Bank Guarantee

I thought it would be worth writing an article on bank guarantees (aval bancaria) as many people bought off-plan properties during the recent boom in construction here in Spain. So first of all, what is it?
A bank guarantee, which since 1968 is required by law, is meant to protect the money of people who have bought or are buying an off plan or property under construction. The aim of the guarantee is to allow buyers to claim back their money, with legal interest of around 6% if the developer goes bust, or breaches its contract.

So why am I writing this article? Well, during the Spanish property boom, when prices seemed to only be going in one direction, bank guarantees were hardly an issue for many buyers as it seemed preferable to hold onto the property than try to reclaim their monies through the guarantee. Who wanted their original investment back with only 6% interest when you could re-sell and make more????

And the developer would have been more than happy to take the property back is the nearer the development got to completion the more they could ask for as there were an army of amateur investors ready to snap anything up in the mistaken belief that everyone can be a winner.

But now that the Spanish property boom has turned to bust, leading to expectations of falling prices, most buyers would rather get their money back, and the list of developers going to the wall gets longer by the week.

But now within the downturn in off-plan purchases and with many finding it difficult to ‘flip’ their investments, many are looking at ways to get their monies back.

According to ‘El Pais’ an increasing number of off-plan property buyers are complaining that banks are refusing to honour their guarantees. Furthermore some buyers are finding out now that they were never provided with a guarantee in the first place! By the way this contravenes consumer protection laws.

In recent months consumer organisations, such as FACUA, and individual buyers have complained to the Bank of Spain, which claims it has never received this type of complaint before. Had to happen sooner or later.

According to the Bank of Spain “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,”

Of course theory and practice are 2 different things, which many are finding out. Some have taken the banks to court, and where they have lost the bank might be appealing. Or if the developers have gone bust, banks are using the company’s status under administration as an excuse to delay paying out. Of course this is nonsense, the rules are clear, if the conditions of the guarantee are met, regardless of the developer’s situation, the money should be paid out.

Andrew Bellés

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