Investment approach
Off-plan flat: how to check the guarantee on advance payments
The developer must guarantee each advance payment with taxes and interest once the licence is granted. Which document to get at signing, how to recover the money and what the guarantee leaves out.
Buying sobre plano (off plan) in Spain is protected by law only as regards the advance payments: from the moment it obtains the licence, the developer must guarantee their return, together with taxes and statutory interest, through a seguro de caución (surety insurance) or a bank aval (guarantee) (first additional provision of the Ley de Ordenación de la Edificación, LOE, the building regulation law). The guarantee is set up separately for each buyer, and the document is handed over when the contract is signed. The other risks, from deadlines to finishes, are settled by the text of the contract.
What the buyer gets in an off-plan deal
Sobre plano is the purchase of a flat that does not yet exist: there is a design, renders, a memoria de calidades (specification of materials) and a promised delivery date. Payments follow a schedule: part at signing, part during construction and the balance at the escritura (deed) after delivery.
The price at the start may be lower than for completed housing, and sometimes the layout can be adapted. In return, the buyer pays for something that does not exist and depends on the developer bringing the project to completion on time and to the stated quality. How pre-sales look from the other side, for the developer and the project investor, is covered in the article on sobre plano pre-sales.
What the law requires of the developer
The first additional provision of the LOE sets four mandatory conditions for any housing developer that takes money before construction is finished.
| Requirement | What the provision says | What the buyer should check |
|---|---|---|
| Guarantee | From the licence, a seguro de caución or aval solidario (joint-and-several guarantee), on the advances with taxes and statutory interest | A document in your name and for your amounts |
| Individuality | The policy is issued for each buyer, naming the flat | Policy or aval number, your flat |
| Special account | Advances go into a separate bank account, only for the needs of construction | Bank and account number in the contract |
| Contract | The duty to return the money, the name of the guarantor, the bank and the account | All three points in the text |
The insurance premium is paid by the developer, and the insurer cannot refuse the buyer on the grounds that the developer did not pay it. How this insurance works from the project's side is described in the article on insuring advance payments.
How to get the money back if construction fails
If construction has not started or the flat is not delivered by the contract deadline, the buyer chooses: terminate the contract with a refund of the advances, taxes and statutory interest, or give the developer an extension, set down as an additional clause of the contract.
The procedure for claiming on the guarantee is set out in the same provision:
- Send the developer a demand for repayment by a method that confirms receipt.
- Wait 30 days. If the developer has not returned the money, go to the insurer or the guarantor bank, and if a demand on the developer is impossible, go straight to the guarantor.
- The insurer must pay compensation within 30 days of the demand.
- With a bank aval it matters not to miss the deadline: if the buyer has not demanded termination and repayment within two years of the developer's breach, the aval lapses.
The guarantee is cancelled when the cédula (habitability certificate) or the first-occupation licence has been issued and the flat has been handed over to the buyer.
How much money is under the guarantee: a worked example
Worked example, not a forecast. A new flat for 400,000 € excluding IVA; under the schedule, the buyer pays 20% of the price before delivery.
| Payment | Amount |
|---|---|
| Advances before delivery, 20% of the price | 80,000 € |
| IVA at 10% on the advances | 8,000 € |
| Under guarantee, not counting interest | 88,000 € |
| Balance of the price at the escritura | 320,000 € |
| IVA at 10% on the balance | 32,000 € |
| AJD (stamp duty) at 1.5% on first transfer, assumed base 400,000 € | 6,000 € |
A new home bears IVA (VAT) at 10% (art. 91 Ley 37/1992), and in Catalonia, on a first transfer with IVA, AJD of 1.5% is added (ATC). A comparison with the taxes on buying a resale home is in the article IVA or ITP.
What the guarantee does not cover
The guarantee protects the money in case the project is not carried out or not delivered on time. It does not answer for a finished flat differing from the renders within what the contract permits, for a grace period for delay if the contract allows one, or for the complex's infrastructure, which may lag behind the completion of the building.
That is why the contract is read together with the memoria de calidades, and at handover the flat is inspected like a resale one: areas, layout, installations, and defects are recorded in writing before the handover certificate is signed. After delivery the LOE liability periods apply: one year for finishes, three years for defects affecting habitabilidad (habitability), ten years for the structure (art. 19); more in the article on the seguro decenal (ten-year structural insurance).
When sobre plano does not suit
Buying during construction does not suit someone who needs the flat by a set date: delivery dates are postponed more often than one would like, and an extension under the contract may be lawful. Nor does it suit a buyer who counts on a mortgage but has not discussed the schedule with the bank: the loan is usually arranged closer to delivery, and the advances are paid from your own money.
If the developer proposes paying money before the licence is obtained or without a guarantee document in your name, it is more sensible to walk away from the deal. DNPI assesses the price of a new development against completed housing nearby as part of a property value analysis.
Questions and answers
Is a developer in Spain obliged to guarantee advance payments when buying off plan?
Yes. Under the first additional provision of the LOE, a housing developer guarantees from the moment of obtaining the licence the return of the advances with taxes and statutory interest through a seguro de caución or a bank aval.
What guarantee document should the buyer receive?
An individual document for your own amounts and your own flat, which the developer hands over when the contract is signed. The contract also names the guarantor, the bank and the special account for the advances.
What should I do if the developer does not show the guarantee?
Do not make the payment and show the contract to an abogado (lawyer). The absence of a document in your name breaches the law, whatever the developer's reputation.
Can I get the money back if construction is delayed?
If the delivery deadline in the contract has been breached, the buyer may terminate the contract with a refund of the advances, taxes and interest through the guarantor, or grant an extension. Grace periods and wording are checked by an abogado.
What tax is paid when buying a new home in Catalonia?
IVA at 10% on the price of the home and AJD at 1.5% on the first transfer. ITP is not paid in this case: it applies to buying a resale home.
