Antonio Flores’ Blog

A couple of weeks ago, I received a telephone enquiry relating to an imminent bank repossession where the soon-to-be ex property owner, seemingly knowing the ins and outs of rental law, requested a quote to draw up a rental agreement. Out of curiosity I asked him if he was going to submit it to the Courts to stop the eviction, and unsurprisingly, he confirmed my question.

His plan was pretty simple: he as the landlord would sign a backdated tenancy agreement with a friend, for a smallish rent (around €200, inclusive of utilities!), with a view to not be considered an “unlawful occupant” and therefore, avoid eviction on grounds that Spanish laws do actually dispense protection to tenants.

What this enquirer forgot is that common sense applies in Spain too and therefore, in the absence of proof of a history of payments to him by his friend, the Courts would deem the contract bogus and deny its existence and therefore, validity. Moreover, I had to quickly advise him that in fact, the Spanish Criminal Code in its article 257 states that “any person who in detriment of his creditors, carries out any act of valuable disposition or creates obligations that delay, hinder or impede the efficacy of an embargo, executive procedure or reposession, whether judicial, extrajudicial or administrative, initiated or of foreseable initiation, will serve a prison term of between 1 and 4 years.

The Courts uphold the principle of common sense when judging the validity of rental agreements submitted by tenants; let us have a quick look at these 2 examples:

Appeal Court in Toledo: in this case, the rental agreement was deemed a simulation and thus did not express the true intent between the parties because, according to the presiding Judges, it was signed between brothers, the monthly rental was €400 on a 2,000 m2 warehouse, there was no visible activity in it (a big lock on the door is mentioned on a photographic report) and there were only private receipts to prove the rental payments. An accumulation of evidence that, in the eyes of the Court, was consistent with that of a simulated contract and thus, the repossessing bank was granted possession.

Appeal Court in Madrid: Judges in the capital city found the rental contract to be fully valid, as there is a presumption of validity of juridical contracts that needs to be destroyed by the bank, and this has not been achieved as the latter entity since only invoked that the contracts were subsequent to the mortgage loan. And the Spanish Supreme Court is clear on this point: “…not even a bank foreclosure extinguishes tenancy agreements agreed to after signing the mortgage loan, if there is no sufficient proof that there was collusion or fraud.”

Antonio Flores Litigation, Mortgages, Property Eviction Spanish Property, eviction tenants foreclosure, foreclosure in spain, litigation rental contracts, Spanish banks, spanish rental contract

The article that was published in the Irish Independent a few days ago reflects the desires and aspirations of many people who feel defrauded by the MRI group. And they can be summarized in the following manner: “…after all, we may be able to get something back.” For there is a legitimate claim over an asset where a few million Euros were invested in, money paid to MRI for products and services that bona fide investors never got yet was never returned to them, rather finding its way to private pockets…

Let’s just hope Mr. Macanthony owns up to his widely publicized categorical undertaking.

Antonio Flores Litigation Darragh MacAnthony, MRI

The video below shows exactly how a summons in Spain is not be conducted: Jason Coglan, from JaCogLaw, personally notifies a criminal complaint filed by an American citizen against John Doust, one of the oldest serving fraudsters of the Costal Del Sol who is, unsurprisingly, a free (con)man.

But Jason’s intention is not to legally fulfill the service of summons, which he knows is a job that in Spain is exclusively reserved to the authorities, but to bridge a judicial system that is slow and ineffective when it comes to pursuing economic or financial crime, and get in front of this despicable man, ahead of the Spanish Police (crime reported to them in June) and the Courts (crime reported to them in May) who have, so far, done nothing except formally requesting the claimant to turn up in Court to confirm the claim.

So how should service of process be done in Spain, as well as any other formal or official notification? Below are what I consider the 10 most important notes on this subject:

In civil procedures, notifications or summons can be made:

