Bank Guarantees and the responsibility of the developer in the world of Overseas Property – Part Two, Cyprus
Posted by jamesdearsley on December 16, 2009
I have had a lot of positive response regarding the last blog I wrote about Bank Guarantees in Spain. It is a really contentious issue and one that is not often discussed. I felt the really interesting bit of information was that in the past it was in the interest of the client not to have a bank guarantee in the past – I thought this was a slight contradiction until I realised that the guarantee was on the money submitted and not on the paper value of the house – the developer was quite happy to hand back the money if the property was delayed as they could still sell the properties easily and this time get far more money for them! The markets have changed however and prices are not rising as quickly as before but the need for security has increased rapidly. Now it is Cyprus’ turn to be reviewed and this is a quite different market to that of Spain…….
The reason for the difference in market is the issue of Title Deeds. Title deeds are usually issued immediately upon the purchase of a property and therefore you have the paper proof that you own the property. However, in Cyprus, this can take between five to seven years (yes, really) and this is accepted as normal in this market place and something that shouldn’t be a concern for people. It is simply due to the fact that the Building Authority checks that the development in question is in accordance with the planning and building permit and yes, it really does take that long…..
It is so common that the Contract of Sale (issued for both developer and buyer to sign in the initial stages) usually contains a clause that states the buyers can sell the property without the title deeds in place. As this is such a normal process in Cyprus, this usually appeases people and they continue to sign the contract and move along with the transaction. I have to say, from personal experience, we haven’t seen any problems with this method but it is still open to a few problems that people should safeguard themselves against, especially in the current market.
In Cyprus there are no legal stipulations about who should pay for a bank guarantee as there are in Spain (the developer) but usually and quite strangely it depends on where the developer is based as to whether they contribute towards a bank guarantee. Essentially the issuing of the title deeds cannot be influenced by the developer and so they are hesitant to risk their sale on a bank guarantee that states “if the client cannot get their title deeds in x amount of time then they can get their money back”.
In areas like Nicosia you can usually get your title deeds within a couple of years whereas in towns and cities further away you can be up to 10 years before you get your hands on the title deeds. Because Nicosia developers know that title deeds will be issued after two years they state they will pay for a bank guarantee if this situation occurs if the process takes longer (this is unlikely to occur and so their financial risk is minimal).
Usually the client will be the one who pays for these guarantees. The cost is approximately 1.8% of the money secured, per year. As you can see, it is not cheap and hence the reason why developers are not keen to back the guarantee if they cannot guarantee delivery of the deeds. There is also a bigger issue that I haven’t discussed yet. The money is held in a secure account by the bank that they cannot gain access to either until the stipulations in the bank guarantees, i.e. deeds issued. Obviously developers will not be keen to issue them and therefore it isn’t publicised widely.
In conclusion, developers are not keen due to their exposure to third party delays but also because money is tied up and therefore their cash flow becomes difficult. From the clients perspective, bank guarantees are a definate factor to consider but one that is quite a financial drain if the matter continues for some time.