sun on the newly completed terracotta tiled terrace. However, for other
purchasers, two to three years on from paying their initial deposit,
the reality of a property being ready for “Completion” hits.
For the vast majority who have paid a deposit plus, often, several
stage payments to arrive at the point when the property is ready for
its occupants, their decisions are relatively straight forward,
depending upon their individual circumstances:
a. Do we raise a mortgage for completion locally in Spain?
Spanish operations, including the local office of UK lenders,
continue to offer very competitively priced mortgages – around 3.75% to
4% are usual. Rates are scaled to the current Euribor (Euro Interbank
Offered Rate) rate – plus an agreed additional percentage. An offer may
well be accompanied by a one or two year interest only arrangement.
Loans to value of up to 80% and terms of between 10 and 25 years are
available.
However, you should note that the costs of raising mortgage funds are
front end loaded and are quite significant - See below. Additionally,
should you wish to redeem your mortgage early, there is usually a
redemption penalty charged by the bank of 1%? However, it should be
noted, that many lenders allow an annual partial redemption at no added
cost. Most mortgage brokers seem to recommend that as the redemption
penalty is in respect of a complete redemption, if you are in the
fortunate position whereby you are able to redeem early to avoid costs,
you may chose to pay off 99% of your mortgage loan.
This is a sound startegy if your circumstances are faily “regular”, you
are able to provide valid P60’s, pay slips and bank statements
justifying income.
It is argued that as the inheritance tax (IHT) laws of, particularly,
Andalucia are somewhat restrictive and because of the lack of inter
spouse transfer on death, may be pernicious as between a husband and
wife, that having a mortgage is fairly useful IHT planning. There may
be some merit in this approach. In other parts of Spain IHT has been
done away with in favour of Succession Taxes which tax the recipient of
the asset not the Estate of the giver.
b. Do we take the developer’s mortgage offer?
As the developer will have borrowed to finance the construction,
he already has a lender who will be keen to pass onto the incoming
purchaser a share of the total borrowing that is represented by the
individual property. Be cautious. Often the rates offered by a
developer’s financier are well in excess of the market rate.
Conversely, many Private Purchase Contracts (PPC) contain a provision
stipulating that if at the completing the purchaser doesn’t take the
developers finance then a penalty, usually 1% of the funding which has
not been taken, will be requested from the purchaser.
c. Do we raise an equity release arrangement on our property in the UK?
I suspect that this may not be a preferred option as, currently,
the costs of servicing such UK borrowings may be significantly higher
than an equivalent loan in Spain. Additionally, although some excellent
currency broking businesses – see below - exist there may be an
exchange rate risk if it is intended to obtain an income from the
rental of the property in Spain in € to service UK borrowings in £.
It may be interesting to note that only relatively recently have equity
release arrangements been available in Spain respect of a Spanish
property. Currently, these products are more used in relation to
pre-owed and unencumbered property but as the financial market in Spain
evolves we expect to see more borrowings against properties that have
previously been mortgaged.
d. Do we place our own UK capital into the property to complete?
This is a means of reducing the outlay on mortgage funding and
wholly depends on personal circumstances. Many clients have
chosen this route if they have the funds available as they are
either not interested in obtaining local rental income or they are not
convinced that they will make sufficient rental income to service
their local mortgage borrowings.
e.
How do we make an economic transfer of funds to Spain avoiding exchange
rate vagaries or the heavy transfer costs of High Street banking?
Specialist currency brokers handle many thousands of € Euro/ £ Sterling
and vice versa deals everyday. The size and buying powers of their
business – and because they specialise in this currency exchange
function – means that they really do offer the most competitive
service.
For someone who needs to ship €s from, say the UK, or a non-€ country,
to Spain for a completion this is the most prudent method. Whilst many
of our clients have saved sizeable sums on making a bulk transfer
others continue to save on a monthly basis, as they pay their mortgages
in €, and need to transfer agreed amounts from their £ Sterling bank
accounts.
