Arrival of the first indemnifications for the delayed commencement of construction

A Court condemned an insurance company to pay back the payments made by a British couple, including legal interests, with regard to a development in Estepona that suffered a delay in the commencement of the construction. Until now, it was only common to claim indemnifications for the delay in the delivery of the property.

Contact IPP Global Legal Services if you need assistance in a case like this.

The buyers affected by a delay in the commencement of the construction of their homes have the possibility to claim the devolution of the amounts paid in advance to the developer plus the legal interest on these amounts. This judgement of the Court of First Instance number 13 of Barcelona has condemned the insurance company Vitalicio Seguros to pay back money and interests to the buyers of several homes part of a development in Estepona (Málaga).

This judgement is pioneer, taking into account that until now it was only common to claim for the delay in the delivery of the property (delay in the termination of the construction) but not for the delay in the commencement of the construction as it was the case in this specific judgement.

The sums obtained by the claimants are quite generous and amount between 70.000 and 276.000 EUR. This case can be a judicial precedent, in such a way that people affected by similar delays in the commencement of their construction can also have their money paid back. Dimas Cuesta, senior lawyer at Lexland Solicitors in Marbella and IPP Global partners, states that "to file a claim, buyers only have to provide the insurance policy received upon signing the purchase together with a document that certifies that the construction has not been started within the period agreed upon in the purchase contract". The facts that lay at the basis of the judgement concern the purchase of a new built home part of the development of Valle Romano in Estepona by the company Comercio del Estrecho.

These houses were offered by an intermediate to associates and employees of football clubs part of the English Premier Football League suffered a delay of 12 months in the commencement of the construction although "it is not necessary", says Lexland, "that the period of delay is that long to file a successful claim".

The buyers signed a contract that stated a date of commencement of the construction around spring 2007. Nevertheless the claimant was able to provide documents proving that the clearing and cleaning of the plot had not been started until June 2008, being 12 months later. The insurance company raised several prejudicial questions and consequently opposed to the writ of execution.

Contact IPP Global Legal Services if you need assistance in a case like this.

By this decision the Court gave a clear answer to a situation that is becoming very common in the construction sector, like the delay in the commencement of the construction of apartments, resulting in many claims handled by consumer protection associations.

During the Spanish Real Estate boom it was quite common to file claims for the delay in the termination and delivery of the property, but the economical crisis has recovered a possibility, foreseen but unexplored by the law, to claim for the delay in the commencement of the construction. Moreover, many buyers purchased apartments for a price that exceeds the current market value with 25%.

The buyers first acted against the developers to recover their initial payments, in most cases around 20% of the total purchase price, plus legal interests. As they did not get any response, they decided to claim the insurance company. However the buyers did not claim damages as they could not proof the loss of possible earnings for the delay in the use of the house.

The guaranty insurance policies are governed by the Law 57/1968 of 27 July guaranteeing the amounts paid in advance by the buyers before execution of the title deed. Furthermore, these insurance policies are qualified as guaranty contracts in accordance with the Spanish Law on Insurance contracts of 1980. This Law states that the insurance company has the obligation to indemnify the loss suffered by the buyer, within the limits of the contract and the law, in case of breach of the legal and contractual obligations imposed on developer.

To assure this guaranty, the Law obliges the developer to contract an insurance policy, and for those cases in which the amount of the damages is not paid on a voluntary basis, article 3 of the Law 57/68 foresees that the insurance policy together with a document that certifies that the construction has not been started within the period agreed upon: "Once the period of commencement of the construction or the termination of the construction has been expired and none of these have taken place, the buyer can opt between the annulment of the purchase contract with restitution of the amounts paid in advance plus legal interest at a rate of 6% per annum or agreeing with granting an extension of this period to the developer."

The judgement concludes that "the insurance contract or the bank guaranty together with a document that certifies that the construction has not been started or that the property has not been delivered grant to the buyer an executive writ [.] in order to claim, to the insurance company or the guarantor, the restitution of the amounts the buyer is entitled to."

Effects of the crisis on legal defence strategies

The crisis is sharpening the legal defence strategies. The fact that many people stop paying off their mortgages has increased significantly the legal procedures as many financial entities are aiming the execution of the mortgage. However, another possibility consists in an ordinary execution procedure, not as fast or agile, to include all the assets of the debtor which will finally lead to seizure and a public auction sale of these assets.

Two recent judgements confirmed that a creditor can execute the mortgage in accordance with the mortgage procedure and, at the same time, can seize all the other assets of the debtor or his guarantors in case there are.

The Expert. Dimas Cuesta Montejano. Lexland Abogados Partner.

The executive procedures based on insurance policies or bank guarantees in accordance with the Law 57/1968, together with a document that certifies the delay of the legal delivery of the property have always boomed in times of economical crisis. The executive writ that we have summoned to defend our clients is most innovative as it not based upon a document that certifies the delay of the delivery, as this final date in some cases has not been reached yet, but based upon the delay of the commencement of the construction works.

The provisions of the Law 57/1968 that aim to protect the buyer are mandatory as article 7 states that "the rights of the buyer granted by this Law cannot be waived". As a result contractual clauses that could contravene the imperative provisions of the Law 57/1968 are fully null and void. This invalidity can be automatically invoked by the Court.

On the other hand, the Court decision confirms that the Law 57/1968 clearly and specifically sanctions the delay of the commencement of the construction works and that it even gives the option to the buyer to terminate the contract in case the construction works have not been started yet.

Moreover, it is important to state that the Law explicitly forbids conditioning the force of the guarantees granted to protect the buyer without judging the breach or the main purpose of the contract which are matters that do not intervene in the executive procedure.

Being an action that can be taken in accordance with article 3 of the Law 57/1968 confirming its protecting and imperative character on top of the insurance policies and bank guarantees granted within the scope of this Law, it can rise more problems with regard to the burden of proof rather than legal doctrinal discussions.

Nevertheless, this Court decision will surprise many developers and guarantors that in the purchase contract agreed upon a date of commencement of the construction works without taking into account this way to execute the guarantees granted within the scope of this Law.

Surprisingly it has been quite frequent granting guarantees that could already have been executed on the moment of emission. This practice can only be the result of a false appreciation by the developer, as guarantor, of the true legal significance of these guarantees and the possibility of early execution.

Contact IPP Global Legal Services if you need assistance in a case like this.