How possible is it that someone who buys a plot of land for €800,000, earmarked to develop 30 apartments, financed with a substantial mortgage loan (€600,000 only after due diligence carried out by bank), with planning permission granted and already with a few off-plan sales on the pipeline, ends up with, after some years of legal action, half-acre of land wholly unsuitable to plant even tomatoes? In Spain, this is actually possible.

The case study in question saw the valuation of the plot go down from €1,198,280.30 to just over €20,000 after the regional Government in Andalucía challenged the planning permission granted by the Town Council in Tolox, a small picturesque village embedded in the very protected “Sierra de las Nieves” natural park. The mortgage loan, as was expected, remained unaltered. The developer’s brain activity, on the contrary, visibly altered, following sleep –and planning permission— deprivation.

This textbook horror story is actually very possible in Spain, where one Government office can challenge a decision made by a hierarchically inferior office, and, although is not commonplace, it did occur to several developers that had their Tolox Town Council planning permissions revoked by the courts, on instigation of the Junta de Andalucía. Horror story as it may seem though, the mayor is currently indicted for corruption as he was –allegedly— taking bribes from some developers.

But as that great Englishman, Ken Dodd, once remarked, every cloud has a silver lining, plus VAT: it could have been far worse if hundreds of off-plan property owners had paid their deposits only to see the works stop-half way to completion (and who could have then successfully pulled out had they secured a bank guarantee or be stuck with a broke developer for the foreseeable future otherwise).

Apart from the above upside, which is a true blessing in disguise for both parties of the contract since those very off-plan buyers seeking a retirement home in this beautiful area would have hardly be willing to complete on an overvalued property, the law protects anyone who is provably damaged by an official decision, undeservedly that is, and can sue in courts.

In this instance, the Tolox Town Hall is poised to be painfully sued by all of the developers that, in different degrees, have had their expectations trashed. Current legislation allows for the following to be indemnified by the infringing Town Hall:

• Demonstrable loss of value of plot of land as a result of the planning permission revocation (where land was purchased with planning permission).
• Demonstrable loss of revenue as a result of not being able to conclude transactions on secured off-plan unit transactions (not on those not sold).
• Taxes, costs and fees incurred in when purchasing the property and/or developing the project.

If the Town Hall can prove willful misconduct or fault on the side of the applicant, the above items become non-indemnifiable. For example, where someone got planning permission from a Town Hall to build close to the sea and they did not ensure compliance with national coastal restrictions; or where clearly planning permission if granted subject to certain, and unmet, conditions. And not least, when some palm was adequately greased…

But barring those reservations, as solid judicial authority on the matter puts it: “it is clear that revoking planning permission causes a developer financially certain and provable damage for, in any event, he is impeded from legally carrying out the previously authorized activity and even, may put him on the path to demolition of whatever was built.” 

It is not unusual for the build up of a property fiasco to start like this:

… at a glittering awards ceremony held at the London Marriot in Grosvenor Square on Friday 4th of November, The Harrial Group representing the Las Torrentas Development won the best architecture (Whole Development) in the Bentley International Property Awards- the world’s biggest and most important property event”

From: http://www.lastorrentas.com/

It then gathers momentum with abundant advertorial news articles where the development receives the highest praises for being the best of its kind…on the drawing board.

The proponents of Las Torrentas, a 150 home development in the Spanish countryside town of Calasparra, The Harrial Group S.L. were directors Linda and Andrew Jones, a couple from Abergavenny, South Wales. And so excited they were that they convinced the mayor of this small agricultural town, if persuasion was at all required, to meet Abergavenny Town Council with a view to establishing a new twinning relationship between the Spanish and Welsh towns.

And then the Jones’, in a fit of hysterical excitement probably fuelled by the sums of unsecured deposits that were being transferred to their accounts by trusting purchasers, and the underserved and silly Bentley award, got confident and wrote a letter stating, among other things, that “about 15 years ago, when my husband Andrew and I started investing in property, we were shocked by the low standards of some developers”

Well, 15 years on, shocked-turned-shocking Andrew and Linda Jones have done a runner with other people’s money and are keeping a low profile, hiding presumably in Abergavenny.

