Home buyers get protection from the Spanish Supreme Court

Posted on Posted in Property Law, Publications

In a recent  landmark judgement dated December 21, 2015, the Spanish Supreme Court has held  that banks are responsible, together with the promoters, to the refund of amounts anticipated by home buyers in case the latter fail to deliver the properties on timely basis.

In accordance with the Spanish Law (Law 57/1968), housing developers receiving funds on deposit for housing had the legal obligation to put them in a specific account and provide their clients with a bank guarantee. The guarantor would then be liable for the return of the deposits  in case the developer failed to deliver  the house within the agreed time.

The reality is that this obligation was generally breached by the promoters. Among other reasons, because most of the buyers were unaware that they had the right to demand this guarantee. In the great crisis of 2008, most of the promoters went bankrupt or disappeared, leaving unfinished promotions and being unable to repay the advances received. Their clients lost all the money and only had a claim against the promoters. This claim could only be exercised in an insolvency proceeding. Since clients were ordinary creditors that could only recover what was left after other privileged (Tax Office and employees) or secured creditors (banks) were fully paid, the likelihood of getting anything meaningful was small.

The novelty of the recent Supreme Court ruling is that it upholds  that the financial institutions in which the defaulting promoters deposited the funds received from their customers are liable for the refund the deposits. The judgement is grounded in the fact that banks, according to the Law 57/1968 should have checked whether the promoters had obtained a bank guaranty for the deposits. Likewise, most banks ignored the statutory requirement which required promoters to put the deposits in a separate account, thus allowing the latter to deposit the funds of their clients in in their general account. Then the promoters could use these funds for any purpose (paying overheads, dividends…) instead using their clients’ money for the construction of their homes.

During the process, which was initiated in Denia (Alicante) in 2010, the bank (in this case is Banco Sabadell) claimed that they were not a party of the construction agreement and therefore could not be made liable for the default of the promoters. As explained, the Supreme Court dismissed this argument and opens the floodgates for thousands of similar claims for defrauded home buyers in Spain. Our deepest congrats to our colleagues that with courage and resolution defeated Goliath again.