Spanish Courts Accept Crisis Woes and Protect Defaulting Buyers
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:
- It is a well-known fact the property buyers require financing to complete property deals.
- 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.
- Obtaining financing from a lender, where the balance of the price is not readily available, is a buyer’s obligation.
- 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.
- 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:
- 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.
- 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”.
- 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.
- 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.
I think this is a very sensible solution to the times we find ourselves in and I applaud the courts decision. It seems that the courts are now applying a certain logic to their decisions and looking at the moral aspects to the case and are thinking outside the box to resolve these disputes. Spanish Law now seems to be thinking in line with other major Constitutions and for that they must be congratulated.
Any news on Darragh MacAnthony? He was in court this month wasn’t he with 51 expats against him? I believe you are/were involved. Do you know what’s happened? Has the hearing taken place yet?
Andy, the Courts requested the claimants to attend Court personally, to ratify the suit. This Court attendance will take place tomorrow. Mr. Macanthony is not due in Court yet.
Thanks for the update Antonio. Are you still involved with this case?
We are, but it is my colleague Luis who is dealing with the matter.
Ok. I write a blog about the real-estate market here in Marbella, and about such events as this case. Would it be possible to get an update after today’s hearing or possibly a short interview about it? Have a look at the blog and let me know if this is possible. Thank you.
http://realestatemarbella.wordpress.com/
Hi
I have just read this article. Very interesting. In terms of Corvera golf and country spa would the same apply in principle, a 50per cent return of monies paid for people who could not complete due to financing or would they be better to go at it from the lack of promised facilities. In fact could they go at it from both angles.I see Corvera are busy contacting people who have not completed and offering to cancel the contracts and retin all deposits paid. Do they know something we don’t!!!
This is the strategy many developers are now opting for, in view that most people are no longer willing to complete and that their own contractual defaults, by for example not building the facilities or amenities promised on their promotional literature, may allow them to successfully pull out. Corvera in particular is countersuing for specific performance to any buyers who are bringing actions for termination of contracts, alleging that they have finished the units and that buyers are just opportunistically trying to pull out.
The 50% would apply if the developer sues to keep the deposit, but not if they sue for specific performance. If a deal is reached, then there would be no discussion of how much they need to return.