This month we take a look at bank liability in court cases regarding unfinished building projects. When you buy a resale property it is quite easy to check that the building and the construction quality correspond to the specifications in the property description. For off-plan properties, as you might expect, this is much more difficult as often there is only a project on paper. In order for buyers to complete the purchase safely the law gives several guarantees that will protect them from any discrepancies.

The law 57/68 Article 1.1 states that the builder must issue at no cost to the purchaser, a bank guarantee or a certificate of insurance (see article: How to reclaim the deposit after signing a purchase contract) for all advance down payments plus any interest earned. If for any reason the construction is not finished within the agreed deadlines, the purchaser can claim back the full amount deposited plus interest.

Law 57/68 continues by saying that the deposit paid in advance by the purchasers must be held in a specific bank account separate from any other accounts held by the builder. It is the bank’s responsibility to verify the existence of the bank guarantee or a certificate of insurance, which fully covers the deposits in their custody.

If for any reason the off-plan project is not finished and there is no bank guarantee it can be difficult for the buyers to recover their money. In these cases the banks that are financing the builders, are falling short of their responsibilities, as they have the legal obligation to guard the money that they have on deposit. If the deposits are not insured, the money could be used as financing for the builders, or spent on another project. In other words, it is clear that in cases where the properties have never been handed over to the buyers, the banks share part of the responsibility along with the builders.

Presently, there are many cases in the Spanish judicial system where banks are accused of irresponsible conduct. In many cases, it has been proven that the banks were perfectly aware that the funds transferred by the buyers were funds for off-plan properties, but they failed to act accordingly, for example, by giving the builder access to the funds or worse still, by consenting to transfer the money directly to the builder’s account without making sure that the funds were deposited in a specific account, and thus failing to comply with law 57/68.

If the banks are found guilty they will have the liability to refund the money to the property buyers irrespectively of whether the bank guarantees were issued or special accounts opened at all. This will occur especially where the builder is unable to refund the deposit to the buyers.

All this is, in practice ,a massive time bomb for many of the banks that failed in their responsibilities during property boom a few years ago, but also gives a glimmer of hope to the buyers that won cases against builders but failed to receive any compensation due to the insolvency of the constructors.

The first rulings due to be disclosed in the next few months will set the precedents that will shape all subsequent rulings.