James' Blog about Property

Discussion, advice and philosophical points about all things property whether UK or International markets

Bank Guarantees and the responsibility of the developer in the world of Overseas Property – Part one, Spain

Posted by jamesdearsley on December 8, 2009

There has been a lot of insecurity over the last year about overseas property and I have seen a real shift in the property market to people buying either resale property or key ready property. This is not surprising since a lot of the media has been filled with developers not finishing their developments and I have to admit I have seen first hand, several smaller and some larger developers having serious problems.

It upsets me somewhat though as there are good deals to be had out there with developers needing cash flow and so willing to give really good incentives for people to put their money down. I am seeing some very astute investors making some very good purchases which will certainly pay off in the next few years.

How can you make these investments knowing that your investment is safe? One avenue is to look at the particular country you are hoping to invest in and look at bank guarantees or insurance bonds to protect you payments.

During the research for this blog article I found it quite difficult to get accurate fact on some countries as quite simply they either didn’t have such a system or developers, for one reason or another, didn’t want to run such schemes. I am covering some of the major markets that my company deal with so this has made it a little bit easier.

Spain.

Spain, for the British and mainland European market, has always been the favourite. Even in tough times Spain remains the leader in terms of general interest and sales though this is where the largest market shift has been seen. The Resale and Repossession market has really increased. However, providing there are safe systems, Spain also offers the best opportunities for bargains.

A lot of people do not realise that Bank Guarantees are actually a legal requirement for developers. Historically developers have never really made a big deal of it and buyers have never really been interested in them. Basically they protect the money you have put down and not the capital appreciation – therefore if you had a three year build and it was a little late in completion the builder would be more than happy to cancel the contract as it meant he could get far more for his property than what he sold it for originally. Needless to say that buyers didn’t really want to tie developers into these agreements.

Now the market has changed and buyers should be aware that they can request bank guarantees according to Act 38/1999, 5th November, about Building Management, by virtue of Act 57,1968, 27th July about receipt of advanced payments against property construction It states that developers have to follow two main stipulations when dealing with cash on off plan developments:

1. Guarantee funds and an additional 6% annual interest by insurance or bank guarantee in case the construction is not finished by that stipulated in the contract.

2. The funds received by the builder have to be held in a separate “client account” that cannot be released to the builder until the agreed section of the build has been complete relevant to the funds held.

In view that there is a 6% interest incurred and the cost of the policy is incurred by the builder it makes sense to ask for these policies to be taken out.

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5 Responses to “Bank Guarantees and the responsibility of the developer in the world of Overseas Property – Part one, Spain”

  1. Great affair, I did not thought reading this would be so interesting when I read the title.

  2. Good point. However, there seems to be evidence in Spain that a small minority of developers do not put an insurance policy in place. We would strongly recommend that all clients buying off plan ensure that their solicitor checks that the correct documentation is in place in respect of this.

    • Hi Moraira,

      As they are obliged to by law I would have thought that any due diligence that a lawyer should do before advising a firm to promote the development would show this up wouldn’t it?

      Thank you for your comments.

      James

  3. Hi James
    I totally agree with you. The solicitor really should pick up on this. However, we are aware of clients who have bought and later found that they have no guarantee. How this can slip through the net is beyond me. It probably only happens in a limited number of cases but we think it is always wise to get confirmation from the solicitor that he or she has dealt with this matter. We are also hearing rumors of a builder facing a substantial fine for not having a guarantee in place.

    • I hear the same rumours! Sadly, in times gone by there hasn’t been the incentive on either side to really tie these guarantees together. The market just hasn’t needed it but now it does, I should think that legal matters will be a lot tighter now.

      Thanks for the comments.

      James

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