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September 2008

2.9.2008 - Mallorca Off Plan Property Bank Guarantees

 

A recent report from Spain's biggest national daily newspaper, El Pais, suggests some Spanish banks and insurance companies are breaching consumer protection laws by stalling, or refusing to honour guarantees for off-plan stage payments.

When buying off plan property in Spain bank guarantees are meant to protect the deposits and stage payments made by buyers, and are required by law. If a developer goes bust, or breaches contract (eg missing the deadline for project completion) buyers can claim back their money, with a legal set interest rate of around 6%, from the bank or insurance company underwriting the guarantee.

However with the Spanish property market contracting rapidly, there appear to be an ever increasing number of off-plan property buyers are complaining that banks are refusing to honour these guarantees.

To make matters worse other buyers have found that they were never even provided with a guarantee in the first place. Martinsa Fadesa one of the country's largest listed developers and which recently went into administration, apparently failed to provide bank guarantees for a great many of its clients.

While such guarantees were less important during the boom years with prices rising and many buyers preferring to keep their property, rather than get their money back via the guarantee, there is now a real problem as both large and small developers face major financial difficulties to stay afloat or simply complete projects.

 Following a flood of complaints both from disgruntled buyers and consumer associations the Bank of Spain is preparing a report, for release in September, which is anticipated to that criticise the practices of certain banks. The Bank maintain that the financial institutions underwriting the guarantees must pay out in full if developers are in breach of contract. In practice this appears often not to be the case.