Is Litigation Against Spanish Developers Worthwhile?

Lawbird Legal Services
23rd of May 2008

All those who purchased off-plan property in Spain and who unfortunately do not have a valid Bank Guarantee or Insurance Policy securing their stage payments stand to lose their funds if their developer files for bankruptcy. This potential threat of insolvency has soared at an alarming rate during the first quarter of 2008.

With many developers in breach of contract for not delivering properties in time (or with no hope of delivering them at all!), there’s an interesting debate on whether it’s a good idea to start a litigation process with the purpose of seeking the return of the deposits paid plus, perhaps, a possible compensation. Those that say it’s a bad idea to do so claim that developers are penniless, and will not be able to return the funds even if there’s a favourable court ruling. They even go as far as claiming that “no one has ever received their deposit back from a developer”. In this article we explain why these claims are false, and that litigating is not only a possibility but in many cases the only option left for many off-plan buyers who have not been able to complete on their property.

Litigation: A last Resort

Litigation should only be used always as last resort. Lawyers endeavour to negotiate on behalf of clients a reasonable settlement with the developer prior to going to court. This avoids lengthy and protracted legal proceedings thus saving both time and money. Unfortunately this is not always feasible, particularly with some developers.

Typical Cases

The following examples sum up what we encounter in our day-to-day legal practice:

1. Mr White purchased an off-plan property. According to the contract’s clauses the developer was obliged to hand over the property in two years time. Five years on, the development remains unfinished because, due to planning illegalities, the developers have not attained either a Building Licence or a Licence of First Occupation which are granted by the local town hall. Mr White cannot complete on the property as no bank, other than the developer’s, is willing to grant him a mortgage because the development lacks the required administrative licences.
   
   Mr White is concerned on his interim payments which amount up to 50.000 GBP (almost his life savings) and he has no Bank guarantee securing his stage payments. Therefore, in the event that the developer folds-up, Mr White would be likely to lose his down payments in full.
   
   Mr White, after trying to negotiate a refund of his payments with the developer to no avail, is tempted to file a law suit against the developer. However, he has been told that the developer is undergoing serious cash flow problems and that even if he hired a litigation lawyer he wouldn’t recover any amount of money. So he thinks “Why put good money after bad paying litigation fees & expenses?”

2. Mr Grey purchased what he thought was an off-plan property as an overseas summer home for his family. It has now turned out that unbeknownst to him, he was actually misled to purchase an aparthotel or an "apartamento turístico".He has since found out that this type of property has its own laws governing it, making it altogether unsuitable as a summer home.
   
   

5 Top Misconceptions about Litigating Against Spanish Developers

Both Mr White and Mr Grey are now desperately trying to find out what is their best course of action in order to find a solution to their problems. Therefore they ask friends or acquaintances on what to do on their particular case, but the truth is that there is no substitute for professional independent legal advice.

We have gathered a list of the most common misconceptions that are widely spread.

1. Instead of taking the developer to court, it’s better to just wait and do nothing.
   
   This is really just burying your head in the sand and hoping that things will somehow sort themselves out. The risk is that, if there are no issued Bank Guarantees –or Insurance Policy- and time goes by there is an increased risk that eventually the developer may file for bankruptcy. Nowadays, all too frequently, you see newspaper headlines stating how developers are increasingly filing for bankruptcy.
   
   Returning to our first example, if Mr White were to act as such in his case, he is likely to lose all of his stage payments.
   
   

   What happens if a developer files for bankruptcy?
   
   In accordance with Law 57/68 a purchaser can claim on their bank guarantee or insurance policy during the construction process, as they are executive titles which secure their interim payments. If they don’t have the guarantees or insurance they stand to lose all their down payments.
   
   That is why if you do not have a bank guarantee, on filing a law suit, a litigation lawyer will request provisionally for a hold to be placed on the developer’s assets until the final ruling. This stops the developer from selling these assets and they act as a sort of guarantee (it isn’t really a guarantee in the sense of a bank guarantee) to recover the stage payments at a later date. The judge has to decide on whether they will allow it or not. The plaintiff’s lawyer will have to prove not only that his client has a case but also that the developer is undergoing a delicate financial situation which may lead him to insolvency in the future.
   
