Financial institutions in Spain not honouring off-plan guarantees

The Bank of Spain is investigating a rash of complaints from property investors that some lenders are developers are breaching consumer protection laws by stalling or refusing to honour guarantees for staged off-plan payments.

These include banks and insurance companies. They issue guarantees that are meant to protect the money of people who buy off plan or under construction, and are required by law. If the developer goes bust or breaches its contract buyers can claim back their money, with legal interest of around 6%, from the financial institution underwriting the guarantee.

But as the Spanish property market continues to sink more and more buyers are pulling out as they find contracts being breached. Those who have guarantees are having a hard time getting their money back but many are finding that they didn't have a guarantee in place despite it being a legal requirement.

The Bank of Spain confirmed it has received a record number of complaints and is investigating the issue and expects to issue a report next month.

One of those being investigated is Martina-Fadesa, one of Spain's largest listed developers, which recently went into administration. It apparently failed to provide bank guarantees for many of its clients.

During the Spanish property boom, when prices were rising strongly, bank guarantees were hardly an issue, as most buyers preferred to hang on for their property, rather than get their money back via the guarantee.

The Bank of Spain is adamant that the financial institutions underwriting the guarantees must pay out in full if developers are in breach of contract. 'The financial institution has to ask the developer if there has been any breach of contract, for example a late delivery. If so, the payout should be automatic,' a Bank spokesman said.

But in practise an increasing number of people are finding that this is not happening. For example clients of Martinsa-Fadesa claim that banks are using the company's status under administration as an excuse to delay paying out.

'This is not a valid excuse. The law is clear. If the conditions of the guarantee are satisfied, execution is obligatory, regardless of the situation of the developer,' said Fernando Herrero, of the Adicae Association of Bank Users.