UK high street bank’s exchange facilities are rudimentary and
their costs are high. We are told that often a “tourist” rate is
applied to their conversions. Additionally, we have many examples of
funds being “lost” in the UK banking system for up to three weeks
whilst they are transferred through the European banking system. The
only gain to be had is enjoyed by the bank.
f. What are the costs of raising a Mortgage in Spain?
If you are planning to complete your purchase using mortgage
funding, in addition to the costs of servicing the borrowing you’ll
need to budget for the following additional costs:
-
Bank Valuation Fee - Calculated as a percentage of the valuation for
smaller properties usually in the region of €400 to €750 plus local VAT
or “IVA”. Rising to 1% of the valuation for larger properties.
-
Bank Arrangement Fee – Often 1% of the mortgage loan amount.
-
Stamp Duty – Based on mortgage liability and usually around 1.8% of the loan.
- Notary
Public Fees – The mortgage needs to be signed and witnessed in front of
a Notary in order to be effective. Notary’s fees for this role are
calculated as a percentage of the mortgage liability. Property
Registration fees -
- Land
Registry – The mortgage needs to be recorded as a charge against the
property and fees will be due based on a percentage of the mortgage
liability.
-
Legal fees – which may be between .75% and 1.5% of the mortgage loan
amount. These fees may sometimes be substantially reduced or waived
where the lawyer is handling the completion of the off plan purchase.
For those who went large and optioned two, three or more off plan
properties hoping to be able to pass on or “flip” the contract before
completion, pocketing a handsome profit in the process, a level of high
anxiety is a usual symptom. They face a decision of which course to
follow. The choices are usually straightforward:
a. Raise mortgage or other funds to make the completion;
It should be noticed that lenders in Spain have not yet become
culturally used to the “buy to let” investor market. They often have a
difficulty in lending to a purchaser who is buying more than two
properties.
If you do arrange funding to complete on all the properties optioned,
being the owner of a multiple properties will bring its fair share of
benefits and some headaches.
Of course, this also applies to the purchaser of a single property, but
you’ll need to organise the “commercialisation” of your properties.
This will include the fitting out of the properties for the long and
short term rental market - whichever you see as being the most stable
and delivering sufficient income to service your borrowings.
Several excellent furniture packages exist which should cost between
€8,000 to €12,000 to simply furnish a straight forward two to
three-bedroom apartment to appeal to the rental market.
You’ll need great rental management to ensure that the number of “void”
weeks are minimised and this is usually available for around 15% of
rentals for short term and one month for long term. The month – on a
long-term contract - often being paid by the tenant.
Please note that as a landlord in Spain you will see an income here and
broadly you should expect to pay around 25% in tax on this income,
unless declared elsewhere and a tax credit in Spain applied for. A
useful information is www.agenciatributaria.es
b. To sell at a lesser market value;
The holder of a PPC option may seek to sell at a price that is less
than the price that they agreed to buy at. Any theoretical profit,
which may have been generated over the last couple of years, is passed
on to the incoming purchaser. The motive behind the sale in this way
being merely to recover as large a percentage of the deposit(s) paid as
possible. We have assisted clients to make such sales but they are
unattractive but possibly expedient.
c. Cut your losses.
Given the cash exposure of the deposits and instalments already
invested whether the current market value of the property warrants a
continued stake. It must be clearly understood that if you fail to
complete the usual risk is that you will forfeit your full deposit.
Prior to risking the loss of your deposit(s) perhaps you should consider the following:
a. In addition to continued attempts to sell the property, you
should consider whether the property, when complete, benefits from a
rental guarantee or similar for a period which may be anything from two
to five years. This will be clear from the PPC that you signed at the
outset. Will this deliver sufficient income to justify completion and
will it go some long way to servicing the mortgage payments? Will long
and short term rentals be permitted in such property or is the
“guarantee” given because the developer already had a willing rental
market? Don’t forget the associated costs of property ownership in
addition to the servicing of mortgages. These include community or
urbanisation charges, wealth taxes and Town Hall refuse and rates type
taxes.
b. Talk to the developer. They may be willing to reduce the
price particularly if you hold options over several properties. If you
fail to complete when requested to do so they are unlikely to return
your deposit but they will need to sell the property to recover their
development and building costs. You may have already a good idea of the
selling price that’s achievable.
c. Are there any other tactics that could be employed to delay
completion? Would a “snagging survey" be a useful weapon for your
lawyer when attempting to ensure that the property should be completed
to the Specification in the PPC? This is always assuming that the
Specification in your PPC is sufficiently expansive and descriptive.