   On seizing the developer’s assets the judge will request that you place an amount of funds in court as a guarantee for the developers’ frozen assets. This amount varies for a standard off-plan purchase in proportion to the value of the assets requested to be frozen. The aforementioned amount is refunded to yourself when the final ruling is published, which puts an end to litigation (long before the assets are sold off in a public auction). However if your lawyer loses the case these funds may be used by the defendant as guarantee. A further non-refundable amount of approximately 2.500€ will have to be paid as well as associated expenses on executing the developer’s assets (auction appraisal, execution procedure, barrister fees etc).
   
   However, in many cases the developer’s bank accounts are frozen (with funds in them) or out-of-court settlements are reached before the ruling, so there is no need to provide the guarantee on the developers’ frozen assets because the stage payments may be obtained by other means.
   
   It is important to understand and distinguish two different concepts: cash flow and assets.
   
   Although a developer may be experiencing a cash flow problem due to the recent credit crunch, one must not forego the fact that they normally own a sizeable portfolio of real estate assets.
   
   On filing a law suit against the developer, the litigation lawyer will request that some of these assets are frozen on behalf of his client, to secure his financial interests. This allows the creditor to be positioned higher up in the creditor’s ladder in the event of a receivership although he will not be regarded as a privileged or secured creditor under Spanish law. In the event of the developer filing for bankruptcy for whatever reason, if some of his assets have already been frozen, they help to position you higher on the creditor’s list. This means that even if the developer enters into liquidation, Mr White will be able to recover his money or part of it at a later date. However this can take many years depending on the complexity of the receivership.
   
   

2. Completion without a LFO is illegal.
   
   This is a common misconception. Completion on a property, before a Spanish Notary Public without a LFO is legal in Spain and the property will be lodged under your name at the land registry. However, it is not legal to occupy/live in a property without the mandatory administrative LFO. So basically you legally own a dwelling which is uninhabitable legally until the LFO is granted by the town hall.
   
   This discussion about the LFO is not directly linked to the litigation process, but it has to do with determining whether you should complete on a finished property without a LFO or, on the contrary, litigate.
   
   What exactly is a Licence of First Occupation and why is it so important?
   
   Upon the granting of the Certificate of End of Construction, the Developer may apply for a Licence of First Occupation (LFO). The LFO is a document which the Town Hall grants and states that the development fully complies with the original Building Licence that was granted by the Town Hall, as well as complying fully with all Planning laws. The inspection to grant this Licence is carried out by Town Hall technicians that certify that the dwelling fully complies with health, access, security, planning and construction laws and is deemed fully fit for human dwelling. No one can speed up the granting of a LFO; attainting it depends solely on the Town Hall’s civil servants.
   
   What are the associated problems of completing on a property without a LFO?
   
   Although it is legal to complete in such a case, it has numerous legal and practical drawbacks which ought to be highlighted by your lawyer to aid you in making an informed decision. To name a few:
   
   
   • 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 developers.
   • You will not be able to benefit from the official utility supplies; only from the developers supplies (water and electricity) with all the associated problems this has, namely that you may be cut off at any time as it’s the developer who is paying for it and if they go into receivership you will be cut off. Besides this, the developers’ electrical supply doesn’t have the same strength and power surges are fairly common if simultaneously turning on various electrical appliances.
   • 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 resale, the purchasers in turn will undergo the same problems to secure finance by means of a mortgage loan. Lack of a LFO implies that you are actually reducing the base 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 –and not the developer- may be held liable to pay the fine for the planning illegality.
     
     
   So, should I complete without a LFO if I lack a Bank Guarantee?
   
   Generally it is not advisable to do so. However, there are some exceptions to this general rule. Until completion the property belongs to the developer. So if you still have not completed and the developer becomes insolvent the property lodged under his name may be seized by the developers’ bank or any other creditor that places a charge on it at the land registry. If you have no Bank Guarantee and afore happens it is then very likely you will forfeit your down payments.
   
