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Evolution of the regulation of the amounts paid on payments during the construction of houses

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Actions that assist those who deliver amounts on account from October 7th 2005 to October 7th 2015 expire on October 7th 2020
  1. Scheme applicable to the collection of advance payments on account of the price during the construction of dwellings.

The original legislation on the amounts advanced on account of the final price of housing construction is found in the so-called 27th July 57/1968 Law, on the receipt of amounts advanced in the construction and sale of housing ("57/68 Law "). This law, as stated in its Explanatory Memorandum, responded to a social need for protection derived from the repeated commission of abuses that caused significant and irreparable financial damage to purchasers.

Law 57/68 was amended, although it remained in force, with the enactment of 5th November 38/1999 Law, on Building Regulations ("38/99 Law ") which came into force on 6th May 2000 and, through its First Additional Provision, regulated the amounts paid on account.

On January 1st 2016, July 14th 20/2015 Law, on the Regulation, Supervision and Solvency of Insurance and Reinsurance Companies ("20/15 Law ") came into force, which, through its Third Final Provision, modified certain aspects of 38/99 Law and introduced the Third Repealing Provision a), which expressly repealed 57/68 Law.

Thus, the regulations in force on the amounts paid on account from 1st January 2016 are those contained in 38/99 Law, as amended by 20/15 Law.

  1. Key notes on the different schemes.

2.1.- Previous regulation: 57/68 Law.

Since the original wording of 57/68 Law, a series of regulatory provisions were introduced, with a clear preventive vocation, which sought to protect the consumer, excluding from the scope of protection professionals in the real estate sector and those who acquired for purely speculative purposes (See, for all, the Supreme Court ruling of 1/6/16) guaranteeing the real and effective application of the amounts advanced by the buyer relating to the construction of a home, as well as their return in the event that the construction did not begin or was not completed within the agreed period.

The characteristic feature of this new regulation was the obligation imposed on the promotors-vendors to receive the advances in special accounts opened expressly for the receipt of such amounts, which must be separate from those containing any other funds of the promotors-vendors.

As anticipated, 38/99 Law introduced several clarifications to 57/68 Law which remained in force until 31st December 2015. These amendments are limited to, but not limited to, the following points: (i) the rule is applicable to the promotion of housing under a cooperative or community property regime, (ii) the guarantee is extended to those advances made both through exchange effects and in cash and (iii) the amount to be returned will be increased with the legal interest of the money in force until it becomes effective.

The now repealed 57/68 Law, whose application was extended until the beginning of 2016, imposed a series of obligations on the housing promotors-vendors that can be summarized in the following:

- The signing of an insurance contract or joint and several guarantee provided by an entity registered in the Register of Banks and Bankers, or a savings bank, which guarantees the potential return of the amounts paid on account, in the event that construction does not begin or is not completed within the agreed period.

- The deposit of the prepayments received in a special account opened in a Savings Bank or Bank, expressly and independently from any other funds.

- To expressly state in the contract signed with the consumer the existence of the insurance or guarantee and the special account, with specific identification of the insurers, financial institutions or savings banks involved.

- Provide the purchaser with a document accrediting the specific guarantee for the specific amounts advanced on account of the price.

- In the advertising and promotion of the homes, it should be stated that the requirements of 57/68 Law will be complied with, as well as the specific financial and insurance entities involved.

2.2.- Regulation in force: Law 38/99.

With the effective date of 20/15 Law which, as anticipated, took place on 1st January 2016, the current regime is that contained in the First Additional Provision of 38/99 Law.

This new regulation can be described as a continuation of the previous system insofar as it extends its preventive and consumer-protective vocation, maintaining -with some nuances- the five obligations of the developer-seller that have been previously set forth.

The most relevant developments introduced by the new regulations in force since 2016 are as follows:

- It introduces financial security as an alternative to damage insurance and surety insurance.

- It specifies the obligation to guarantee the amounts received from the time the building permit is obtained and expressly includes in this respect the applicable taxes and the legal interest on the money.

- It includes a detailed list of the requirements that must be met by both the surety insurance and the guarantees, so that these serve to guarantee the amounts advanced in the construction and sale of dwellings.

In this regard, the most noteworthy changes are (i) the need to make a credible claim against the developer and wait 30 days to be able to demand payment of the corresponding compensation from the insurer or guarantor and (ii) the expiry of the guarantee if a period of 2 years has elapsed since the developer's breach of contract without being required by the purchaser to terminate the contract and consequently return the amounts.

- It includes the licence of first occupation or equivalent document, to the already foreseen certificate of habitability, as a reason for the cancellation of the guarantee, as long as the delivery of the dwelling is additionally accredited, even if the purchaser refuses to receive it. 

- It catalogues non-compliance with the obligations imposed as an infringement in the area of consumption, with the consequent application of a general penalty system on consumer and user protection provided for in general legislation and in the corresponding regional regulations, without this affecting the powers legally attributed to the Directorate General of Insurance and Pension Funds.

It also establishes that failure to comply with the obligation to provide a guarantee will result in a penalty of up to one-quarter of the amounts refunded and, cumulatively, the developer (including both owners' associations and cooperative societies) will be liable for the infringements and penalties applicable under specific building regulations.

- It provides that certain public housing development bodies may be exempted by regulation from compliance with the requirements of the First Additional Provision of 38/99 Law, and that the Government may issue complementary provisions for the development of the content of the same.

To conclude, it is useful to point out how those actions that assist those who deliver amounts on account from October 7th 2005 to October 7th 2015 expire on October 7th 2020, by virtue of October 5th 42/2015 Law reforming the Civil Procedure Law, which modified the limitation period contained in Article 1.964 of the Civil Code.

You can see the article in Lefebvre-El Derecho.

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