Buying off plan: how the law protects your money and how to check it yourself

Example: a flat for 300,000 euros

Let us take the usual scheme. A reservation of 6,000 euros, a payment at the signing of the contract up to 30% of the price, and the rest before the notary on the day the keys are handed over. Before the keys you pay the developer 90,000 euros, and with 10% IVA that is 99,000 euros.

Suppose the home is not delivered on time and you claim your money back two years after the payments. The law requires everything you paid to be refunded together with taxes and legal interest:

99,000 + 99,000 × 3.25% × 2 years = 99,000 + 6,435 = about 105,400 euros.

These 105,400 euros are paid to you not by the developer, who may no longer have the money, but by the insurance company or the bank. But only if you hold a guarantee in your own name.

What the law requires

The rule is called the first additional provision of Law 38/1999 on Building Regulation, as amended in 2015. In essence it places three obligations on the developer.

From the moment the town hall grants the building licence, the developer must guarantee the refund of all your payments with taxes and legal interest. Buyers' money may only be taken through a bank, into a special account kept apart from the developer's other funds. And both in the contract and even in the project's advertising the developer must state that it complies with this law, who issued the guarantee and which bank holds the account.

If the guarantee is not in place, the developer faces a fine of up to 25% of the amount that should have been insured.

What the guarantee looks like

It is one of two documents: a surety insurance policy (seguro de caución) or a bank guarantee (aval). The law requires a separate policy for each buyer, naming your particular home. So make sure the document shows:

Your name and NIE as the beneficiary of the payout.

The number of the flat or house and the name of the project.

An amount that covers all your payments including IVA and that grows with every new payment.

A reference to your purchase contract.

The name of the insurance company or bank and the policy or guarantee number.

A general document «for the whole project» without your name and flat number does not protect you personally. You can claim the payout from the insurer or the bank yourself, directly, without the developer.

How to check it yourself

1. The building licence: number, date and that it was issued for this very project. Until it exists, the guarantee is not yet compulsory.

2. The insurance company in the register of the Directorate General for Insurance and Pension Funds (DGSFP), the bank in the register of the Bank of Spain. Both registers are open on their official websites.

3. Confirm the policy number with the guarantor itself, by phone or email taken from its official website, not from the contacts in the document you were sent.

4. The same special account must appear in the contract, in the guarantee and on your payment slip. A different account, even one belonging to the same developer, is a reason not to pay.

5. Pay only by bank transfer and keep every payment slip: without them neither the insurer nor a court will see your money.

Reserving before the licence

Projects are often sold before the licence is granted. At that stage the law does not yet require a guarantee, so a reservation before the licence should be small and made only by transfer. Write into the reservation contract the date by which the licence must be obtained and a full refund of the reservation if it is not. Large payments only after the licence and only against a guarantee in your name.

What to put in the contract

Required by law:

The developer's obligation to refund all payments with legal interest if construction does not start or the home is not delivered on time.

The insurance company or bank that issued the guarantee.

The bank and the number of the special account.

What I add myself:

An exact handover date, not «12 months after the start of works»: with a vague date you cannot tell when the deadline has been missed.

That every payment is accepted only into the special account and only against a guarantee for that amount.

For a reservation before the licence, the date by which the licence is obtained and a full refund.

If the contract lacks the compulsory clauses, it is not signed until they are added.

If the home is not delivered: steps and deadlines

If construction has not started or the home is not delivered by the date in the contract, you choose: terminate the contract and get the money back, or give the developer an extension. If you take the refund:

1. A formal demand to the developer to refund the money, by letter with proof of delivery (burofax).

2. If the developer has not refunded within 30 days: a claim to the insurance company under your policy, with the contract, the policy and the payment slips.

3. The insurer must pay within 30 days of the claim.

With a bank guarantee the deadline is strict: the claim must be made within two years of the date on which the developer missed the deadline. Miss the two years and the guarantee lapses.

If there is no guarantee at all

Even then there is a chance of getting the money back. On 21 December 2015 the Spanish Supreme Court ruled that a bank which took buyers' payments into the developer's account without checking for a special account and a guarantee is itself liable to the buyer. This applies to any account of the developer at that bank. So once again: transfer only, and keep the payment slips.

When the guarantee ends and what happens after the keys

The guarantee is closed once the first occupation licence (licencia de primera ocupación) has been issued and the home has been handed over to you. Before the final payment at the notary, make sure this document already exists.

After the keys the developer's liability continues: the home is insured for ten years against defects in the foundations, load-bearing walls, beams and floor slabs. Keep the number of this insurance; it also passes to the next owner.

My conclusion

The law in Spain protects new-build buyers well, but only when the paperwork is in place. Before your first large payment you should hold three documents: the building licence, a contract with the special account number and a guarantee in your name for the full amount.

I check the licence, the guarantee and the contract before your first payment, and your price is the same as at the sales office. Why you are better off with me than without me.

Read also: Spain's national short-term rental register is annulled: what it changes for buyers.