Due diligence carried out on the development reveals the following:

1. The Harrial Group Spain S.L. never had planning permission on the plot(s), and yet they confirmed that completion would take place on the first six months of 2008. On the 6^th of May 2006 a public announcement on the official local gazette declared a period of 30 days for submission of allegations in respect of the proposed Las Torrentas project, indicating that once this stage is over, a report on ecological impact assessment will be drawn up with a view to determine the convenience of approving the project and if positive, the conditions under which it is to be carried out. The project has now been indefinitely shelved.
2. The Harrial Group Spain S.L. never provided bank guarantees to their customers. Clearly, when the funds were taken by the developer, he knew or should or could have known that the probability of the project stalling was very high, and yet chose to exchange contracts, request payment and fail to provide a bank guarantee.
3. The Harrial Group Spain S.L. has never filed company accounts with the Companies House (Alicante), since it was first created (!), which is indicative of business malpractice and lack of activity.
4. The Harrial Group Spain S.L. entry with the Companies House has been cancelled due to not having submitted tax returns, with date 19/07/201, which is indicative of business malpractice and lack of activity.
5. Press and media: What dealings did the Jones’ have with the Calasparra Town Hall are unknown, but a payment of €160,000 was made so that they would reclassify enough land to build 150 villas in an area considered of high ecological value  given the presence of river rats, partridges and other animals as well as local agricultural land.
6. And what about the development plot? All we have found is half acre of arable land suitable for…rice-growing.

Conclusions to be drawn from this:

• The Jones’, infamously advised by local lawyers, have misappropriated others peoples monies and could face prison terms in application of current jurisprudence where a property developer has not guaranteed the down payment nor has offered a refund.
• Stay well away from Bentley International Property Awards awardees, just in case.
• Always have a disclaimer opportunistically stating that “we do not hold responsibility for any errors and we cannot be held reliable directly or indirectly for any loss whatsoever”. You can then add, for full protection, something along the lines of “we are entitled to take your monies and run, and shall not be held responsible for not looking back”.

Try to guess what is it that the following have in common: an electrical company from Alicante, a cement subcontractor from Valencia, a real estate company from the Balearics, the Spanish Inland Revenue, the Spanish Social Security, 6 banks and 65 employees (2 of which guard an empty plot), on the one side, and 150 consumers that were hoping to acquire Spanish off-plan property on the other.

You guessed right: they are all registered with the courts on occasion of a voluntary company administration arrangement of a large Alicante-based property developer, San José Construcciones, hoping to perhaps get paid some money back over the course of a number of years.

The above scenario, however normal it may appear to be these days, hides a fundamental legal flaw that brings into question, once again, a legal system that has routinely failed to protect those who deserved the utmost protection: consumers.

Such flaw can be inferred from the controversial fact that the first group of creditors are hoping to get paid with the monies of the second group, the buyers, who should have had their deposits bank-guaranteed or insured pursuant to a Franco time law, the Ley 1968/57 Act, that was specifically enacted to avoid the situation they are now in.

In this case-study the irony (or irritation) is that BBVA, the second Spanish bank in size, is queuing up to try to grab a chunk of the money they are supposed to have been guaranteeing in the first place, since they provided a collective bank guarantee to underwrite deposits on a 120-unit development, deposits on which they profited handsomely for the developer’s mortgage and various commissions were being paid out of these. Crazily enough, this bank will only agree to “voluntarily” comply with its mandatory obligation after some arm-twisting, which involves lawyers and legal action.

Another surprising aspect of this all is the fact that criminal case-law states that no developer can use consumers’ down payments for anything else but building the contractually agreed property, and this excludes real estate commissions, admin staff salaries, pocket money…etc. As there is not one brick on the plot, helping consumers get their monies back should be a priority of any property developer, particularly where many lawyers have found that the criminal route can render results (many developers are serving prison terms for this), not the least where the developer has broken the law so blatantly.

Financially ailing developers are probably too traumatized by what has happened and can only hope the market will recover one day (and that lawyers will not press too hard). On the contrary banks shirking their legal, and ethical, responsibilities towards trusting property buyers (Spanish and foreign alike) has to now come to an end, particularly where abundant bank-guarantee case law is invariably favouring consumers and banks are seemingly getting unlimited funding from the Spanish State.

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Adaptation of the post originally written for the Olive Press – The Banks Are to Blame.

The percentage of disputes within Spain’s communities of owners that find their way to the courts is substantial, to the extent that they now make up a significant share of Courts case load. The nature of these disputes ranges from the rather boring (from a practicing lawyer’s point of view) money claim to the more exciting topic of activities that may or may not be allowed within the urbanization or block, as well as how owners’ rights are exercised in respect to others. The variety of scenarios and circumstances and the corresponding case law mean that lawyers not always have straight answers and therefore, a case by case analysis is required.

So which activities are deemed illegal?