Issue may be taken where the property to be completed doesn’t accord
with the description in the Specification. A price reduction or a sum
by way of a “cash back” payment from the developer may be the best
solution for a failure to attend to the necessary remedial work.
d. Should you try to get out of the PPC and seek to recover
your deposit? The vast majority of PPCs are standard form agreements
that invariably the purchasing client had no option but to sign
unamended. A closer examination of the small print may disclose an
opportunity, given the particular circumstances of the “build out”
period, to argue that a stated completion date, as set out in the PPC,
has not been adhered to and/or has been exceeded. Various of our legal
colleagues have suggested that extensive, and totally unjustifiable
delays, the total failure to commence any work at all or an other
substantial failing, may well give rise to such a claim. It is often
specified in the PPC that should such a failure exist then after a
period for “curing” the breach, usually three to six months, the
purchasing client may be entitled to rescind the PPC and demand the
return of the deposit paid plus judicial interest, usually 6%.
Naturally every case depends upon its precise facts. We have seen some
stronger and some weaker cases, but there may be merit in considering
such action. You’ll need to ensure that your Abogado in Spain is
willing to advise that action is feasible and that they are prepared to
proceed with such action. It will involve, potentially, ripping up the
PPC for you and by extension, many other purchasers in the same
development. Requesting the developer’s guarantor to hand back hard
cash back under the, now, legally necessary, Bank Guarantee.
There are a couple of elementary steps that can be followed prior to
issuing legal proceedings. Experience has shown that developers and
their Guarantor Bank have a tendency to negotiate a settlement rather
than become embroiled in long drawn out litigation.
Should your developer not negotiate and you take the decision to pursue
the matter through the Courts in Spain, with the guidance of an
experienced Litigation lawyer, you should expect to wait up to a year
for a decision “at First Instance”. This decision may in turn be
appealable by the defendant developers and/or his Guarantor Bank.
Legal costs and expenses are not treated in the same way as they are in
the UK. A potential claimant needs to be certain of receiving the most
comprehensive advice before embarking on such an action. If they are
100% successful, I understand that there is a right to be indemnified
for your full legal costs and expenses by the losing party – but not
otherwise.
We are aware that many purchasers seeking information about the
progress of their development are connecting with other purchasers via
websites such as the aptly named, and really very good, www.eyeonspain.com.
In this way they swap detail and update other purchasers on the
progress of building etc. at their development. It may also be an
appropriate forum to discuss what happens if the completion of your
development is unduly delayed.
A number of parties have approached us in recent weeks worried
by the appalling press following the “White Whale” money laundering
scandal that had, at its heart, a Marbella law firm. The more recent,
“Operacion Malaya” has seen the Mayor of Marbella, her Deputy, the
Planning Chief, along with others, including several from the Town Hall
and Police force, arrested for “trafficking in influence” and planning
irregularities. These incidents have sent a shock wave through the
purchasing community who are as a result questioning the value of
information being received from several quarters including from their
current advisors.
Some are now being told that the properties they are hoping to
buy are now threatened with demolition as they were illegally build on
land that was not classified in the first instance as that available
for building. Alternatively, the developer has exceeded the density of
allowable building or for one reason or another the development finds
itself in difficulty when the developer seeks the all important Fin de
Obra – a document confirming the Formal Completion of Works on a new
property. Without this a Licencia de Prima Ocupación – the Licence to
occupy a completed property - will not be granted. This will mean that
services, such as electricity and water, will not be supplied by the
utility companies, unconnected lenders will not agree to provide
mortgage funding and insurance companies will not provide building and
contents cover.
