Buying Property In Spain Tips Part II. Off-Plan Property
Raymundo Larraín Nesbitt - Lawbird Legal Services
18th of April 2010
Not that long ago there was a time in which purchasers gleefully bought en masse their dream homes in Spain. A few on the prowl to make a quick profit, the majority just wanted a quiet place to settle down and retire leading the relaxed lifestyle for which Spain is renowned.
Unfortunately for some, their dream turned sour for a number of reasons and we are now reading the consequences of it in the aftermath of Spain´s property bubble. The majority of these problems could have been avoided by doing some research yet in other cases purchasers in despite of being careful and taking all the necessary precautions still encountered difficulties.
The aim of this article is to do a brief rundown on the basic legal checks that ought to be done prior to committing yourself on buying Spanish off plan.
The market has swerved from one extreme to another; from loving off plan to having a major fallout. In time the market will find its equilibrium. Although nowadays you will find that off-plan is being almost demonised in the press the fact is that buying off-plan has many advantages as well as associated drawbacks. Not that long ago it was normal to obtain a significant discount (premium) on buying off-plan as you took on a risk until the unit was ready to be delivered legally (with a Licence of First Occupation). The main risks were related to the uncertainty of the property ever being delivered as well as the time elapsed until completion which could easily take two years or more.
Many took advantage in the boom times selling on these properties for a sizeable profit prior to completion (also known as “flipping”) as it was basically a leveraged investment which only required a fraction of the funds paid up front. That same off-plan dwelling was significantly more expensive (i.e. 30%) if you purchased it key-ready as now there was no associated risk.
This, however, changed over time leading us onto today’s depressed market. Now that the dust has settled, purchasers are increasingly turning to resale property in lieu of off-plan as they judge it safer post credit crunch particularly out of fear of developers filing for creditor protection. Off plan is being shunned as they believe the hazards nowadays frequently outweigh the rewards, making the resale and let market look altogether more appealing within the context of a grim financial environment.
This no doubt will change in the future with the upcoming of the next property cycle. The million dollar question is of course second-guessing when that will be!
Your guess is as good as mine.
Tips for Buying Off Plan Property In Spain
The following useful tips will help you avoid the majority of off-plan hazards:
- Hire a Qualified Registered Lawyer.
It is advisable that you retain a registered lawyer before you commit yourself signing any document or else paying any amount. Initial down payments, such as security deposits which strike the property off the market, are non-refundable unless specifically agreed otherwise. If you pull out you will likely forfeit the deposit. Many legal problems can be easily avoided following this simple advice.
- Make Sure the Plot of Land is Registered Under the Developer's Name.
In some cases developers marketed and sold on whole developments without even owning the land. This is what, for example, developer AIFOS used to do. They sold on entire off-plan developments without owning the land; they only had an option to purchase, within an agreed deadline, the plot of land. One should not buy an off-plan unit in a land that is still not registered under the developer’s name. There are far too many associated risks to take a gamble with your hard-earned money.
- Make sure the Developer Attained Planning Permission
The basic recommendation would be not to sign a Reservation Contract or a Private Purchase Contract (PPC) unless the Town Hall where the property is located has issued a Building Licence (Licencia de Obras) for the development. Notwithstanding the latter, let us examine the nuances that spice up life.
I would, in general, recommend that this Building Licence has not been obtained by means of what is known as the Administrative Silence Rule as it may be successfully challenged should it have been attained breaching Planning laws, for example.
Additionally the building licence must not have been challenged administratively i.e. imagine the case of a Building Licence issued by a Town Hall’s Planning Department. Someone may buy a property relying on the Town Hall’s licence. However, unbeknownst to the buyer, this may lead to an ongoing dispute between Town Hall and Regional Planning Authorities over the legality of the issued building licence. Regional Authorities can actually override the authority of Town Halls if necessary on Planning issues so they are bound to win. Remember the Prior’s?
This is by far the biggest mistake that, unknown to many, one can possibly make. Many problems could easily be stemmed off on following it. The Building Licence will ensure that the building is above board and the property is not being built in green belt land for example. Your lawyer will be able to verify the building licence is not being challenged at court by anyone, including Regional Planning Authorities.