1. By post, ensuring that there is certification of content and acknowledgement of receipt (typically called “burofax”).
2. Directly in Court, by the Court Secretary directly to the defendant or through the appointed Procurator.
3. In the address of the recipient or defendant, by issuing judicial summons directly to the defendant or, if he refuses to receive the Court decision or sign acknowledgement of the summons, he will warn the recipient that a copy of the document is at his disposal, in Court, and that with this formality he is understood to be legally notified.
4. If the recipient or defendant is not present, summons will be given to any employee, family member or person cohabiting with him (older than 14 years) who are present, or to the porter of the property or premises, if available, issuing a warning that the notification or summons is to be given to the recipient, if his location is known.
5. On the notice board: this is a special communication system that is used where all the above fail, and consist on a fiction of notification where the Court officer reads the content of the summons and is then published on the Courts notice board.
6. In the Official Gazette: this system entails publishing the summons on the notice board and also, in the Provincial Official Gazette and where the Court deems it necessary, in the Autonomous Region Official Gazette.
7. Where the recipient or defendant is not located, the civil procedure can go ahead and the ruling will be also notified formally, and where this is not possible, it will be published on the notice board, as above.
8. An adverse ruling (most of them will be) against a disappeared defendant can be challenged where he was not able to collect the summons due uninterrupted force majeure, even when he knew of the proceedings, or where he was unaware of the proceedings and the notification was made by judicial summons, or where he was unaware of the proceedings, the notification was made by publication in the notice board but he was in a different place from where he was living.
9. In criminal procedures, a defendant has more protection in that a trial cannot take place where the commission of the crime carries a penalty of more than 2 years imprisonment, or 6 years of another nature. But the most notable difference is that generally, depending on the seriousness of the charge, the defendant will be arrested and brought before the Judge, to be formally notified of the charges.
10. Where communications between private parties are concerned, there are several possibilities: Burofax, as explained in point 1, BuroTex , that allows notifications between private individuals to be carried out by mobile device text message (sms), Certimail, which is made by email sent by a Notary Public and not without controversy, even also by regular fax which, in spite of its evident weaknesses, was deemed by the Constitutional Tribunal to be valid in administrative proceedings where the defendant did not prove that the fax machine was not working well, that there was power cut-off or generally, any other provable excuse of non-delivery of the content.

Antonio Flores Legal Practise, Litigation Judicial Notifications, Service of process, subpoena, summons in spain

An 80 year-old rural-based lady who could not write nor read was told it was the ideal product for her, others were advised that it was a secure fixed-deposit they could cash at any time, when the small-print indicated that the deal’s maturity was postponed till… 31/12/3000 and many others were simply duped by excessively commission driven bank staff.

Examples of the inventiveness of despicable branch managers, hoping to convince anyone with any decent sum of money entrusted to them, are as abundant as are the numbers of people affected: around 900,000 according to some estimates.

It makes me wonder how come savers who bought Spanish banks’ preference shares, or were (mis)sold rather, have not revolted as pretty much everyone stuck with this “toxic refuse” would argue that bank managers doing time in some Siberian gulag would not be harsh enough.

Below is an email sent to a client advising on what I think are the different options specifically related to CAM and Sabadell:

Dear John

I have been getting information about this offer made by Banco Sabadell.

As you know, the original CAM was split into to 2, the CAM Savings Bank and the CAM Bank, that was taken over by Sabadell.

You purchased “participaciones preferentes”, which form part of the latter and therefore, are taken over by them. Had you had “cuotas participativas”, which are a type of share or bank stock, the value today would be literally zero.

Banco Sabadell is now offering that you change your preferential shares for ordinary Banco Sabadell shares, until the 27^th of July 2012. One thing seems clear from all of this: it is difficult to predict whether it best to accept the swap or not.

The 3 options you would have now are as follows:

1. Accept the swap: the main advantage with this is that you get rid of a perpetual product, which is exactly the nature of these shares (and which was never told to you when you “bought” them). The main disadvantage is that you can lose a substantial part of your investment if you sell, in fact you will, since you are being offered shares at €2.3 per share when the value is now around €1.5 per share.What you would then need to do is cross fingers and hope that the share value goes up to €2.3 so that it washes its face (at €2, you would be losing in the region of 20%). Below is a chart showing the trend of the bank, clearly downward.
   
2. Keep the “preferential shares”,which would allow you to keep receiving the annual coupon, as it is called, provided the bank has profits. The bigger problem is that lack of liquidity: if you wish to sell them you need to go to the secondary market, a pretty difficult scenario nowadays.
3. Sue CAM and Sabadell invoking that contracts were sold unlawfully i.e., without a clear, transparent and concrete explanation of the nature of the product and associated risks. This again throws you into the litigation route, which we had managed to avoid till today…but it may mean that your contract is declared null and void. Following a consultation with our legal library elderecho.com, there are currently 63 Court rulings showing when typing the search words “participaciones preferentes”, some as back as 2005 (which indicates that far from being a novelty, defrauded bank users have  silently battled along…I cannot give just now the proportion of wins vs. loses but there are of both types).

It appears that many people are accepting the swap as the least worst of options, but many others are staying put since there may be a second “offer” for those investors who chose not to swap: the value here is unknown though.

Antonio Flores Litigation, Scams Banco Sabadell, CAM Bank, Preference Shares

There comes a time in the Spanish off-plan property development fiasco when the robberies, theft, misappropriation, fraud, call it what you may, stop being a surprise…it merely becomes a matter of measuring the size of the outrage.

