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Payments on account of the price during the construction of a property in Spain

In the complex process of real estate construction in Spain, financial transactions are a fundamental aspect. The amounts on account of the price, colloquially known as advances, are a crucial part of these transactions.

This report seeks to explore in depth the legal framework that regulates these amounts, their implications for both parties, developer, and buyer, as well as recent legislative updates that impact on this area.

Value Added Tax.

Legal Regulation
The main law regulating this issue is Law 38/1999, of 5 November, on Building Regulation (LOE), which establishes a framework for the management and control of quality in the construction process of buildings, complemented, in terms of consumer protection, by Royal Legislative Decree 1/2007, of 16 November, which approves the revised text of the General Law for the Defence of Consumers and Users.

On 1 January 2016, a new regulation came into force on the collection, during construction, of amounts on account of the purchase price which, together with the repeal of a series of legal provisions related to this matter, configured the new regulation of this controversial issue.

What are the sums on account of the price?
Deferred payments are payments made by the buyer to the developer during the various stages of the construction process of the property. These payments are usually made as the work progresses and are detailed in the purchase contract.

Protections for the Buyer.

Guarantee of repayment of amounts.
Guarantee, from the moment the building licence permit is obtained, the return of the amounts paid plus legal interest, by means of a surety insurance or joint and several guarantee, in the event that construction is not started or is not completed within the period agreed for the delivery of the property.

The guarantee shall extend to the totality of the sums advanced, including applicable taxes, plus the legal interest accrued from the effective delivery of the advance, “until the planned date of delivery of the dwelling by the developer”. However, only the amounts advanced “from the time the building permit is obtained” will be guaranteed.

Guarantee Insurance.
An individual insurance policy will be taken out for each purchaser, identifying the property. The original document of the policy must be given to the purchaser at the time of the execution of the contract. The sum insured will include the total amount of the sums advanced in the contract, including the applicable taxes, increased by the legal interest of the money, which must be paid in advance by the purchaser, on signing the contract or subsequently in a deferred form. In no case will the amounts that are not accredited as having been paid by the insured person be compensable.

Joint guarantee.
The original guarantee document must be given to the buyer at the moment of the signing of the purchase contract. It will include the total amount of the sums advanced in the contract, taxes, and legal interest on the money that the purchaser must deliver in advance, at the signing of the contract or subsequently in a deferred manner until the foreseen date of delivery. In contrast to the guarantee insurance, the rule does not say anything about the sums that have not been paid by the purchaser. However, given that the guarantee is joint and several, under the provisions of article 1.148 of the Civil Code, the guarantor may refuse to pay the amounts that are not accredited as having been provided by the purchaser.

Special account in a credit institution.

The developer who intends to obtain advance payments from future purchasers of the dwellings shall be obliged to open a special account in a credit institution, through which the purchaser must deliver the amounts that he has undertaken to advance. The credit institution with which the account is opened shall, at its own risk, demand security in the form of a guarantee or insurance. Under its responsibility, that is to say, in the event that the buyer demands the rescission and the return of the sums, and the seller does not comply with the return and no insurance or guarantee has been provided, the buyer may demand the return of these sums from the bank in which the account, in which the advance payments have been made is held. The Supreme Court has gone further when interpreting this responsibility “When the entity knew or had to know that the buyers were paying in amounts on account of the price of the houses in the development, it had the legal obligation to open a special and separate account, duly guaranteed, otherwise incurring the specific responsibility established by the regulation”. Consumer protection will be achieved, therefore, if the buyer makes a deposit or transfer into an account of the developer, whether special or not, indicating in the concept “payment on account of the price of the property under construction”.

Minimum contractual and advertising information.

This information requirement regarding obligations and guarantees would be a third way of guarantee.

Responsibilities of the Developer
The developer is responsible for ensuring that the sums advanced are used correctly in the construction of the property. In addition, he must comply with the delivery deadlines set out in the contract and guarantee the quality and safety of the property in accordance with the applicable regulations.

Failure to start the works within the stipulated period.
The legislator configures the date of commencement of construction as an essential term of the contract in such a way that, if construction has not begun within the period stipulated by the parties, the purchaser may choose to terminate the purchase contract, with a refund of the amounts paid on account plus legal interest.

When it comes to determining when the work is understood to have begun, it seems clear that this date must be set at the time of the execution of the official record of the reconsideration or commencement of the work. This document, which must be signed by the builder, by the architect in charge of the works and by the director of the execution of the works, has as its main objective to verify on the physical reality of the site the suitability of the architectural project drawn up for the specific construction planned.