   In cases in which there is a significant delay in granting the LFO, the development complies fully with all the required planning permissions, there’s no ruling affecting the building licences due to planning problems, and there is a high risk of the developer filing for bankruptcy, the short answer would be yes. In this particular scenario, litigating is not recommended. The property will be now lodged under your name at the land registry. You will still have to wait until the LFO is granted but at least now there is no risk of you losing your funds if the developer becomes bankrupt.
   
   However, cases differ and require a case by case study by your lawyer.
   
   

3. Litigation fees are very expensive in Spain and that you need at least 15.000 GBP to litigate.
   
   This is untrue. Litigation, in a court of First Ruling (Primera Instancia) often averages less than half the said amount. These fees already include the procuradors’ fees (Barrister).
   
   

4. Litigation takes on average 20 years in Spain until you obtain the final ruling.
   
   This is also untrue. The timescale for the first ruling ranges typically between 12 and 15 months. Depending on whether this ruling is appealed, this would set back the whole process approximately a further 9 months until the second hearing. On obtaining this final ruling, in the event that the seized developer’s assets need to be executed to obtain a refund a new procedure will be started. This is not always the case. The total legal procedure, from the time of filing the law suit until the stage payments are actually refunded, may last approximately three and a half years if execution is involved, if not then much less. The legal system in Spain is slow so patience is required.
   
   In some cases, out-of-court-settlements are reached with the developer, thus avoiding lengthy procedures.
   
   

5. Hearsay has it that no one has had their deposit returned from developers by means of litigation.
   
   This is untrue. We confirm that our firm has recovered client deposits from various developers, in many cases by means of litigation. Often these rumors are spread by people who have vested interests in others not litigating for various reasons.
   
   

Conclusion

A lack of Bank Guarantee coupled in with no Building Licence or LFO attained due to serious planning issues is the scenario in which purchasers are potentially more likely to lose their full deposits. Developers are increasingly more reluctant to refund deposits regardless if they are in a clear breach of contract quite simply because they do not have the funds. In such cases in which developers are very late in delivering properties as per the Private Purchase Contract’s clause, litigation is often the only means to recover the deposits, even in a scenario in which the developer is likely to file for bankruptcy (according to statistics¹, there has been a rise of 78.6% in Spanish bankruptcies during the first quarter of 2008 of which 45.7% are from the construction and property industry).

1. Source: Daily Financial newspaper Cinco Días (06-05-2008)

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Lawbird Legal Services is specialized in representing clients affected by real estate and planning problems.

For more information please visit Lawbird Property Litigation

Discuss this Article

• odbhreejt Says:

  Mon, May 4th 2009, 05:32

• San Jose Says:

  Tue, Sep 22nd 2009, 15:52

  Can I assume that one cannot enter into litigation once a developer has gone into Administration?

• Lawbird Lawyer Says:

  Wed, Sep 23rd 2009, 08:06

  Dear Sir/Madam, Your assumption is incorrect. Existing trials will continue regardless through a First ruling and a Second ruling if necessary. New litigation cases will be heard by the Mercantile court itself whose been appointed the Receivership procedure, not by Civil courts as it would be usual. Yours faithfully, Raymundo Larraín Nesbitt

• Salah kamil Says:

  Sat, Feb 13th 2010, 22:33

  myself and few others had sued the developer, we won the case, they appealed, now we wait for appeal hearing date in the mean time we applied for the excuation of the sentence" is there time limit for the court to give this order? becuase it is taken longer to excute the judgment than the initial hearing!!! are we on the right track? we have a good lawyer but it seems that he focuses on the appeal rather than getting court order to freeze / sell the developer's assests. we need another opinion. can you help?

