Banks must demand these guarantees or they will be secondarily liable for them.
Prompted by some well-known cases of “off-plan homes” that were never delivered in the 1960s, Law 57/1968 of 27 July, on the receipt of advance payments in the construction and sale of homes, was published. It required developers to have a number of guarantees in place when carrying out a housing development and receiving money in advance.
Likewise, the banks holding these funds were required to exercise a special duty of active supervision, making them jointly responsible, requiring them to know where the funds come from and to request the appropriate guarantees from developers, and preventing them from relying on ignorance or on their own lack of diligence to frustrate the rights of consumers and users. Nor could they plead lack of knowledge resulting from their own passivity and lack of diligence.
Since this can cause irreparable harm to those who, trusting and in good faith, enter into an always uncertain off-plan purchase, it became necessary to lay down general preventive rules guaranteeing both that the money advanced by purchasers and future users is actually and effectively applied to the construction of their home, and that it is returned if the home is not built and the company promoting the works is completely insolvent.
Later, the Spanish Building Act 38/1999 of 5 November (Ley de Ordenación de la Edificación, LOE) continued this special protection for advance payments, transcribing article 1 of Law 57/1968 in its First Additional Provision. Its wording was, however, amended by Law 20/2015 to bring it up to date and include housing cooperatives:
Section 1.1 of the new First Additional Provision of the LOE provides that developers must:
One. Obligations of developers receiving advance payments.
- Natural and legal persons who promote the construction of any kind of homes, including those built under a homeowners’ association or housing cooperative arrangement, and who seek to obtain payments of money for their construction from purchasers, must meet the following conditions: a) Guarantee, from the time the building permit is obtained, the return of the amounts paid plus statutory interest, by means of a surety insurance contract taken out with insurers duly authorised to operate in Spain, or by means of a joint and several guarantee issued by duly authorised credit institutions, in the event that construction does not start or is not completed within the period agreed for the delivery of the home. b) Receive the advance payments from purchasers through credit institutions, where they must be deposited in a special account, separate from any other funds belonging to the developer, including in the case of homeowners’ associations or housing cooperatives, and which may only be drawn on for expenses arising from the construction of the homes. In order to open these accounts or deposits, the credit institution shall, under its own responsibility, require the guarantee referred to in the previous condition.
- The guarantee shall cover the amounts paid by purchasers, including applicable taxes, plus statutory interest. In other words, when developers receive advance payments they must guarantee them by means of surety insurance issued by an insurance company or a bank guarantee provided by a bank, and deposit the amounts in a single special bank account.
Thus, banks must require developers to provide these guarantees before the payments are made; otherwise, they will be liable for breaching their duty of supervision as the depositary of those funds.
Precisely because the bank knew, or ought to have known, that the buyers were paying in amounts on account of the price of the homes in the development, it was legally obliged to require the developer to provide a number of guarantees (surety insurance or a bank guarantee) and to open a special, separate and duly guaranteed account exclusively for the amounts received for that development.
As we say, the aim is to protect home buyers who make advance payments on off-plan developments that may never be built: first, the developer must guarantee those amounts, and if it fails to do so, the banks must answer for them.
If you have a problem with advance payments made for developments that are not going ahead, contact us.
DPcon Reclamación de Daños Constructivos
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