Antonio Flores’ Blog

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