Antonio Flores’ Blog

I may be stretching the concept of misappropriation a bit too far, more so when criminal laws are always to be interpreted restrictively, but the absence of a bank guarantee has landed the property developer of our case study in jail after being given a two year prison sentence, a term that could have been avoided if he had done what he was supposed to do, guarantee the funds paid on account of the purchase price.

The Supreme Court has ratified an earlier ruling by the Appeal Courts in Madrid where the developer was sentenced because the deposit he received was not destined to cancelling the mortgage loan on the property, as promised. The 2010 ruling, in peseta denomination (which means that the claim was lodged prior to 2002!), describes the facts leading to the 2-year prison term ruling:

1. Property developer sells off-plan villa for 24 million pesetas.
2. Payment plan establishes that 8 million pesetas are to be paid upfront and 16 million pesetas on completion, paid in cash or alternatively by taking over the mortgage facility offered by the developer’s lender.
3. Nearing completion, the developer fails to finish the works, and, consequently, buyers are advised to complete at the earliest as unfolding events cast serious doubts on the developer’s financial solvency.
4. Buyers find out that the developer’s mortgage is of 19 million pesetas and not the figure of 16 million pesetas. Still, the latter is unable to refund the 3 million pesetas the buyer has overpaid, or redeem the mortgage down to 16 million, as he is underfunded.
5. Developer is not only unable to reduce the mortgage to 16 million pesetas but he cannot finish the works.

As a consequence of the above, the buyers sued in Court, as they felt swindled by the developer (clearly!). He was sentenced in 2002 for aggravated misappropriation (by reason of it being related to property). Seven years later, the Supreme Court understands that there is no reason to uphold the appeal and maintains the original ruling. Additionally, the developer was forced to pay damages, these being the sums lost to the developer plus interest.

However, if the developer had guaranteed the down-payments by offering an irrevocable bank guarantee or insurance policy, the buyers would have not had a chance to pursue the matter criminally because a refund would have been immediately available (especially as the license of occupancy was not issued at the time of closing). Nevertheless, by breaking statutory civil laws, he found himself in the hands of a prosecuting lawyer, a criminal prosecutor and uncompromising judges.

This ruling opens the door to heavier scrutiny on the use of deposits paid to developers, to the point that if they are used for purposes unrelated to, strictly speaking, the construction of property, criminal cases can be easily brought.

We have been informed that the developer of Los Monteros Hill Club incurred in such practice, causing at least one buyer to lose hundreds of thousands of euros, as the full purchase price was handed over but was not used to cancel the outstanding loans on the properties.

aflores Litigation, Mortgages, Property bank guarantees, Bank Guarantees in Spain, litigation against spanish developers, Los Monteros Hill Club, spanish developers

Although selling a property without acceptance of the lender is considered to be, together with not paying the mortgage installments, a forceful reason for foreclosing, the reality is that, in these times of tight financing, it is being used an easy way for cheap and easy finance. How is this possible? I’ll show you below…

Article 118 of the Mortgage Act stipulates that a mortgage loan can be transferred provided the creditor has agreed to it, expressly or tacitly. In our case study (a client of our firm), the bank would have refused to approve the transfer because the property owner had obtained an 80% loan-to-value in 2006, and the valuation was now 25% less. As a result, the property was in some negative equity, the owner was desperate to get rid of the debt and the buyer wanted a 100% loan to value property.

So what did we do? We went straight to the Notary and signed the deeds of transfer with €0 payment. Previously, the buyer had opened an account with the lender and told them that, being a friend of the debtor (owner still at the time) he was going to start covering the mortgage repayments on his behalf, and instructed the lender to debit these from his account. Additionally, we took out a new insurance policy, through the bank, but in the name of the new owner. The idea behind this has been to force the bank to tacitly agree to the transfer of the loan, as they will have been inadvertently accepting repayments and issuing insurance policies in the name of the new owner, who will also have the deeds to his name, thus precluding them from opposing this de facto reality.

Although this is a very quick way to obtain 100% finance, it is risky because:

1. The lender could still foreclose on the property on the basis of its unauthorized transfer if they find out within a certain number of months; it is not clear how many months, but if nobody tells them, they will not find out. However, if they are getting religiously paid, it would be rather stupid to do so.
2. If the new buyer stops paying, the bank could still hold the previous owner liable, although it is possible to successfully argue that the bank tacitly consented to the transfer.

This ‘clandestine’ maneuver is useful when buyer and seller have certain trust in each other, and the owner’s desperation to sell is matched by buyer’s keenness on the property. Allowing principals of up to 100% of the property value, this is like a non-status mortgage on steroids!

aflores Mortgages, Property bank repossessions, foreclosure in spain, non status mortgages in spain, spanish mortgages

Everyone knows that a mortgage loan title deed is a lengthy document with elaborate legal clauses and complex formulas where the main conditions of the loan agreement are set out. What most people don’t know, however, is that banks tend to include restrictions as to what one can and cannot do with the property. The latter restrictions are what we are more interested in, because breaking them entitles the bank to cancel the loan agreement and request repayment of 100% of the remaining capital.

It has to be said that some of them are clearly abusive and would not withstand a legal challenge on application of the Consumer Protection Act, but going through some of the restrictions makes interesting reading if only to see how one-sided can banking contracts be.