€4,500,000 is the size of the outrage in this case, which is the combined sum paid by loyal off-plan property customers, through a local law firm, to finance a development that was to be built by Proyectos Antele/Costa Palatinum, in Murcia. In the end, the story repeats itself: nothing gets built, the monies disappear through a network of group of companies and when asked, the developer claims that the market has hit him hard.

And there is the statement of the account of Proyectos Antele/Costa Palatinum to show the trail of the fast disappearing monies.

From a legal point of view, the matter unfolded as follows:

• The sole director of this company received four and a half million from trusting buyers, mostly from the United Kingdom, took out a mortgage loan to buy the land (€13,000,000).

• For reasons unknown to us, even though it seems that he probably ran out of money, the development is halted indefinitely.

• Faced with a deluge of claims, the developer chose to do one of two: either file for voluntary receivership or offer alternative properties. He chose option number two, a development in none other than Hugo Chavez´s Venezuela (not difficult to guess how that went down…).

• Caja Murcia, the lender and the guaranteeing savings banks, in an action of unsurprising lack of solidarity and neglecting of contractual and social obligations, tries to wriggle out of responsibility; and all of it, in spite of having provided a bank guarantee in 2007 which they “unilaterally cancelled” in 2008 and now renege on, and having paid back, at least, on one occasion.

• Having the matter been submitted to criminal courts, as evidence of criminal activity was mounting, we requested the developer to give a statement, which he did, but to state that an unprecedented crisis had hit him so hard that he was unable to develop this project. As for the monies, his answer was that he had used it all to… move earth around the building site (all he could prove he did). And unworthy-of-customers-trust Caja Murcia, after confessing to have refunded at least 1 deposit, -by mistake- according to their words, said they were really never underwriting this development.

• The Judge, seemingly more comfortable dealing with purse snatchers, shoplifters and other instances of public nuisance, was hopelessly out of her depth and consequently resolved that justice was best served through the civil courts. According to her, intent to defraud had not been proven, even though the Supreme Court in Spain states that intent in a misappropriation case exists where someone diverts monies knowingly.

• The State Prosecutor, presumably not dissimilar to the sort that makes the headlines in Spain because of attaining this post of utmost responsibility at the silly age of 25, supported the shelving of the case on grounds that no evidence of fraud was produced: €4,500,000 of stolen monies seemed not a purse big enough for him…all of it in two lines.

• The acting conveyance lawyers have washed their hands of this hold-up.

• The criminal matter has now been referred to the Appeal Court. A separate civil case against Caja Murcia is now under way.

Documents

• Proyectos Antele Case: Court Requests Bank Statement from Bank  (PDF ~990 Kb)
• Proyectos Antele Case: Prosecutor Writ Requesting Dismissal (PDF)
• Proyectos Antelee Case: Criminal Case Dismissed by Judge

Antonio Flores Litigation Caja Murcia, Costa Palatinum, litigation against spanish developers, Proyectos Antele S.L.

The collapse of the 4th biggest investment bank hit the headlines in a spectacular fashion and sent the world, Spain included, into financial turmoil. The figures were staggering, so big that it remains the largest bankruptcy filing in the U.S in history.

In Spain, the financial debacle has recently been revisited on occasion of the controversial appointment of a Lehman Brothers former director as the new Ministry of Economy. However, little is known about what happened with private investors of generally modest sums, who, through the advice of their branch managers, were beset by the collapse of Lehman Brothers.

An investor with a Professional Profile

The most notorious case was ventilated via the Marbella courts and was ruled against the claimant: UBS, the Swiss Bank, was not to blame for the loss of no less than €12 million, obtained through the sale of land, even though they had recommended the buyer to acquire the soon-to-be defunct stock, among others.

So what went wrong with this mega-rich land owner? The Marbella court found that:

• The investor had a professional profile, as opposed to a retail investor.
• UBS was not administering his funds nor providing advice, but was a mere intermediary.
• At all times, he had been properly informed to make a sound decision.

Well, sound was not to be!

A Savvy Investor Addicted to Email

This other case was mainly decided on the basis of substantial email correspondence between Bankinter and the investor, who happened to be partner at Accenture, a multinational management consulting, technology services and outsourcing company. Again, the courts ruled against the investor because:

• The offering made by the bank was specifically worded “sin capital garantizado” (principal not guaranteed).
• Lehman going bust fell between the probable and the possible, and thus was an associated risk.
• Emails containing words such as “I have substantial structured products with Telefonica”, “Iberdrola is not a stock share I am comfortable with” or “in this particular moment I would be inclined to go for a 3-year BBVA” are not consistent with that of a curious or rudimentary investor.
• The investor profile test (MiFID), which was not a mandatory requirement for the bank to carry out prior to 2007, was however covered by the 1993/612 Royal Decree, and such would have been substituted by actions the investor carried out throughout his business relationship with the defendant bank.

