Spanish Court reinforces bank liability in failed off-plan property developments

The recent judgment delivered by the Provincial Court of A Coruña constitutes a further significant development within the established body of Spanish case law concerning the liability of financial institutions in relation to advance payments made by purchasers of off-plan properties under Law 57/1968.

The decision orders ABANCA to repay more than three million euros, together with the corresponding legal interest, to several British buyers who had paid deposits for the purchase of properties in a development located in Marbella which was ultimately never completed following the insolvency of the developer.

In these proceedings, several British purchasers sought the refund of amounts paid on account for the acquisition of properties in a development to be built in Marbella (Spain). Although the payments were not made directly into accounts held by the defendant bank, there existed a collective guarantee facility agreed between the developer and the financial institution securing the repayment of advance payments in the event that the development was not successfully completed.

The protection afforded to purchasers of off-plan property in Spain originates from Law 57/1968 of 27 July, pioneering legislation intended to guarantee the refund of advance payments made by purchasers in the event of breach by the developer. This legislation was later repealed by Law 20/2015, with a new legal regime entering into force on 1 January 2016.

Spanish jurisprudence has evolved significantly in favour of purchasers, regarded for these purposes as consumers, namely where the property was acquired for residential purposes, establishing the liability of banks and insurance companies that guaranteed the repayment of the amounts paid, as well as financial institutions in which purchasers’ advance payments were deposited.

The spirit of the legislation is that banks share joint liability with the developer where the properties are not completed or are not completed within the agreed timeframe. Under Spanish law, the construction process of an off-plan property is considered completed once the developer obtains the first occupancy licence, rendering the property legally fit and suitable for habitation.

The legal significance of the judgment lies not only in the liability imposed on the financial institution, but also in the reaffirmation of key interpretative principles established by the Spanish Supreme Court, particularly regarding the scope of liability of guarantor entities under Law 57/1968.

The Provincial Court expressly refers to the doctrine established by the Supreme Court — including, among others, judgments 1666/2023 of 30 May and 653/2023 of 3 May — according to which the guarantee regime established under Law 57/1968 is strongly protective in nature and must be interpreted in favour of the purchaser as consumer.