What are Spanish Property Development Deposit Recoveries
In 1968, General Franco, the head of the Spanish government introduced a law to remove the risk of investing in off-plan property. Known as Law 57 of 1968 (a.k.a. 57/68) it required builders and banks to insure deposits on off-plan property developments in case they were not completed.
Under the Labour government of the late 1980s, buy-to-let investments were deregulated to encourage the sale and raising of mortgages to pay for them. The reason for this is because it was seen that pensions would be inadequate for the ageing population and self-investment was believed to be a good answer to acquiring wealth for retirement. This meant that financial advisers could sell BTLs and mortgages required to finance them, at the same time.
However, due to the inadequate housing stock available to purchase, UK IFAs worked with developers to sell off-plan properties as BTL investments. And if off-plan property BTL investing was easy to sell, offshore off-plan properties were even more attractive. It is now known that many thousands of off-plan offshore properties were sold to UK residents during the 2000s of which extremely few have been built or fulfilled the returns on investment if built at all.
It led to a surge in building in Spain culminating in the 2008 banking collapse when 90% of Spanish developers became bankrupt. It is written in the press that over 1.25m properties were not completed. By far the majority of such deposits were paid by UK residents.
Obligations of Spanish Banks for Property Development Deposit Guarantees
Although it is little known in the UK that only self-certified high-risk investors can be sold unregulated investments by IFAs, Spain’s protection of buyers of off-plan property in 1968 provided a guaranteed safety net to protect and encourage buyers to risk paying them.
Claims are made against Spanish banks that provided and operated bank accounts of Spanish property developers and lending to build them; the two were inextricably connected. Under Law 57/68 banks were required to guarantee that all deposits that landed in developers’ accounts were insured against loss if the development did not or could not be completed. Completion meant that buyers received a certificate of completion and that the property was habitable (the two did not necessarily happen together).
Some Key Obligations
- All Spanish banks and builders were/are required to insure buyer deposits in the event that developments were not completed.
- Although the law requiring this came into force in 1968, the need for it was limited due to relatively benign economic conditions.
- By the time of the banking crisis of 2007/8, Law 57/68 had all but been forgotten or dismissed as not applicable, that is until a handful of Spanish Abogados (solicitors) tried to use it and were required to take the matter to the Spanish Supreme Court in Madrid.
- Although the case was won, the banks tried to restrict its implementation, especially the addition of statutory interest. They lost. However, to placate banks, a stop date was created for all action to be submitted by. The last date to submit claims to court is 7th October 2020. There is also a 15-year period from when contracts were entered into to, by which claims must be submitted.
Why were so many off-plan Spanish properties sold to UK residents?
The incentive to generate commissions above and beyond what could be achieved by selling standard savings and investment products is always considerable. Encouragement by government for individuals to take greater control of their retirement funds was a serendipitous factor that encouraged financial advisers to sell UK, UK off-plan, offshore and offshore off-plan seemed a natural progression. Although offshore property sales people should have been aware of the risks and advised clients accordingly, they did the reverse when promoting such and earned huge commissions.
Under Law 57/68, Spanish banks are required to compensate deposits paid to developers who banked with them, if the developments were not completed or the client did not complete.
The calculation of loss includes the deposit plus statutory interest, currently calculated since 2008 at 4.1% annually, not compounded. Where a UK person paid in GB Sterling up to 2008, the Pound to Euro exchange rate at the time was greatly in favour of the former. Now with Brexit it means that converting back will be of significant gain to UK clients.
As there is no statutory arbitration body in Spain for clients to complain to, legal action through the courts is required. Legal action takes between 6 and 18 months to complete. TCB’s uphold rate for 130+ cases completed to date is currently 100%.