Important Supreme Court Ruling in Spain to protect property purchasers

by Chris Henniker on May 19, 2016


The property bubble story in Spain is well known. In 2008 the credit dried-up, almost overnight. Lenders pulled the plug and left property developers without financing. Hundreds of thousands of developments were left unfinished, and buyers and investors (who in many cases had purchased properties “off-plan” in good faith) found themselves trapped.

The Spanish law is on the whole protective for those investors. According to the 57/1968 Act, the developer has to provide to the purchaser who advances monies a “bank guarantee”, bond or insurance, which operates as a “safety net”. If the developer does not complete in time or does not deliver at all, the purchaser can enforce this bond against the bank and retrieve his money.

Law 57/1968 is a pre-constitutional law that was widely held as ‘revolutionary’ at the time. Unfortunately, it has been recently reformed, as of January 2016, to restrict consumers’ rights.

The problem

The so-called safety net provided by the law has functioned very well over the years, to the benefit of purchasers, but does have some holes.

In particular if the developer did not comply with his duty to provide a guarantee, and the property is not built, the purchaser is left helpless.

To solve this problem, some lawyers took the approach of suing the bank where the money had been deposited by the developer. The first cases were heard in around 2010 and in 2015 they reached the Spanish Supreme Court.

Spain has a civil law system, which means that Courts do not abide by precedent but by statutes. Notwithstanding, two Supreme Court rulings to the same effect are regarded as a “source of law” (or “jurisprudence”) and all Courts have to follow them, when they have a case in hand.

The ruling – legal overview

On 21 December 2015 the Spanish Supreme Court issued a ruling on this very issue, that sets “jurisprudence”.

As per this ruling, following article 2 of Law 57/68 it is the exclusive obligation of a developer to place all the anticipated funds received by off-plan purchasers in a special account that the developer must open ad hoc. It is also an obligation on the developer to hand a bank guarantee to the purchaser. If the developer did not comply with those obligations, the lender (bank) where the account into which those funds were paid by the purchaser is directly responsible to refund the purchaser. The rationale of this is that, according to the Supreme Court, the bank had a “surveillance duty” to check that the developer (that had received its financing) was in compliance with legal obligations.

In summary, according to this ground breaking ruling, purchasers who did not obtain a guarantee from the Spanish developer now have an opportunity to recover the funds they anticipated. They can sue the bank into which the money was paid, provided that this bank knew that they were purchasers. This claim has a limitation period of 15 years as per article 1.964 of the Spanish Civil Code. There is no need to sue the developer as a pre-requisite, as the bank is jointly and severally liable for the breach.

It is expected that this pivotal judgement will trigger massive litigation against the banks. The experience with other similar issues shows us that banks tend to settle these kind of claims before Court proceedings, in order to avoid paying legal expenses.

This guest article was contributed by David Grasa of the Spanish member firm of Kidd Rapinet’s international association, CLG.  If you have bought property “off plan” in Spain, the developer has not delivered and has not put in place a bank guarantee, David may be able to help you, as he explains above..

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