BANK GUARANTEES

Bank Guarantees : How do you protect your payments in an     off- plan purchase?

 By Noelia Poveda (Poveda & Associates)

Buying an off-plan property is nowadays one of the most popular ways of buying real estate.  It represents many advantages for the prospective buyer such as a lower purchase price and the possibility of making part payments towards the property.  However, it also implies some risks on the buyer’s side as the construction could be seriously delayed or even end up not being completed.  In this case the buyer could lose the payments already made towards the property.
What can be done to secure these payments?  A bank guarantee issued by a Bank (or eventually an insurance contract) guarantees that the part payments are reimbursed to the buyer in the event that the construction of the property is cancelled, extremely delayed or never started.  The amounts paid to the developer are to be deposited in a restricted bank account where the monies are not allowed to be disposed of unless it is used strictly for purposes related to the construction of the building.
On many occasions the obligation of the developers to provide the purchasers with a bank guarantee (Act 57/1968) is hardly taken into account.  It should always be ensured that the bank guarantee is provided, especially when we are talking about figures between 10 to 40 % of the total purchase price.  It is not only important to check the building permission, the ten year building insurance and the title to the land where your property will be built , but also that the following terms are included in  your private purchase contract:-

  1. The vendor’s obligation to reimburse the purchaser with all monies paid to date plus legal interest in the event that the building works are never started or the limitation period for the final construction having expired.   This also applies in the event of a Habitation Certificate (Cédula de Habitabilidad”) not being granted.
  1. The terms “bank guarantee” or eventually “insurance contract”, the name of the guarantor bank or insurance company and the account number where the payments will be deposited.
  1. Upon signing of the private purchase contract, the vendor will provide the purchaser with the bank guarantee document that will specify the amounts guaranteed and the expiry date.

By having a bank guarantee in place, if the period for building the property had expired without it being completed or the construction was never started, the purchaser could rescind the contract and would be entitled to recover all monies paid towards the property plus the legal interest up until the moment of being reimbursed.
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