Off-Plan Bank Guarantees and Supreme Court Rulings – Payback Time

Raymundo Larraín Nesbitt, June, 8. 2016

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of June 2016



A fortnight ago the BBC News published in its Business section an enticing article which has garnered much attention from the media. It relates to Spanish bank guarantees and the payout that is potentially due to thousands of off-plan buyers (mostly British).

The article quotes as source a Barcelona-based law firm which estimates that up to 100,000 UK off-plan buyers were due payouts to the tune of £20,000 per investor. The law firm quotes a Supreme Court ruling of the 21st December 2.015 which established the joint liability of banks (and developers) on refunding off-plan stage payments. The article then goes on to explain that Britons could be owed as much as £2bn. The article compares the situation Spanish banks are now facing to the PPI scandal that engulfed UK high street lenders forcing them to set aside billions of pounds in claims as a result of mis-sold financial services.

I will resist the urge to introduce a wedge and mention here how I was harassed day in and day out with phone calls and text messages, whilst working in the UK, offering me 100% guaranteed PPI claims. The fact of the matter is that I knew I did not qualify but that did not stop the buzz. Do not expect a repeat PPI scenario unfolding in Spain anytime soon.

Setting the Record Straight

Long story short, well over a year ago, in the 1Q 2015, I wrote an article titled “Supreme Court Rulings on Bank Guarantees”. This article was published on the 8th of April 2.015 in Spanish Property Insight, which coincidentally also happens to be a Barcelona-based company.

This long article (over 3,000 words) was the first to analyse in painstaking detail a number of recent Supreme Court rulings that shaped our understanding on how off-plan bank guarantees work in Spain. The article collates a number of legal changes; chief amongst them is the joint liability of banks (along with developers) when no bank guarantees had been issued (or had been wrongly issued) to off-plan buyers.

In layman´s terms this translates into now, for the first time ever, being able to claim directly from banks where off-plan deposits were paid into even when no bank guarantee was issued to a buyer by the developer (as is mandatory by law 57/68). I highlighted repeatedly the legal significance of this change brought about by the Supreme Court in my text.

This, coupled with the fact the Supreme Court had made it clear that the statutory limitation to litigate is now 15 years, effectively moved the goal posts for thousands of off-plan buyers which previously had been barred from litigation for legal reasons I explain below. Please note I avoid at all times using the term ‘investors’, as does the BBC article, for legal reasons I also care to explain further below.

Thousands of new-build buyers which had NOT been issued a mandatory bank guarantee safeguarding their interim deposits, as is mandatory per Law 57/1968, and to which the litigation door was previously tightly shut, found the door left ajar almost in a beckoning manner by way of the recent Supreme Court rulings. These were uncharted waters for us all.

The significance of the legal rulings I analysed early on in 2.015 is threefold:

  • You could now litigate for a full refund of your off-plan stage payments (plus legal interests) despite never have been issued a bank guarantee (or been issued an incorrect or partial one).
  • The statutory limitation was confirmed to be 15 years as from the first payment.
  • Unlike before you could now litigate and file a claim against the lender skipping the developer altogether. This was previously not an option as I highlighted in multiple litigation articles of mine at the time (back in 2.008). This change has associated two major benefits: you save yourself protracted litigation time chasing a developer and most significantly you can now file a claim directly against a bank, which has money, leaving aside developers which in most instances had gone under (so there was little to no chance to recover the funds as their assets had been legally seized by creditors who were first in the pecking order following insolvency procedures).


I even went the extra mile writing a bullet point section, as a recap, collating all the legal changes I had examined throughout multiple Supreme Court rulings for ease of comprehension.

So as can be surmised from my 2.015 article, the ruling of the 21st December 2.015 the BBC article quotes is not the first and most certainly not the last. It is in fact one more in a long string of positive Supreme Court rulings which clearly favor consumer interests (off-plan buyers). Again please note I do not use the term ‘investor’. Moreover, I concluded stressing in my article the strong pro-consumer bias the Supreme Court has manifested in its rulings. These rulings set jurisprudence, meaning lower courts are bound by them.

To close, I would like to mention I do not know where the catchy headline of “100,000 UK investors” being owed payouts comes from; but frankly I would be highly surprised if even a tenth qualifies. This figure seems way over optimistic to my mind.

Unfortunately, after my positive spin, comes the reality check.

The Damper

Despite the warm fuzzy tone the BBC article exudes, the road to recover off-plan deposits is long; it is by no means a cakewalk. First of all, banks are not going to roll over handing payouts left, right and centre to Britons. Anyone expecting that is naïve and simply deluding themselves.

Knowing lenders, they are going to put up one heck of a fight, Supreme Court rulings or not. Anyone expecting a payout as in the UK with the PPI scandal is in for a sore disappointment. I am certain it hasn’t even crossed Spanish banks´ minds to set aside billions of pounds, unlike their UK counterparts, for these payouts.  And there are multiple reasons for it which I go on to explain.