- Make Sure you Obtain a Bank Guarantee Securing Your Stage Payments
Once your lawyer has checked there is a Building Licence and the plot is under the developer’s name, amongst other issues, it’s time to sign the contract. The installments paid while the property is being built can be guaranteed by means of what is known as a “bank guarantee”.
Bank Guarantees in Spain are a legal tool devised to secure the deposits of prospective off-plan purchasers should their properties not be delivered on time or their developers file for Administration. Post credit crunch, all the bank guarantees we are executing are acting as safety nets for many stressed new build purchasers who find themselves bogged down in mire out of no fault of their own i.e. developers filing for receivership.
Spanish bank guarantees may be a daunting legal minefield for many, albeit with the assistance of an independent lawyer acting on your side you will be able to dodge the pitfalls both safely and successfully.
A Spanish Bank Guarantee may be either an Insurance Policy or Guarantee issued respectively by either an Insurance Company or Bank. Both types can be grouped under the generic term bank guarantee for simplicities’ sake. A bank guarantee’s purpose is to secure the full amount of deposits paid by off-plan purchasers. It secures the initial reservation deposit, which strikes the property off the market, the interim or stage payments as well as the applicable VAT paid, currently set at 7%, on said amounts. On top of this you are also entitled to the legal interests on the amounts secured.
A bank guarantee is of critical importance acting as a safety net securing your full deposits should something go wrong. Bank Guarantees should have no expiration date as per Law 57/1968. Bank Guarantees expire upon the developer attaining the Licence of First Occupation.
- Make Sure the Dwelling Attained a Licence of First Occupation (LFO)
A Licence of First Occupation is issued by the Town Hall where the property is located and is granted once the building works have been duly completed (Certificate of End of Works or Certificado Final de Obras in Spanish). It allows off-plan purchasers to dwell in a property legally.
The LFO is important mainly for two reasons:
It is in general recommendable to complete only once a Licence of First Occupation has been attained; however completing without a LFO is legal in Spain and the property will be registered under your name at the Land Register.
- It provides a check on the Planning Legality. Its granting means the developer has built the dwelling in compliance with the original Town Hall’s Building Licence as well as complying with all Planning laws. The inspection to grant this Licence is carried out by Town Hall’s chartered technicians who certify that the dwelling complies fully with Health, Access, Security, Planning and Construction Laws and is deemed apt for human habitation.
- It is required by utility companies to have access to official supplies (water, electricity and gas). Spanish law requires the granting of the LFO to hook up the dwelling to the supply grid. Although in some parts of Spain there have been reported cases of supply companies waiving this and connecting you without the said licence. In such exceptional cases the only requirement was showing the application of having requested the LFO from the Town Hall.
The following are just some of the drawbacks you may face if you happen to close on an off plan property lacking a LFO:
There may be nonetheless exceptional circumstances in which it may be advisable to complete without one. Specifically if there’s no bank guarantee securing your down payments and the developer is in risk of going into Administration, provided that there’s no ruling or legal procedure affecting the Building Licence due to planning issues (as explained above in point three).
- Primarily, you will not be able to take out a mortgage on the property or remortgage it - if needed be- by any bank other than the developer’s.
- You will not be able to benefit from the official utility supplies; only from the developer’s supplies (water and electricity) with all the associated problems this has, namely that you may be cut off at any time as it is the developer who is paying for it and if they go into receivership you will be shut off. Besides, the site supply electricity doesn’t have the same strength and power surges are fairly common on simultaneously turning on various electrical appliances such as air conditioning. Until the LFO is attained, the developer has to pay, by law, for the utility supplies.
- Any future prospective purchaser, or their lawyer, will haggle with you and only pay a lower purchase price if you lack a LFO in a newly built resale. In a resale, the purchasers in turn will undergo the same problems to secure finance by means of a mortgage loan. A lack of a LFO tacitly implies that you are actually reducing the pool of potential purchasers for your resale.
- If there are Planning issues, the Town Hall can set a charge against the property and you as the new owner of an off-plan –and not the developer- may be held liable to pay the fine for the planning illegality.
- Needless to say, you cannot rent a dwelling without a LFO.