Failure to deliver the property within the stipulated timeframe.
In accordance with section four of the First Additional Provision of the LOE, if the property has not been delivered within the period stipulated by the parties, the purchaser may terminate the contract and demand the return of the sums paid in advance, plus legal interest.

In general, the delay of a contracting party in fulfilling its obligations does not constitute a breach of such a degree as to justify the termination of the contract at the request of the other contracting party. For this reason, the Supreme Court has established that “in principle, the date of delivery of a property does not constitute an essential term whose non-fulfilment entitles the buyer to terminate the contract (automatically) since, even in the event that the property is delivered late, such delivery may continue to satisfy the buyer’s interest”. The assumption of the Law is that of the total or practical non-existence of the dwelling”. Consequently, it is possible that the mere delay may lack resolutory transcendence when its incidence does not frustrate the purpose or basis of the contract and the performance, slightly late, continues to be useful and suitable for the satisfaction of the interests of the other party.

However, the essential nature of the term cannot be denied when its non-fulfilment has been stipulated in the contract as a cause for termination, since the fact of having agreed an express termination condition is sufficiently indicative of the importance that the parties gave to the term of the performance of the contract.

On the other hand, it is important to highlight that the Supreme Court recognises that the fulfilment of the developer-seller’s obligation to deliver cannot be understood to be limited to the fact that the dwelling is a dwelling in a purely physical sense, with walls, roof, floor and the material possibility of having basic supplies, but must also include that the dwelling is a dwelling in its legal aspect, which requires that the essential legal requirements are met so that the purchaser can use, occupy and inhabit the dwelling effectively and according to its purpose, which in turn involves obtaining the first occupation licence or certificate of occupancy.

Granting of an extension to the developer.
If construction has not been started or the property has not been delivered, the purchaser is not obliged to request the “rescission” (termination) of the contract but may choose between termination, or the granting of an extension, specifying the new period with the date of completion of construction and delivery of the property.

However, when granting an extension to the developer, the purchaser must bear in mind that, in principle, this option entails the loss of the guarantee of repayment of the sums advanced, since the guarantor is not obliged to extend the insurance or guarantee contract beyond the initially stipulated period. In other words, the extension of the purchase contract does not automatically entail the extension of either the insurance contract or the bank guarantee.

Therefore, together with the extension of the delivery period, it would be advisable to expressly agree on the extension of the guarantee granted. As regards the possibility of terminating the contract once an extension has been granted, it is understood that even if an extension has been granted, termination could be requested before the new period has expired if it is clear that the seller will not be able to perform before the new period expires.

Legal Protection
In the event of a dispute or breach by the developer, the buyer has access to legal protection through the Spanish courts. These courts can order the return of the sums advanced and, if necessary, impose penalties on the developer for breach of contract.

The claim action against the developer and the guarantor.
The new regulation has eliminated the enforceability of the guarantee insurance or joint and several guarantee and requires the purchaser to previously request payment from the developer, which casts doubt on the joint and several nature of the guarantor’s obligation. Until now, the Supreme Court allowed the purchaser to take legal action against the developer and his insurer or guarantor to demand the joint and several repayments of the amounts advanced, when the legal requirement that the construction is not started or is not completed within the agreed period was not met. However, following the reform introduced by Law 20/2015, of 14 July, it is likely that the High Court will follow the wording of the rule and require a prior claim against the developer in order to be able to exercise the claim against the guarantor entity.

On the other hand, the jurisprudence has eliminated the doubts raised regarding the limitation period of the claim action, stating that such period is in any case the one generally provided for in article 1964 of the Civil Code, regardless of who is the party liable for the action (promoter, guarantor, insurer or depository entity).

Subsidiary liability of credit institutions.
The depository credit institution shall be liable for the restitution in the event that the developer does not grant the legally required guarantee or does not comply with his obligation to receive the amounts advanced by the purchasers through a special account.

In order to open the special account, the credit institution must first verify that the developer has provided the guarantees for the return of the amounts advanced, while the obligation to deposit the amounts in the special account is an obligation imposed on the developer, and the guarantor is responsible for urging the developer, who receives the amounts, to deposit them in the special account set up for this purpose, as well as verifying that the funds are available to meet the costs of the development.

Final recommendation.
Before formalising any purchase contract for the purchase of a newly built home, it is essential to seek advice on the fulfilment of these guarantees by the developer, not only for formal and legal purposes, but also regarding the credibility and solvency of the entities that are going to provide them.

In this regard, VOGT Advokatfirma España, S.L. has extensive experience in drafting off-plan purchase contracts, reviewing the fulfilment of the developer’s legal obligations, managing the relationship between buyers and developers during the construction process, and supervising the correct delivery of the property.

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