Incomplete building projectA ruling by the Supreme Court in Spain says Spanish banks that held deposits for property that was never built are to be held to account. Around 100,000 people in the UK are thought to have paid big sums towards such properties in Spain but these were lost when several developers went bust in the wake of 2008’s financial crisis. Estimates for how much British buyers could claim are around £4bn.

Prior to the economic crisis that hit Europe, many people in Spain purchased properties off-plan where the developments were not yet built and handed the developer advanced payments on the purchase price, which were paid into accounts set up in banks. When the property bubble burst, many of these projects never materialised and millions of euros have been trapped in the accounts since, in order to minimise the cost of the developments, it was common practice for banks to grant loans without requiring guarantees or insurance.

Traditionally, it was considered that only the insolvent developers that had failed to complete the developments were liable to refund the deposits to the homebuyers with no liability for the bank in which the deposits advances were paid. Spanish law applicable at the time forced banks to supervise the funds advanced by homebuyers to the developers, it being their responsibility to ensure that the deposits were paid into special accounts at the bank in question, and separated from the developer’s other accounts.

The rulings concern the joint and several responsibility of banks, as co-respondents along with the developers, which, due to their scant diligence and lack of caution when granting loans, must respond to homebuyers in the event of the insolvency of the developer unable to repay these amounts.

After examining the special protection obligations granted to homebuyers by Spanish legislation, the Supreme Court has resolved that the bank must also be liable in those cases in which the necessary protection measures have not been implemented, such as the need for the amounts advanced by homebuyers to be deposited in special accounts set up by the developers, even though it was the latter’s obligation to set up such accounts.

Consequently, the Supreme Court held: “In home sale-purchase transactions governed by Law 57/1968, credit institutions accepting homebuyers’ deposits into a developer’s account without requiring that a special account be opened and the relevant guarantee produced, shall be liable to homebuyers for the entire amount advanced by the homebuyers and deposited in the account or accounts the developer has opened at said institution”.

This means that, in the event that the developer becomes insolvent, buyers who have paid deposits may claim back the amounts deposited in the bank, rather than wait until the end of the insolvency process, when in any case they rarely recoup the advances paid to the developers. The banks are also liable to repay legally accrued interests since the first deposit was paid.

The Supreme Court is unequivocal in both of its rulings, highlighting that banks cannot overlook their duty of special protection and allege that they were unaware of the nature of these advances, since in both cases it was patently clear that the amounts deposited were advances to the developer on the sale price of the home; hence, although these amounts did not feature in special accounts separated from the developer’s other accounts, the banks did know what the deposits were and what their purpose was.

Accordingly, the Supreme Court ruled that the banks cannot be considered to be third parties unconnected with the relationship between buyer and seller, but rather they have a duty to supervise the developer to whom they granted the loan; in other words, they have the duty to ensure that the developer has contracted a guarantee or insurance. Consequently, the Supreme Court denied that the banks were unconnected third parties, as they alleged, but held that, precisely because the bank knew or should have known that the buyers were paying advances into an account, it was legally bound to open a special, separate, properly insured account, and by not doing so it incurred in the specific liability indicated above.

To quote the Supreme Court, the bank “knew or should have known that the second of the deposits corresponded to an advance payment on the sale price, since this was noted in the guarantee of reimbursement of the first of the amounts deposited at the bank”, and, as a result, it was legally bound to uphold the duty of supervision and require the developer to implement measures to protect the buyer, which in these cases was the obligation to open a special, separate, duly insured account at the bank.

Although Law 57/1968, of 27 July, concerning the receipt of advance payments in the construction and sale of homes, applicable at that time in Spain granted forceful and imperative protection to homebuyers, holding banks jointly and severally with developers for the amounts advanced by homebuyers, the law that currently governs those situations, namely Law 20/2015 of 14 July, concerning the regulation, supervision and solvency of insurers and reinsurers, limits the liability of banks so that they are only liable in respect of developments with permits and reduces the period for wronged homebuyers to claim back the amounts advanced.