Bank guarantees in Spain explained

On buying off-plan property in Spain, it is normal to make a 30 to 40% down payment in instalments and the balance is paid at completion, before the notary.

Regarding down payments, they are structured as regular stage payments made to your developer. However, off-the-plan has inherent risks, as you are actually making a payment on a property which is still under construction or which construction has not even begun. There is a risk that the development will not be completed on time, not at all or that the developer files for receivership in the future. In such a case, a buyer’s deposit would be in jeopardy.

For this reason, Law 20/2015, and others, were enacted creating ‘bank guarantees’ (or insurance policies) securing all interim stage payments. Bank guarantees are mandatory and should be made available to all buyers of new-build property free of charge.

BGs is a complex matter that has been considerably abridged for ease of comprehension. This blog post should not be taken as substitute for professional legal advice.

Definition

Bank guarantees in Spain are a legal tool devised to secure the deposits of off-plan buyers should their properties not be delivered on time or their developers file for bankruptcy. Bank guarantees act as safety nets for new-build buyers in dire cases i.e. global virus outbreak causing financial mayhem.

Importance

• If a developer files for bankruptcy, bank guarantees protect all your stage payments.
• If the construction is not finished on time, or not at all, your deposits are secured, being entitled to a full refund plus legal interest.

What amounts are covered by bank guarantees?

• Initial holding deposit (reservation paid to either the estate agency or developer, normally amounting to 6,000 euros) which strikes the property off the market.
• All interim or stage payments, as well as the applicable VAT paid on said amounts.
• On top of this, you are also entitled to the legal interest on the amount secured.

From what moment is a bank guarantee valid?

Only as from the time a developer attains a building licence from the town hall where the development is located. Any payment/s made before they attain it are unsecured.

Validity of a bank guarantee?

Ideally, bank guarantees should be valid until a developer attains what is known as a Licence of First Occupation (LFO, for short).The moment a developer attains a LFO, the buyer is legally compelled to complete on the property at a notary.

However, recent changes in law mean they now expire two years as from the time a developer is in breach of contract without the buyer exercising his rights to terminate the contract and apply for a refund. Bottom line, bank guarantees now have an expiration date.

Bank guarantee cancellation

Bank guarantees become null and void when one, or more, of the following conditions are met:

• As from the time a developer attains a Licence of First Occupation from a town hall’s planning department.
• The developer makes the new-build property available to a buyer (as in physically handing it over to him) and notifies him, or his representative, by recorded delivery.
• If a buyer refuses to complete before a Notary Public when legally compelled to.

Does the buyer have to pay for bank guarantees?

No, by law the developer must pay for them.

Pro-tips

1. We strongly advise you do not pay any amount towards off-plan property before a developer attains a building licence as your funds would be unsecured.
2. Buyers, or their legal representatives, should safeguard physical copies of bank guarantees at all times. On completion, you are required to hand them back.