Its your lawyer’s job to ensure that there are no defect in the
performance of the Licencia de Obra – or Building Licence – or the
planning permission that has been granted that could affect the
legitimacy of the property, its value or saleability.
Given the current situation in Marbella, a new temporary Town
Committee has be constituted by the Malaga based Deputación of the
Madrid Central Government, this will remain in place for the next
thirteen months before the already scheduled municipal elections aimed
at electing a new Mayor. The Junta de Andalucia, the Andalucian Local
Government based in Seville, that had already removed the right to
grant planning consents from the Marbella Town Hall pre-Christmas 2005,
are readying themselves post Easter 2006 to consider all of the
Building Licences granted by Marbella on a case by case basis. This
will mean considering many thousands of licences and, for those
developments where building and infrastructure are almost complete, it
will have the effect of delaying the grants of the Fin de Obra and the
Licencia de Prima Ocupación. This will in turn delay the actual date of
Completion for many off plan purchases.
Stories persist of local developers putting pressure on lawyers
who are being squeezed by banks in respect of final building finance to
obtain completion of property even thought the property may not be
legalised, registered or habitable. This should be avoided.
We appreciate that when you are dealing at a many hundreds
possibly a few thousand miles of distance with a high value item such
as a property purchase there are many fear factors involved. When you
add to that the recent adverse press whether or not the property you
are buying is actually sited in the Marbella region this may well be
shaking your confidence. The physical distance aside, there are
significant cultural distances that are also pretty alarming – imagine
Weybridge or Macclesfield Borough Council being arrested on mass – its
unthinkable!
You need a team including bilingual lawyers with whom you can properly
discuss the issues of your purchase and provide you with commercial
solutions.
In addition, you’ll need “the Family Solicitor” type role to be played
in Spain for your ongoing benefit. You’ll need wills, you’ll need
advise about long and short term rental agreements, key-holding and
proper property management – now that you are about to become a “jet to
let” landlord. You’ll certainly need a Fiscal Representative who will
be responsible for the delivery of your annual tax return, the setting
up of standing orders for the payment of your utility bills – you’ll
only need to make sure the moneys in the bank!
The very good www.Expatica.com
(24.04.06) reported that the UK’s Financial Times has observed that
expats are a driving force behind the Spanish economy and that expat
purchases are accredited with sustaining Spain’s construction boom.
Further, a Spanish property expert is quoted as saying that there is
“…no risk of a property crash in Spain in the short or medium term
thanks to new demand generated by immigrants". He goes onto note that
immigrants will buy some 170,000 homes in Spain this year – almost one
quarter of total demand for new houses.
Whilst this is a brave prediction it does reflect a market that has in
built confidence and which expects to be here for many many years to
come.
Contact: Mark Wilkins of The Rights Group SL on 0034 600 343 917
or by e-mail on mark@therightsgroup.com
www.therightsgroup.com
© The Rights Group SL (Marbella) 2006
About the author:
Mark Wilkins – a UK qualified Solicitor - has been in Spain with his
family for nearly four years, three of which running The Rights Group
SL (TRG).
TRG’s primary role is to project manage or to “drive” clients dealings in Spain.
TRG is a “one stop shop” solution for busy Northern European clients
seeking leisure or investment property in the South of Spain. It
comprises a network of test driven and wholly independent bilingual
client service professionals.
Clients entrust TRG to provide access to those professional services
needed to get the job completed. These include lawyers, accountants,
surveyors, mortgage, currency and insurance brokers. They are “best of
breed” client service providers who TRG are confident to recommend and
about whom they hold glowing testimonials from many satisfied TRG’s
referred clients.
A TRG representative will be on hand to co-ordinate and "drive"
client’s deals and, where necessary, the client’s appointed advisors.
Following up and chasing the advisor as necessary to get the job done.
TRG are also delighted - where asked - to co-ordinate a clients home
search, the raising of the funds required to complete the purchase
through its many contacts in the real estate and finance worlds in
Spain.
TRG’s services – as opposed to those of the network member – are
usually free to TRG’s clients. TRG receives a referral fee, which is a
usual custom in Spain.