It was written on 15 June 2016. The law and practice in Spain change all the time. Our guides are updated as frequently as possible - typically every three years - but may be out of date.
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This guide covers what to do when a property investment in Spain – particularly an investment where you are one of many investors in a large project – goes drastically wrong. It should be read alongside our Global Guide to Rescuing Failed Property Developments, which goes into far more detail.
Property development in Spain has always been a cyclical industry. Markets increase and then diminish, typically every seven years or so. During the bad years development projects often fail.
During the crisis of the mid- to late-2000s, the Costa del Sol – like every other tourist destination in the world – suffered from a number of failed developments.
However, there is good news for Spain. Developers are by law obliged to issue bank guarantees or contract an insurance policy for all payments received during construction. While this process did not always work particularly well in practise after the great crash of the late-2000s (although the Costa del Sol fared better than many parts of Spain), the protection offered to investors has now been beefed up.
The basic problem of failed property developments is the same around the world. During property boom years, land prices rise dramatically and people are prepared to pay a lot of money for villas and apartments. When the downturn comes, land prices fall – just as dramatically as they rose – and either people are only prepared to pay a great deal less for an apartment or a villa or (as in the crisis of 2007-12) there is, in effect, no market at all for apartments and villas.
This means that the developer cannot sell what he has built or wants to build and so the project fails.
Equally, it means that those who bought finished properties at the top of the market will find that their house is worth a great deal less than they paid for it. That, however, is not the subject of this guide.
Under Spanish law, there are a number of legal remedies available to people who bought into projects where the property was never delivered to them. Usually, only the first remedy would be applicable to private buyers. The remedies under points 2-5 (below) normally only apply to professional investors, banks and/or insurance companies.
Execute the bank guarantee/insurance policy
If the property was not delivered to you by the date stated in the contract you have the right to cancel the contract and demand your money back through execution of the bank guarantee or insurance policy that the developer will have taken out.
The exact process may vary between different policies but, in general, it starts with an official communication through registered fax (Burofax ). In this letter you communicate the breach of contract by the developer. You include your contract and proof of the payments which you have made. Your lawyer will coordinate this process.
Sue the developer
If the property was not delivered to you by the date stated in the contract you have the right to cancel the contract and demand your money back.
Unfortunately, in these situations the development companies are usually bust and so there is no money with which to repay you. Their only assets tend to be the land and that is likely to have fallen so much in value that it may be next to worthless or – at best – to be unsellable to any other developer until the market recovers.
Unless you are lucky enough to have bought from a developer with lots of assets, suing is usually not very successful. See our Guide to Disputes & Court Cases on the Costa del Sol.
Take criminal or other action against the developer
If the sale to you was part of a fraud then you may be able to take action against the developer through the criminal courts. This means that the developer could end up in jail. This tends to focus his mind and sometimes means that he might raise money to repay you from otherwise unavailable sources such as members of his family.
Despite what some people claim, very few developments are fraudulent and even where you have cause to suspect one might have been it is very difficult to prove that the development was fraudulent via the criminal courts. See our Guide to Crime & Criminal Cases on the Costa del Sol.
Liquidate the development company and seize its assets
The buyers of properties in a development, as a group, can apply for the company to be liquidated and – in many cases and subject to the rights of any other creditors – can seize its assets.
This may do them no good in the short term because the only major asset is likely to be the land will probably be unsellable until the market recovers. However, recessions do come to an end and these investors will, at least, have protected what value they can by taking this step.
Reach an agreement with the developer that the investors take over the company
This is less expensive and often quicker than liquidating the company but, of course, it does require the consent of the developer.
Just as in the case of liquidation, it may bring little immediate benefit to the investors but it will produce some long-term benefit if and when the value of the land recovers.In the meantime, the investors can often raise some money themselves with a view to finishing off the partly-built houses so that they have at least something to show for the money they've invested and somewhere to spend their holidays.
The execution of a bank guarantee or insurance policy is quite straightforward, but dealing with failed developments is a specialised area of the law and needs lawyers who are experienced in the field - and who are good at managing what can be quite complicated arrangements involving lots of buyers.
If you are involved in a failed development, it is vital that you seek good legal advice as soon as possible. The sooner you take action the more likely you are to see a good outcome to the problem.
Your lawyers will usually have to bring in the services of other professionals such as accountants, engineers and surveyors and so dealing with these cases is never cheap. Fortunately, in the case of bigger developments where there are many buyers, the cost can be split amongst quite a large number of people.
This kind of work will involve the investment of further money and the obvious risk of 'throwing good money after bad'. You will have to decide whether, in your case, the extra investment is worthwhile.
Have you got experience with investing in property developments in Spain - either successful or failed? Tell us about it by emailing email@example.com.
Investing in a development that then fails is always a huge disappointment and can be expensive.
Fortunately, the existing laws of Spain oblige developers to issue a bank guarantee or contract an insurance policy for all payments received. When a developer breaches the contract in terms of delivery dates, the guarantee / insurance can be fairly simply executed.
|Buying a Resale Property on the Costa del Sol
This guide is mainly about buying a resale residential property on the Costa del Sol. It covers everything from finding a property to closing the deal and looks at the legal framework that operates when you buy a property in Spain.
|Property Development on the Costa del Sol
This guide covers the process of property development on the Costa del Sol in Spain. It covers both large-scale and small-scale development.
|Selling a Property on the Costa del Sol
This short guide is about selling your property on the Costa del Sol. How to sell your property on the Costa del Sol. How to find a buyer for your property on the Costa del Sol. Other general things you should do when you sell your property in Spain.
We hope you have found this guide useful. If you need any further help, please contact us.Manzanares Abogados S.L. 15 June 2016