New reform of the LOE

New reform of the LOE: what has changed?

Law 20/2015 of July on the regulation, supervision and solvency of insurance and reinsurance undertakings has amended the Spanish Building Act (Ley de Ordenación de la Edificación, LOE) with regard to the guarantee covering damage arising from building defects and construction defects, and the rules on receiving advance payments towards the price during construction.

It thus introduces the concept of a financial guarantee in article 19 as a way of guaranteeing against damage, in addition to the existing ones, namely material damage insurance and surety insurance.

However, the most important change concerns the rules on receiving advance payments during construction. The first additional provision has been reworded and, from 1 January 2016, will concisely regulate the obligations of developers who receive advance payments; a third repealing provision has also been introduced, repealing the legislation that previously governed this matter, including Law 57/1968 of 27 July on the receipt of advance payments in the construction and sale of homes.

The new features worth highlighting compared with the rules in Law 57/1968 are as follows:

1. The obligation to provide a guarantee will apply from the moment the building permit is obtained, and the guarantee will cover the amounts paid by purchasers, including applicable taxes, plus statutory interest.
2. The requirements that guarantees must meet are set out, whether surety insurance has been taken out or a bank guarantee is chosen.

• Surety insurance:

-An individual policy for each purchaser.

-The full amount of the advance payments must be insured, including applicable taxes, plus statutory interest from the date of the advance payment until the scheduled handover date of the home.

-The policyholder, who is obliged to pay the premium, is the developer.

-The insured party is the purchaser named in the purchase contract.

-The insurer cannot raise against the insured the defences it may have against the policyholder.

-Non-payment of the premium cannot be raised as a defence.

-The insurance cannot end before the construction and handover of the home.

-If an extension is granted for the handover of the home, the developer may extend the insurance, and must inform the insured party.

-If the construction is not successfully completed on time, a formal, verifiable demand must be sent to the developer for the return of all the amounts and, if the developer does not return them within thirty days, a claim may be made against the insurer.

-If it is not possible to claim from the developer first, the claim may be made directly against the insurer.

-The insurer must pay compensation within thirty days of the claim.

-Amounts that the insured party cannot prove were paid are not compensable.

-The insurer may claim from the developer the amounts paid to the insured parties.

-If the insurer has paid compensation, the developer may not sell the home without first reimbursing the insurer for the amount paid.

• Bank guarantee

-It must be issued and kept in force for the full amount of the advance payments, including applicable taxes, plus statutory interest from the date of the advance payment until the scheduled handover date of the home.

-If construction does not start or is not successfully completed on time, a formal, verifiable demand must be sent to the developer for the return of all the amounts and, if the developer does not return them within thirty days, the return may be claimed from the guarantor.

-If it is not possible to claim from the developer first, the claim may be made directly against the guarantor.

-If two years pass from the developer’s breach of the guaranteed obligation without the purchaser having demanded termination of the contract and the return of the amounts, the bank guarantee will expire.

1. The bank guarantee or insurance contract is not given the status of an enforceable instrument, which was previously established in article 3 of Law 57/1968.
2. As for the cancellation of the guarantee, in addition to the issue of the certificate of habitability, the first occupancy licence or equivalent document and proof of handover of the home to the purchaser, it will also be cancelled when, once those conditions have been met, the purchaser refuses to take the home.
3. Breach of the obligations imposed is established as a consumer protection infringement, to which both general and regional legislation apply, without prejudice to the powers of the Directorate-General for Insurance and Pension Funds. Failure to comply with the obligation to provide the guarantee will give rise to a penalty of up to 25% of the amounts that should have been insured and, in addition, the developer will be subject to any infringements and penalties that may apply under the specific building legislation.
4. Some public housing development bodies may be exempted from these requirements, as determined by regulation.
5. Finally, insurers must adapt the policies in force on 1 January 2016 to the new regime before 1 July 2016, for amounts paid from that date onwards.

In general terms, this new law is a continuation of the provisions of Law 57/1968. The most notable points are that the obligation to provide a guarantee applies from the moment the building permit is obtained; that a prior claim must be made against the developer before the return of the money can be requested from the insurer or guarantor; and above all, and in our opinion the most open to criticism, that the bank guarantee expires if the purchaser does not demand termination of the contract and the return of the amounts from the developer within two years of the breach of the guaranteed obligation.

This means that buyers must be very careful about deadlines when requesting the return of advance payments, because if two years have passed since the date construction started or the agreed handover date, they will find that the guarantee has already expired and they will not be able to demand reimbursement from the guarantor.