In principle, those forbidden expressly by the statutes; such prohibition can be upheld so far as they are not against the laws and, generally, the supreme of all laws, the Constitution. As a rule of thumb, the following are illegal: activities deemed cumbersome, immoral, obnoxious, unhealthy, dangerous or contrary to morals.

I can mention a few real cases, such as a kindergarten or school, a bar, a laboratory, a massage parlour, a poker room, a druggy that has the home and himself in a total state of decay, a manufacturer handling gunpowder, a dog or cat breeding business.

A medical practice was considered to be acceptable by one ruling, whereas a traumatologist was banned from opening his business due to courts deeming the activity as cumbersome given the high circulation of clientele.

One other court rulings deemed acceptable that a taxidermist (yes, he who is an expert in the art or operation of preparing, stuffing, and mounting the skins of dead animals for exhibition in a lifelike state) got his license. And another one also found in favour of a radiologist’s practice.

Finally, another Judge deemed that insurance brokerage was a noisy activity and thus banned it because the clients used the lift continuously…

And what about noisy or cumbersome neighbours, how is that dealt with?

This is a tricky one as what is right for someone may be wrong for another and where in doubt, a dispute is bound to arise: as an example, excessive noises, invasions of privacy, improper use of the communal areas and generally, any behaviour susceptible of interfering with someone else’s right to a peaceful living.

Courts know that the difficulty to deal with such dispute means they have to strike a fine balance between diverse, and occasionally opposing, rights, and to that extent they have come up with the Theory of Due Tolerance, which marks the boundary lines of our behaviour in respect to that of others. This theory encapsulates 5 principles:

1. Reciprocity: if for example other neighbours do the same unopposed, we may infer it is correct to follow suit.
2. Just or fair balance: if diverse behaviours are not on a collision path, they should be allowed to exist.
3. Estoppel: it stops one going against one’s owns actions.
4. Prolonged consent: it seems an obvious consequence that a certain behaviour that has been unopposed for a long period of time should be acceptable by who consents.
5. Permissiveness: it mixes consent with the notion of social acceptability.

Since getting involved in legal action pertaining to unfinished-or-never-started-developments (e.g. by Ochando S.A., Promociones Eurohouse S.L. and Grupo San José Construcciones e Inversiones S.A.), one thing that I have found rather incomprehensible, from the perspective of a law firm actively pursuing the return of off-plan deposits, which should have been placed “in escrow” or backed by a bank guarantee, is the inconsistent and conflicting information on points of law that is being circulated by all manner of participants (lawyers, developers, group actions, banks, internet forums etc.).

But aside from the many interpretations, one can give to whether a credit should be ordinary, privileged or none at all, within the receivership/insolvency proceedings, or whether you should have terminated your contract on, before or after the developer did some or other action through the mercantile courts (all of which baffles me significantly), or that you are, or aren’t, or perhaps may be entitled to 40, 50 or 60% of your deposit in a number of years to come, what is clear to me is one thing: a consumer’s deposit for a property in, say, La Fortuna Golf is not and never to be used to pay for a topographical surveyor’s outstanding invoice on, say, Residencial San Pedro del Pinatar, looking after the salary of some night guard at Residencial San Pedro or more annoyingly, a plumber to fix some piping problem at the mansion of a company director.

Property developing companies have two options when handling off-plan buyers’ deposits: either keeping them in safe custody and not use them save for the needs of the specific development, and if not used return them fully, or provide a bank guarantee: there are no more options. Dragging bona fide consumers through a receivership procedure alongside electrical suppliers, cement subcontractors, real estate agents, the Spanish Social Security or the Spanish Inland Revenue seems not the right thing to do, particularly where it is the deposits of off-plan buyers who are earmarked to satisfy the debt of all others, related or not to the development in question.

Current case law does not envisage any other use for those funds, certainly not have them used for purposes not allowed to by law. Which means that these developers should be, in my opinion, encouraging, guiding and assisting off-plan property buyers in cashing bank guarantees to precisely avoid the aggravation of their already difficult situation, i.e. the transformation of these civil disputes (contractual default) to an action for criminal swindle and misappropriation, which entails serving time, particularly on those developments where nothing has been built (on others with a certain percentage built, advice would have to be on a case-by-case basis).

It is every so often that I get enquiries from disgruntled former clients of colleagues, claiming that their chances of recovery, on occasion of a legal dispute or in a failed property transaction have been seriously diminished or even thwarted by, in their view, negligence of the acting lawyer. And whenever the option to sue another lawyer is raised by a third participant in the meeting (it tends to be a friend, acting as the Good Samaritan for the occasion), the victim of the suggested negligence tends to raise all kinds of objections, arguing that “lawyers tend to stick up for each other and they will avoid filing lawsuits against fellow practitioners..”