We have used a standard mortgage loan contract, in this case from Caja Rural de Granada (savings bank), although they are all pretty much the same. As an example, this “Caja” can foreclose on the loan if:

1. You are late by 10 days in making a repayment (that’s ten days, never mind 6 months!).
2. You don’t pay the IBI (Council Tax) or Basura (Rubbish Collection Fee) receipts and insurance policies (IBI can be as low as €200s per year and Rubbish collection €40 per six months).
3. You don’t pay the Notary fees for the mortgage deed (possibly the daftest of them all when it is the banks who take the money from you, upfront, to pay for the Notary fees!).
4. You use the property for any other activity other than what has been agreed (any ideas? ).
5. The property catches fire or is damaged and as a consequence it loses value (this could make sense but you have the bank forcing you take out insurance to cover this anyway).
6. You don’t give the bank the original mortgage deed within 6 months from signing the loan agreement (does anyone know where the original mortgage deed for their property is? From a legal point, it is completely irrelevant where the deeds are once they are registered so you can keep them in a safe, like some villagers do to get proper sleep, or use them to get the barbecue going, it really makes no difference).
7. You rent the property without prior consent of the bank and/or in detrimental conditions for the landlord (this clause is outright illegal and deserves no further comment).
8. You sell the property without the bank’s consent (they must first find out and then choose to add another property to their plentiful property portfolio!).

The notorious stupidity of some of the above clauses makes one laugh, but let’s look closely at what clause 8 entails. Recently I have been advising on some transactions on behalf of willing buyers and sellers without notifying the bank, because the bank has, quite simply, refused the buyer’s application on financial grounds. I will leave this for my next blog post.

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A client of ours has lost sleep over a Spanish property transaction and we cannot possibly help. The story is a mixture of error, oversight, greed and ultimately theft which has the potential of landing our client in a criminal court.

It all starts when our client, the seller (let’s call him Mr Smith) is about to sign over title deeds to the buyer of his property (lets call him Mr Jones) after having exchanged private purchase contracts. As Mr Smith had a mortgage, we phoned up his bank to give them notice of the impending closing at the Notary office and ask them to attend to formalize the cancellation of the mortgage deed. The bank kindly advised that they had no one available to attend on that particular date and so it was agreed between the seller’s bank (BBVA) and the purchaser’s bank (Bankinter) that Bankinter would transfer the amount of the outstanding mortgage to BBVA by interbank transfer (which is a safe method of transferring prior to singing the deeds).

As it happened, the transfer was made and all parties concurred at the Notary office where the transfer of title was effected and Bankinter signed the mortgage loan agreement. It is after this when the problems started… Our client, Mr Smith, when sorting the outstanding matters and preparing to transfer the proceeds of the sale, realized that his account had been credited with the sum of the loan he owed and which had been transferred by Bankinter. Mr Smith, who had expected to find €50K was delighted to find €150K and unconcerned about the consequences he decided to transfer the full sum to his UK account. He did not seemed curious as to how his account had received such windfall, nor what the consequences would be if he appropriated what was clearly not his, or even what would the Inland Revenue say about this rather hefty and inexplicable sum.

When his bank realized the mistake, they tried to recall the transfer to UK, but it was late. Following a few unreturned calls and emails, our client eventually accepted a mistake had happened and proposed to return the funds to his bank. Meanwhile Bankinter and its lawyers had started to get nervous because Mr Jones mortgage had not been cancelled, and were threatening legal action.

Mr Smith had taken €100K and proposed to return the same amount, but, as he had sent the funds to his UK account and 12 months had elapsed, the exchange rate was to affect him horribly. The result was that he now had to buy €100K, a currency now 30% more expensive! To add to his problems, his bank, who was now being sued by Bankinter for negligence, decided to send him legal notice of criminal action for misappropriation (the Spanish Penal Code envisages the action of intending to keep monies received by mistake).

Surprisingly, our client in an attempt to find “the guilty party”, turned on us and accused us of poor advice for his problems, i.e. not informing him that he was likely to receive a sum which was not intended for him, and in an even funnier twist, he demanded from us the extra €30K it would cost him to buy €100K. Needless to say, his demand was rejected, and, given the breakdown in the solicitor/client relationship, we decided to give him “the sack”.

This specific problem was clearly a mistake on the part of BBVA because the transfer received in Mr Smith’s account should have been frozen, as it is customary, until used to cancel the loan. This oversight could have also been avoided by BBVA attending the Notary and cancelling the loan simultaneously to the purchase and new loan formalizing. However, BBVA representatives, instead of getting off their lazy asses and walking 10 minutes to the notary, said the magical words: don’t worry, I will do it mañana mañana!!

aflores Litigation, Mortgages, Property bankinter mortgage, bbva mortgage, spanish conveyancing, spanish horror stories

With the reduction in interest rates, currently just under 2%, many of us may have realized that our repayment has not gone down as much as it should have. The reason for this is that some mortgage loans included mortgage “floor” clauses (“cláusula suelo” in Spanish) which limited the reduction to a maximum, not allowing borrowers to fully benefit from the drop in rates. For a €200,000 mortgage this would mean you could be paying €6,000 yearly more in interests (calculations made for a ”floor” set to 5%).

After making some enquiries it appears that these went unnoticed for mortgage brokers as they were written in the “small print”. If the above clause is in application it would be convenient to talk to the bank to have it removed, so we recommend that you approach your bank to find out if there is one and challenge it, requesting that it is eliminated. We do warn that it will not be easy to persuade the bank to reduce their earnings but it is well worth a try, even under the threat of stop paying the installments!

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