Banks will make use of the legal defence developers had to counter claims as they are in fact in the same legal position. In my 2.008 litigation article I gave a list of ten reasons why your case could be thrown out of court. I will list some of them below:

  1. You can only litigate if you legally terminated (or cancelled) the off-plan purchase contract before a developer attained what is known as a Licence of First Occupation. The reasons to excercise a cancellation must have been a serious breach of contract not a whim i.e. the property was being delivered significantly after the contractually binding date for completion. If you did not cancel your contract legally before a LFO was attained your case is doomed, period. It is almost guaranteed the judge will rule against you. It doesn´t matter if the property was completed properly at a later date (with LFO issued) so long as the off-plan buyer terminated the contract legally before the developer attained a LFO.
  2. Only consumers or buyers of good faith qualify for a payout. Investors are expressly ruled out. Hence why I give so much importance above to the terms that are used. This is explained because in Spain Consumer law is very protective. The European Court of Justice (ECJ) has done a sterling job as well over the last years protecting consumers at large from abusive contract terms (i.e. mortgage-related claims on abusive mortgage clauses). On the other hand, the law takes for granted that investors are financially savvy and need no protection so they are excluded from the benefits offered by Law 57/68 (bank guarantees law). So who qualifies as an investor in the eyes of a Spanish judge? An off-plan buyer that buys several properties with the intention of reselling them at a higher price will be seen as an investor (i.e. also known as ´flipping´ properties which was very popular and lucrative at the height of the property bubble). E-mails sent to your estate agent claiming you are looking for an attractive investment with high potential (rental) yields can also be construed as that of an investor. Bottom line, the language, the number of properties bought and the use you are going to give the properties is relevant to be qualified as an investor or not.
  3. Lenders must have been ‘aware’ the funds deposited with them were destined to buy an off-plan property in compliance with terms of law 57/68.
  4. To claim successfully a refund, an off-plan buyer must be able to supply to a law court prove of having made ALL stage payments (including the initial reservation deposit that strikes the property off the market). Any money that cannot be proved to have been deposited with the bank can simply not be claimed back. In the past there have been serious issues on wiring funds overseas using intermediary companies (i.e. currency forwarding companies or even real estate agents’ accounts) grouped transfers for economies of scale (to get better exchange rates) and it is nigh impossible to prove part of those funds belong to a given client. Many cases have been dismissed at court because lawyers were unable to prove that part of those bulk transfers belonged to their client. Obviously this is not an issue when Mr. Smith, for example, wired his funds from his account at Barclays UK over to Cajasur Spain. Also it may prove challenging for some buyers to retrieve bank records of transfers that were made well over a decade ago.
  5. The statutory limitation is 15 years as from the time the first payment was made. Some cases will now be time-barred i.e. those who bought in 2.001 or before.
  6. Losing a court case in Spain means the case cannot be considered again.
  7. Losing may also mean that you are liable to pay the lawyer’s fees, procedural costs and legal interests of the OTHER party (besides your own set of legal fees). So when someone cold-calls you offering you litigation on a ‘no-win, no-fee’ basis that sounds too-good-to-be-true make sure you are not getting a raw deal. Because even if you do not end up paying the legal fees of your own lawyer as plaintiff, you may be forced by the court to pay the legal fees, procedural costs and legal interests of the defendant (the bank). And banks have a notorious penchant for hiring expensive lawyers.
  8. As mentioned above, lenders are not just going to roll over allowing buyers to walk all over them demanding huge payouts. In all likelihood they will follow an attrition war that in their eyes will hopefully prove too expensive and time-consuming for a plaintiff leading them to throw the towel eventually. You can expect protracted litigation that will drag on for several years. Do not expect a swift out-of-court settlement on this matter – won’t happen.

Practical example on who qualifies for litigation now; what has changed

As a case in point, and to avoid esoterics, I put forward a practical example:

Mr and Mrs Fatebringer set down a deposit to buy off-plan property in Spain in 2003. They wire over funds from a UK account under their own names over to a (Spanish) bank designated by the developer in their Private Purchase Contract. No bank guarantees were handed over to the couple safeguarding their deposits as would be mandatory under the provisions of law 57/68. For whatever reason the development is never completed (i.e. Building Licence is not forthcoming). The developer eventually goes under and files for creditor protection (insolvency).

  • Situation pre-Supreme Court rulings


 Lawyers would have advised the couple that no legal action could be taken against the bank as lenders are not responsible for handing over bank guarantees (that is the developer´s duty). Such cases were quickly dismissed by judges at the time. Lawyers will have also advised them not to take action against a developer teetering on the brink of bankruptcy as in all likelihood all its assets are frozen or legally seized (lawyers would have verified this point). Bottom line, this couple will have lost all the savings (stage payments) they paid into the Spanish bank. Litigation was pointless as it was a case of throwing good money after bad. Normally off-plan deposits equated to approximately 40% of the value of a new-build property; a substantial amount.

  • Situation post-Supreme Court rulings


 Following new jurisprudence from the highest court in the land, Mr and Mrs Fatebringer may now take legal action, despite never been handed a bank guarantee, directly against the bank that held their funds. They have a window of 15 years as from the first payment (which was in 2.003). It is likely the bank will fight them off in court but will lose eventually. To qualify for a payout the couple must comply with the points I lay above under the heading ‘The Damper’.


Litigation is a serious matter and should not be taken light-heartedly. Reckless litigation offered by ambulance chasers often leads to expensive legal bills.

Shop around, look for a reputable litigation law firm that has experience and request a preliminary assessment on your matter to determine success odds (fees may apply). A case-by-case approach ought to be taken, there are no one-size-fits-all solutions. Be wary of law firms claiming to guarantee 100% litigation success rate – no such thing exists. The outcome on legal procedures is always uncertain and caution is key.

All things said, the litigation prospects for thousands of off-plan buyers, who were previously barred from litigation, is looking brighter than ever. The success odds have dramatically improved through the recent actions taken by Spain’s Supreme Court. Thousands of property buyers now, for the first time, stand a good chance at court to recover all their monies plus legal interests if they are resolute and committed to success.

The gates of reckoning stand open, for now.

Trust, like reputation, is hard to earn, but easy to lose.


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