• Lawbird Lawyer Says:

  Mon, Feb 15th 2010, 09:06

  Dear Sir, I'm sorry, we cannot help. We do not take on caes which have already been filed before a court. Yours faithfully,

• Unregistered Says:

  Thu, May 20th 2010, 17:57

  Is is possible that i can sue the devloper for my deposit back on the gardens of mailva project. Paid £100,000 deposit, which i thought was lost until i saw one of the artcles posted saying that they had won their case. Can somebody please point in the right direction of a good solicitor. Used Conveyancing UK as purchasing solicitor.

• Lawbird Lawyer Says:

  Fri, May 21st 2010, 07:28

  Dear Sir or Madam, You can hire us. We already have over a dozen cases litigating in said development. I take it you bought one of the 258 flats and not one of the villas which alreday have a Licence of First Occupation issued. You can read more on this development here: Manilva Costa, SA (Gardens of Manilva) Plesae contact us on your matter and we'll take it from there. Yours faithfully,

• Yvonne Wright Says:

  Tue, Sep 21st 2010, 14:22

  Hi. I am writing on behalf of my mum who had paid a 70,000 deposit for a property at Almanzura Country Club and has never seen any return, she sold her house and has retired so now has no money. She now rents a council property. It says that on her documents there is a bank guarantee, but she hasn't received a copy. Please, please how can I help her to get her money back?

• aflores Says:

  Wed, Sep 22nd 2010, 06:31

  Yvonne, I you send us the paperwork we will be able to give you an opinion, free from cost. I can say however that Almanzora Country Club has turned out to be a disaster for investors but they are still operating so that´s something. Below are my details.

• Lynda England Says:

  Thu, Feb 10th 2011, 14:32

  What happens if papers have been filed and accepted by the court and the address for the developer is now out of date and it is proving difficult to find a current one, but the properties are still being marketed for sale.

• GreginLondon Says:

  Mon, Mar 7th 2011, 17:54

  We won a case against the developer of a community in the Marbella area - the case was heard almost 4 years ago. The judgement took over a year from the hearing before being made (though why, I have no idea - but I am losing any faith or confidence in the Spanish legal system). However, the developer appealed and so we waited. And waited. I have now found out that our lawyer left the practice 15 months ago and it appears that nothing has been done about chasing up our case in that time (I know, I should have chased sooner but I have fallen into the Mañana, Mañana expectation....) I am about to fire a missile at the firm for not informing me that our lawyer had left nor for continuing to follow a case that we've paid a lot of money for already. Do you have any opinions of the likely scenario - you say above that an appeal would delay a judgement by about 9 months, but it is now about twice that length of time. I am really despairing of any fairness or common sense in Spain and wish I'd never thought about buying there - my daughters have grown up and gone to university so the hoped for amenity of a place in the sun during their teens is now gone! Surely it can't take all this time to hear a straightforward case and make a judgement?!

• aflores Says:

  Sat, Mar 12th 2011, 17:13

  Hello, I fully agree with you as we feel the same, on behalf of our clients, where the system fails to deliver justice or at the very least, if not justice, a ruling as if nothing else, it will be bring certainty and a sense of closeness. You have probably landed your case in the slowest Court of First Instance and tehreafter, in the closest section of the Provicial Audience (Appeal Court). Under these circumstances, the case is likely to take years. With respect to the ruling on the appeal, it does seem to be taking an awful amount of time. However, the lawyers cannot really be blamed as chasing rarely has any effect on the deciding magistrates, given that they work on a date-of-entry system to ensure that there is no "special" treatment to any lawyer or claimant/defendant in particular. What you could do is find out when is it likely to be issued, more or less, by getting the Procurador to make enquiries. This will have to be done through the lawyer.

• geoff.hackett@virgin.net Says:

  Fri, May 11th 2012, 17:20

  I won my case over 12 months ago and appeal date set for Jan 2013. It seems that developers appeal most decisions on the basis that they gain time and increase the chances that the client runs out of cash as I am told that I atill have to pay all my costs even if the original desion and appeal both go my way. Why do the courts allow this to happen. Surely appeal should not be tolerated purely because the developer does not like the decision and they should lose heavily for wasting more of the courts (and everybody else's) time. Having bought a retirement home, like many, my retirement will be over by the time this is resolved.