Unite to Fight

Written by Mark FR Wilkins
Thursday, 29 January 2009

Please note that the information provided in this article is of a general interest nature and intended as a basic outline only. It is not intended as any substitute for detailed legal or other professional advice specific to the reader’s circumstances. Nothing contained in this article should be seen or taken as the writer or publisher providing legal or financial advice.

ImageYou may only be 1200 to 1500 miles away as the crow fly’s between the UK/Ireland and the South of Spain but when a dispute erupts with your developer you may as well be on Mars! There is an overwhelming feeling of isolation.

You have seen the plot, studied the project, chosen your apartment, signed a Private Purchase Contract (PPC) and, no doubt, paid over a hunk of the purchase price by way of a deposit. All plain sailing – but that was nearly three years ago – or at least it will be in March 2009. In that time you have become one of the worlds other two hundred internet experts on your development.

You have made a number of on-line friends who are in the same boat and have swapped with others, via a number of forums, details including pictures of “your” development in its various states of completion or not.

A few purchasers have combined a holiday to the area with a visit to see the sales agent. They have discovered that the agent closed their office without any notice a year ago – no wonder they stopped replying to your e-mails; your lawyer is now in Brazil or Morocco and the developer has gone into hibernation with their sales deck – or portacabin - now being manned by a solitary - but talkative “Prosegur” security guard - Antonio.

The building seems close to being completed – so Betty from Halesowen was right when she reported in June 2008 that there was water in the pool and the top soil had been delivered.

So why hasn’t the developer called upon us to complete? Why is it so quiet? Has construction stopped? The terrace tiling seems to need completion and the paint applied to the exterior walls could do with another coat – but otherwise it looks ok.

Well, on digging a little deeper you discover that your developer and the builder are in dispute and for the first time you hear a word that will become all too familiar, “embargo”. This is a legal device deployed by a creditor in Spain to turn the screw on the party who owes him money.

The builder, not surprisingly is unwilling to complete construction without payment – hence building has indeed stopped. A little further investigation shows that the plumbers and electricians have also withdrawn their labour for the same reason.

The developer is stuck in the middle of a cash flow crisis. Building costs have risen since he first sold the development off plan. He banked – as he was required to do by the financing bank - all of the purchaser’s deposit monies in support of his mortgage finance to complete the build. Since then the bank has been credit crunched and unwilling to release more.

The first phase of the development is complete – fully licensed but also standing empty. The developer sold all fifty apartments off plan but since being called upon to complete sadly a number of the purchasers who had expected to be able to raise local mortgage finance have now discovered that obtaining funding in Spain has become increasingly difficult. The current criteria being applied are invariably a maximum of 60% to 70% loan to value or purchase price – whichever is the lower. This combined with an institutional objective by the local valuers to down value has resulted in defaults in completion amounting to, say, seventy percent of Phase 1. The result being to starve the developer of much needed cash flow.

Depressed – yes, me too. However, there is a glimmer of hope.

Some banks, who may have financed the development from the start - and who have given off plan purchasers the all important bank guarantees - when faced with the developer who is in default of their repayment obligations are starting to consider a variety of solutions.

Rather than causing the developer to enter into Administrative Receivership and then having to deal with an Administrator with little or no experience of the property market, the financing bank may be willing to compromise with developer by taking the property into their control and writing off the debt to the bank. This means that the bank become an estate agent and is keen to make sales of the unsold units thereby providing a fillip to the “distressed “ priced property market by selling modestly priced stock which is complete or close to completion.

In taking this position the bank will usually be on notice of those PPC’s signed by the off plan purchasers – including those not in default of completion. In establishing this arrangement we believe there exists opportunities for those purchasers.

Firstly, it may be appropriate, in relevant circumstances, to consider calling on the Bank Guarantee. If the facts of your case allow you to demand that the granting bank honours their guarantee to you this may be the most expedient way for you to recover your deposit and stage payments.

One aspect which you should bear in mind is that it is usual that a Bank Guarantees can only be called upon when there has been a failure to deliver your property by an agreed date and not before unless the developer or promoter has entered into bankruptcy or similar before such date.

Let’s be crystal clear - we have seen and heard of a number of situations where the banks have wriggled and sought to delay payment under the guarantees that they have granted. It is essential that all payments that you have made are protected by such guarantee and, more importantly, that the guarantee itself is properly and fully executed and continues to be completely valid. Any failing here may well give the bank the right to swerve their obligations.

Secondly, and this may be seen to be a more commercial solution for those willing and able to complete their off plan purchase - seek to negotiate with the bank on the agreed purchase price as stated in the PPC. With the development in the hands of the bank their aim will be to recover their mortgage debt owed by the developer – as quickly as they can. The price that you agreed to pay will no doubt have been scaled on a basis of the developer making a 20% or 30% profit on the deal. Therefore there may well be some flexibility with the bank to say that the price you would be willing to pay should be 20% to 30% lower than the PPC agreed purchase price. It’s got to be worth a try!

We have already noted that you are at some distance, so how are you going to address these issues and progress them in Spain?

A daunting prospect is the usual emotion but look at what you have. A community of purchasers – some of whom may sadly have dropped out as they simply do not have the means to complete - but others who are keen to preserve their deposits and see their purchase through to completion should gain strength from each other and unify.

A group action has got to be appealing to the bank which is seeking solutions. It is in no way going to be an easy negotiation but by gathering willing players together and approaching the bank in a formal and collegiate manner must exponentially improve the prospects of success. We have seen success from group actions in the past with parties joining together – unity does mean strength - to bring a weight of numbers to a negotiation.

It is essential that the group has a focal individual for the processing and gathering of evidence – copies of PPC’s and Bank Guarantees etc and this will also provide a point of contact for the lawyers appointed to deal and to represent the group’s interests. The other useful side effect of this should mean where all group member’s interests are the same that the professional costs associated with running and progressing such a group action should be proportionately less than those incurred in an action taken by a lone party.

It’s worth stressing that no one can foretell the likely outcome of such actions or the reaction of the relevant bank or developer but we are all faced with the same imperatives and striving for acceptable solutions must be a priority.

Mark FR Wilkins,
The Rights Group
mark@therightsgroup.comThis e-mail address is being protected from spam bots, you need JavaScript enabled to view it
www.therightsgroup.com
+34 600 343 917

© Mark FR Wilkins (Marbella) 2008