Admittedly, this perception is widely spread among foreign people, further aggravated when they throw in other elements of collusion (lack of determination or bias, the logic idea that other lawyers are naturally antagonistic toward lawyers who sue lawyers, corrupt judges, unknown timescales, costs etc.).

Good lawyers always want to police their profession, they believe that lawyers who have damaged their clients should be held accountable. Warren Trazenfeld

The reality is that, unlike in the US, in Spain we don’t have lawyers specialized in suing other lawyers. It is in fact a field of the law that is almost unknown, and you will normally find that it takes a lawyer with a very tough skin to feel comfortable in this practice. Yet there are now more and more articles devoted to legal malpractice being published, quoting relevant rulings and other interesting material on the issue and astonishingly, when you make a search on one of many legal libraries on use, using the words “abogado negligencia”, the result shows a whopping… 5221 court rulings!

So it might be that we need to embrace the motto of a known Miami-based malpractice lawyer, Warren Trazenfeld, who some years back said: “Good lawyers always want to police their profession, they believe that lawyers who have damaged their clients should be held accountable”.

Links

• La responsabilidad civil de abogados en la jurisprudencia del Tribunal Supremo (PDF)

It is only a few days ago when we read a story of an ailing 80-year-old diagnosed with Alzheimer and dementia, who had been sold €18,000 worth of… worthless financial products from CAM bank. The gentleman in particular had an officially recognized 80% disability, impaired vision and a history of strokes, and yet, he was persuaded by his branch manager into buying CAM shares for €9,000 and a further €9,000 on deposit, until year…3000!

This example of disgraceful behaviour, far from being an isolated case, adds on to a long list of what we could call “bankers´ most despicable actions” (we would completely miss the point if we thought that these are not man-made) and illustrates the utter disrespect and greed of certain individuals working for some banks.

So listed below are Top 7 Banks’ questionable at best, despicable at worst practices I have come across both in the exercise of the legal profession, and exemplifies the declining ethical standards within the industry.

1. Equity Release: a scam that was operated by a number of Scandinavian and British banks where pensioners were asked to gamble away their lifetime savings on two main pretexts: that by registering a mortgage on their property, they could eliminate Inheritance Taxes for their children, legally, and that by investing the loan obtained from the mortgage they would obtain an additional income to their limited pension. A few criminal ongoing court actions, and an avalanche of soon to come civil suits will determine how ethical it was for Rothschild Bank offer a 90-year old a 90% loan on her property…
2. Clip or Swap clauses on mortgages: financial products wrongly sold to mortgage-loan customers as insurance against increasing interest rates. The bona-fide insurance policy was in reality a complex derivative instrument. Most Spanish banks indulged in this awful practice and court cases are being resolved in favour of customers. Bankinter, Popular Bank and a few other culprits have lost 523 Court cases versus 90 ruled in their favour…
3. Bad-advice provided by Deutsche Bank to its customers when advising them that Lehman Brothers and some Icelandic banks, which ultimately went bust, were, nevertheless, the investment of choice. Court number 57 in Madrid is currently dealing with the matter.
4. Awful advice by Santander Bank when offering customers to invest with “world’s biggest conman” Bernie Madoff, despite knowing since 2006 the dangers of investing with him, according to the press.
5. Deceitful advice given to long-standing clients by La Caixa, CAM, BBVA and many other banks to sign up “preferential shares”, when they thought they were depositing their savings on a fixed-deposit. Whereas one would think that younger, dynamic and financial-savvy investors would take on these products, this meeting held by very upset customers seems to suggest otherwise.
6. Abusive use of the extra-judicial foreclosures by some banks. This repossession mechanism is generally (and inadvertently) agreed to by the borrower when signing the mortgage loan deed, is conducted by Notary Publics and can lead the bank keeping a property for €1. An association is fighting to expose this practice.
7. And lastly, a shocking photographic report of Jyske Bank’s not-so-exquisite treatment of an evicted property owner, his belongings and the property itself, following a bizarre dispute lasting 18 years. The Gibraltar-based bank managed to regain possession of an offshore-company-owned property although not ownership, that was retained by the ultimate owner (our client), as confirmed by a  number of quirky court rulings that nevertheless allowed Jyske to put their hands on this property with one sole purpose: destroy as much as they could!

