A bank guarantee in Spain is required by law for new construction projects for residential purposes, regardless of the actual destination. So it makes no difference whether you will use the property for your usual residence, your second residence or holiday rental. Yet in practice - and especially on the Costa Blanca - we see that bank guarantees are often not provided. Therefore, in this article you will find some alternatives.
What does a bank guarantee in Spain mean?
A bank guarantee protects your payments to the promoter. When you buy a buy on plan in Belgium, you first buy the land. Your land is then built on. That way, you are already the owner. In Spain, you only become owner after the property is delivered, but you have already paid around 30 - 60% of the purchase price in the meantime. To cover the buyer against a default by the promoter (the promoter cannot deliver for one reason or another), the promoter is obliged to take out a bank guarantee. This involves two things.
- The promoter pays for a bank guarantee or insurance policy that protects your payments.
- The promoter will open a special bank account, linked to the bank guarantee or policy, to receive the funds for the project. This is a segregated account with funds specifically for the construction of the project. The bank is jointly and severally liable with the promoter for funds deposited in this account.
In case the promoter cannot deliver the project, you can recover your payments plus statutory interest. A bank guarantee is therefore not a completion guarantee.
Finally, the bank guarantee is valid until the property is formally delivered by the architect.
Here is the link to the general legislation (see first additional provision) and the legislative history.
Why is there not always a bank guarantee?
In an ideal world, we would not need alternatives to statutory protection. In practice, however, it happens that no bank guarantee or protection is provided. People then talk about "years of experience", "family business", "no need because we are solvent", "we always do this this way", etc.
So why not take out a bank guarantee? Either the cost is too high for the promoter. Either the bank considers the promoter insufficiently solvent and/or cannot provide sufficient guarantees. Another reason could be that the project is still in its early stages: the building permit, for example, is delayed.
However, the risk for you as a buyer is there: if the promoter cannot deliver and there is no bank guarantee, you have to hope that the promoter can repay you. All alternatives therefore share the same premise: the promoter cannot access your funds until he meets his obligations.
Alternative 1: you do not pay yet
This option is simple. You wait to make a payment until the promoter proves that he has taken out a bank guarantee and that planning permission has been granted. Or you wait to make payment until the property has been formally completed. For this, you work with an extended reservation, for example. For both parties, this option has the least certainty regarding the progress of the purchase. After all, you can change your mind without severe consequences (your risk is limited to the reservation amount). For the promoter, realistically, without a sales agreement, there are no adverse consequences for selling to someone else afterwards.
Alternative 2: the third-party account
Under this option, you enter into the purchase agreement but deposit the funds in the trust account of counsel for one of the parties involved. When the promoter demonstrates that it has fulfilled its obligations, the funds are released. This is a common solution for projects in initial phase. After all, a binding purchase agreement is entered into. The buyer is sure he will not lose his pennies and can enforce the sale. The promoter knows that the funds were paid and can become available.
Alternative 3: the notarial trust account
As in the second alternative, you first conclude the purchase agreement. Then you deposit the funds in a notary's third-party account. This notary will be appointed by both parties. The notary in Spain will then also draw up a notarised deposit deed stating the conditions for release. This way, most certainty for both parties on the availability of the funds. A notary will often charge a fee for executing the deposit deed and safekeeping the funds. This cost is borne by the promoter.
Bank guarantee in Spain: decision
If you are buying a new build in Spain, having a bank guarantee is extremely important. And this is for both parties: as a buyer, you have security over your funds and the promoter does not have to pre-finance. However, if no bank guarantee is provided, it is important that the promoter does not have access to the funds.
Do you have any questions about buying in Spain? If so, please feel free to contact with us.