It is very important to realise that until completionthe property still belongs to the developer. So if you still have not closed and the developer becomes insolvent in the interim, the property lodged under his name may be seized by the developers’ lender or any other creditor that places a charge on it at the land registry. If you have no bank guarantee and the above happens, it is very likely you will forfeit your down payments. However, cases differ and require a case-by-case study by your appointed solicitor.
The issuance of the LFO by a Town Hall is the major milestone in the off-plan procedure. In fact, from a legal point of view, it marks the turning point whereby the property is now deemed to have been delivered legally to the purchaser. Once the LFO has been attained and the developer has sent you a registered letter compelling you to complete within a deadline before a Notary public, you should no longer withdraw from the PPC and litigate (specifically read point three in the link supplied) for a refund as you are bound to lose at court. This is known as forced completion.
Developers can actually pursue you abroad against your home country’s assets once they’ve obtained a favourable judgement from a Spanish court. Do not think for one moment you can walk away breaching an off plan contract and that there will be no legal consequences arising from it. Some developers will be happy just withholding the stage payments as compensation and yet others will sue you on top demanding fulfilment i.e. that you close on the property.
Indulging in reckless litigation can leave you seriously out-of-pocket.
- Try to Avoid Ghost Developments
Some new communities remain largely unsold post credit crunch and you may find additionally that many common holders are not contributing to the communities' expenses. This nasty surprise may create practical problems such as green swimming pools, lack of security, derelict gardens and even break-ins. It may be recommendable before buying into a community that you ask around first. This will no doubt change in the future when the market moves on again to a new cycle.
- Make sure the Development Complies with Coastal Laws
If you are buying a resale or off-plan property, make sure it is not within the protected area of Public Domain (100 mts from the shoreline) or else you may risk your house being pulled down, at your expense, by the local Authorities. Spain’s Coastal Law was passed in 1988 but it hasn’t been until recently that the Government has decided to enforce it harshly.
- If you are Considering Buy-to-Let, Make Sure the Local Laws Allow This
If you are buying with a view to rent the property out, either as short or long-term, make sure the region of Spain in which you are buying allows for this. Some regions, i.e. Balearic Islands, have stringent regulations whereby a special licence is required to rent. Failure to comply will result in the Town Hall fining you. Disgruntled neighbours always make apt whistle-blowers, so be warned. Other regions in Spain, such as Andalucía, do not require letting licences but do have their own regulation in place on letting out property. i.e. Decree 218/2005. And as a final word of caution, unless your property is in a prime location, do not rely on the let to offset the mortgage repayments.
- Don't Forget to Apply for Your NIE Number
I refer on this section to my previous article on buying resales.
- Off-Plan Post-Completion: Make Sure the Property Is Now Registered Under Your Name
I refer on this section to my previous article on buying resales.
- Off-Plan Post-Completion: Don't forget to Pay Property Taxes, Utilities and Community Fees.
The particularities on buying off-plan are for example that IBI tax will not be usually readily available to pay until two years after you’ve purchased the property, maybe even more. You will be nonetheless held liable for those two previous years on the backdated IBI tax. Regarding utilities, even when a LFO has been issued you may find yourself waiting for some time before you are officially connected to the supply grid with your own individual water and electrical meters. Regarding community fees, you are liable for them since the LFO was attained by the developer, not before.
You are also liable to file Income tax every year for which you may need to appoint Fiscal Representation.
More on this topic on my previous article on buying resales.
Although off-plan property may have fallen foul of purchaser’s tastes due to all the associated post credit crunch problems featured in the press, it will no doubt claw its way back. This is likely to take place when we exit this gloomy deflationary environment and enter a new cycle of property capital appreciation. Property cycles in Spain take, on average, 15 years from peak-to-trough. The last cycle has taken from 1993 to 2007 approximately. For a recovery to materialise we need foremost low interest rates coupled in with banks willing to lend. With neither liquidity readily available nor lenders prone to take chances the property market’s lifeblood is sapped away leading us onto a languished standstill.
As always it will be shrewd investors who, having second guessed correctly the ailing property market, will snap up the most sought-after units at knockdown prices, profiting from today’s irrational fear; much like in a stock market rebound. Many will look back with everlasting regret on not having seized the buying opportunity of a decade grabbing themselves a bargain under the sun in a bottoming out market. Or conversely you can always wait to catch the next train which is not due until another 15 years time!
Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice.
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