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COVID concerns for off-plan property

Many second home buyers, along with everyone else, are keen to draw a line under 2020 and look ahead to 2021. But what does the coming year have in store for Spanish property buyers? Keith Rule of CostaLuz Lawyers explains all…

Will the COVID-19 pandemic lead to construction and delivery delays?

Almost certainly. The construction industry in Spain essentially shut down for seven weeks in spring due to the national lockdown. This means that many developments have been delayed or had their schedules altered.

In addition, Spain’s economy has suffered hugely, leading to a property market contraction that analysts believe may last into 2021.

I can foresee some off-plan developers struggling to meet completion deadlines over the next few years, especially if the Spanish property market has a marked downturn where we see funding banks refusing to give additional builders’ loans to developers. We’ve already seen corporate insolvency in Spain increase by 4.3% in October 2020 and there’s plenty of potential for it to rise further.

So, given the impact of COVID-19, some off-plan developers may run into financial trouble next year. This could lead to completion delays or potentially failure to complete at all. The client then has the potential to make a claim under LEY 20/2015.

What is LEY 20/2015 and how does it affect those buying properties in Spain?

LEY 20/2015 replaced the older law – LEY 57/1968 – that has been the basis of CostaLuz Lawyers winning back €25 million for clients who lost deposits on properties that were never completed due to the financial crisis.

All off-plan purchase contracts signed from 1 January 2016 onwards are covered by the new Law. LEY 20/2015 means that if there is a delay then the buyer should be protected and be able to enforce their bank guarantee.

However, unlike under LEY 57/1968, the bank guarantees or insurance policies issued to buyers to protect their off-plan deposits are only protected from the time that the developer obtains the building licence from the local town hall planning department. This means that it’s vital that off-plan buyers never hand over any off-plan deposit money until their conveyancing lawyer has received a copy of the building licence from the developer.

Over the last decade, many off-plan buyers have won cases against developers’ banks under LEY 57/1968, on off-plan projects without building licences and/or planning permission.  This situation will never be possible under LEY 20/2015. Any money paid to the developer prior to the issuing of the building licence will be totally unprotected.

Where does force majeure come into play?

That’s an interesting point. If construction delays are purely as a result of the pandemic, would banks pay out on their guarantees? Or would they fight doing so under the umbrella of force majeure? The force majeure principle is always allegeable under contract law, irrespective of if the clause is contained in a particular contract or not.

If the developer’s bank refused to honour the guarantee, then the buyer would need to file a lawsuit against them to enforce it. Then it would be up to a judge to decide the outcome of the claim process.

What is a COVID-19 clause?

Many developers have introduced a COVID-19 clause into contracts for off-plan purchases in Spain. The clause safeguards the developer should there be a further lockdown or any restrictions that impede the usual progress of construction and purchases.

We recommend that buyers do the same, demanding a COVID-19 clause in their favour, through their lawyer before they sign anything. This will protect their interests in the case of circumstances caused by the pandemic or its collateral effects.

Have any other parts of the property process been affected?

Definitely. We’re likely to see delays to property-related cases in the courts continue into 2021. COVID-19 has affected the speed at which the courts work. The Spanish courts already had a backlog of work and this has been made worse by the pandemic.

Courts were closed for almost three months (March to June 2020) and since then have been working with reduced staff due to social distancing requirements. So the delays are even greater now, despite some courts turning to video conferencing to try to work around the restrictions that the pandemic has caused.

So, how should people who want to buy off-plan property in Spain in 2021 proceed?

With a degree of caution. Buying from reputable developers with long-term operations in Spain is always advisable and now more so than ever. Buyers also need to ensure that the building licence of their development is in place before handing over a penny.

For more information, please contact CostaLuz Lawyers’ UK office on +44 1908 635 111 and speak with Keith. To speak with Maria in the Spanish office, call +34 956 092 687 or you can visit www.costaluzlawyers.es

Photo by Gunnar Ridderström on Unsplash

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