The Man on the Clapham Omnibus With Significant Financial Knowledge

Moving on from these spectacular losses into more mundane scenarios, we also have a ruling against the investor, an ordinary man that took out the Lehman Brothers stock in 2005 at a 7.5% annual yield, and claimed, shortly after the collapse, that he had not been properly advised. The Appeal Court found in favour of Credit Valencia, stating that:

• The investor had bought Lehman stock after selling Deutsche Bank Cap Trust, which would indicate he had significant prior financial knowledge.
• The investor was aware that he had been sold an investment fund product, and that not reading the paperwork he was given is dire recklessness that only he could be held responsible for.
• The bank had properly informed the client, pursuant to article 79 of the Stock Exchange Act (Ley Mercado de Valores), by providing clear, correct, concrete and precise information to avoid an incorrect interpretation.
• The bank had no means to anticipate, in 2005, of what could happen in 2008.

A Trusting Conservative Investor

Conversely, many other rulings favourable to the investor dispute the bank’s allegations that they had acted appropriately. In this one in particular, the Courts pounded Banco Espirito Santo by concluding that that:

• The investor always went with the advice of Banco Espirito Santo, on the basis of his conservative profile.
• In August 2007, when the investment was formalized, Lehman Brothers was already under question due to the advent of the subprime mortgage crisis, in the USA.
• The contracts were deceitful as they made reference to Telefonica, a company that, to the average Spanish investor, is close, reliable, stable and rarely volatile.
• The information provided in the contracts was obscure, insufficient and negligently worded in a manner that was only understandable to professionals belonging to the world of complex investments. Quoting Supreme Court precedent in respect to information that is to not fall foul of the mandatory obligations of transparency, clarity, concretion and simplicity: “It needs to fulfill the double requirement of legible, physically, and comprehensible, intellectually.”
• The bank manager and client had deep trust in each other, to the extent that the former visited the offices of the latter.
• According to the Spanish regulator CNMV, the “analysis of the contract indicates that the financial transaction lacked enough precise, clear and congruous information for the investor to be able to make an informed decision.”

8 Retail Investors Deemed Incapable of Making Informed Decisions on Financial Investments

In a further case instigated by 8 investors who lost everything through bad investment advice by Bankpyme, the Courts found that:

• The forensic expert witness dictated that the profile of all investors was that of a “retail investor”, in spite of which the bank chose to be incoherent with such reality by placing their money in high risk products, not adequate to their profile.
• As a result of the above and consequently their lack of comprehension, the investors could have never made an informed decision about the product.
• According to the Spanish regulator’s (CNMV) report, the whole process embodied a catalogue of bad financial practices for it dismissed crucial aspects such as the profiling of clients, information about the products, lack of diversification of investment (international standards in the matter dictate that no more than 10% of the basket, or clients global position, should go to high-risk complex investment products), lack of warning of loss should collapse occur, and lack of information on commissions charged by the bank.
• The bank sacrificed the clients’ interest in favour of higher commissions or margins.

The rulings analyzed (around 35) help conclude that, almost invariably, the investor profile is crucial for the Courts to decide one either direction. Alongside it, other determining factors are compliance with banking and investment regulations, the quality of the information supplied, the content of the contracts, events occurring prior, during and after exchange, the real intentions of the parties as shown during the negotiation process and whether the bank had one of two obligations: to provide investment advice or to provide information only (albeit correct, transparent and clear).

Antonio Flores Litigation Bankinter, Credit Valencia, Espirito Santo, financial miss selling in Spain, Lehman Brothers, MiFID, UBS

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 19/07/2001, 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”.

Antonio Flores Litigation, Property Las Torrentas, Linda and John Andrews, litigation against spanish developers, The Harrial Group S.L

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.

—

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

Antonio Flores Litigation, Property Bank Guarantees in Spain, BBVA, Ley 1968/57, litigation against spanish developers, San José Construcciones

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).

Antonio Flores Legal Practise, Litigation Grupo San José Construcciones e Inversiones S.A, La Fortuna Golf, litigation against spanish developers, Ochando Golf, Promociones Eurohouse, Residencial San Pedro del Pinatar

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. 

Antonio Flores Litigation Act of God, Contract Resolution, litigation agains spanish developers