A row between the Secretariat of Labour and Immigration and the Central Police Station is threatening to discourage hundreds of potential property buyers from taking the plunge. The former has ruled, against the opinion of the latter, that the obligatory NIE numbers can no longer be applied by representatives with a power of attorney and so personal attendance is mandatory (as from the 3^rd Jan 2012).

Although the reason behind the disagreement appears to be how both Government offices interpret a particular norm, the consequences can be devastating given that NIE numbers are now required for almost anything and many people will just not feel that Spain is a country worth investing in if you need to queue up at 6 AM at police stations, get a ticket, walk to a specific bank to pay the fee and then go back to the police station to apply for the number: buying property, setting up a business, signing up for a job and many other legal matters just don’t deserve this third-world treatment. In Madrid, a city that aspires to become a European financial hub, you can expect a 3 month wait for an appointment to apply for the NIE.

Also, there is a total lack of uniformity in what documentation is required: for EU and Non-EU citizens alike, some police stations in the Costa Blanca are asking for notarized documents of the property one wishes to buy, others will accept a reservation contract (original or copy) and proof of payment of deposit and if you are not around to pick the number up, you will have to give an official power of attorney to someone if you are in Ibiza. The random nature of documentation requirements is perplexing to professionals and unbearable to investors.

Spanish Consulates, not particularly equipped to assist investors, have been commissioned to process applications and return an NIE number within 5 working days (RD 557/2011), a tall order for some of such offices not used to dull admin work. And that is if you have a consulate nearby, as cost-cutting has meant that the Spanish Government has closed many (e.g. Manchester and Hamburg), so if you happen to be a billionaire currently in Vladivostok looking at buying a property for a zillion euros that you have already visited and reserved, and you are told that you need to fly to Moscow, or back to Marbella, to apply for the NIE that you forgot to get whilst property hunting, then Spain has a problem.

The property industry is dismayed by what are probably the weirdest, craziest and most idiotic laws around Europe, and is hoping that as with most things, common sense will ultimately prevail.

The Provincial Audience in Cordoba recently passed an interesting sentence in a dispute between an off-plan property purchaser and a developer, on account of the inability of the former to complete the purchase due to lack of financing and the unwillingness of the latter to refund the deposit, on those grounds.

The buyer had argued that he was a victim of the financial crisis and requested a full refund, considering the downturn of the economy as an Act of God. The developer, in turn, counter-sued and requested that the contract was complied with (specific performance suit) and, only in the event that the buyer was declared unable to complete, due to insolvency, the contract was terminated and the deposit kept.

The courts started stating some general observations, applicable to most contracts, whereby:

1. It is a well-known fact the property buyers require financing to complete property deals.
2. Prior to entering into an off-plan property contract, buyers have a duty to establish their credit-worthiness and the financial means available to them.
3. Obtaining financing from a lender, where the balance of the price is not readily available, is a buyer’s obligation.
4. To the extent that the buyer is able to complete, the courts will not examine the required diligence in the buyer’s activities or actions in respect to compliance with his obligations.
5. As a consequence, in the event of the buyer’s insolvency, he still has an obligation to complete the sale and should this not occur, the developer will be entitled to formally terminate the contract (which is exactly what happened here).

But then, in a solomonic ruling, established that indeed the crisis could be considered as a mitigating factor, and upheld the following considerations:

1. That penalty clauses are envisaged by parties as a means to fix the value of the loss, in case of full or deliberate contractual default.
2. That in this economic day and age, the financial cataclysm that has affected lenders and the drastic downturn of the property market are events that property developers cannot stand aloof from, even if they can be considered to be “risks of the trade”.
3. That although in this case the buyer is the victims of the debacle, property developers are well aware that it is now no longer possible to find a buyer at year 2007 prices, and thus cannot stay in “limbo”, estranged from reality.
4. That in this case, the buyer did not default fully but partially, as a result of events outside of their control, and therefore the penalty clause has to be reduced as a result of the necessary sweetening  or mitigation of the degree of default, to avoid unjust enrichment.

The Cordoba courts, on account of the above considerations established that, notwithstanding the content of the penalty clause, it was fair and equitable to reduce it by 50% as the buyer had not fully defaulted. 

Having met with dozens of victims of the Equity Release fraudulent scheme, we asked some of them if they would be happy to be interviewed; the result was very positive, with some willing to be interviewed every week, if need be! 

Julia Hilling (88) and Peter Cosgrove (78), two Rothschild + Hamilton’s victims, have no more money to pay to the bank and have not been yet forced out of their homes. Listen to their stories here.