It is well known that the Spanish sector most affected by the economic crisis is that of property development and construction. During the past two and a half years, numerous developers have filed for insolvency in the commercial courts.

For any company involved in insolvency proceedings, a key issue is the continuity of the contracts that were in the course of being performed at the time when the petition for insolvency was filed. This problem is particularly serious for property companies with houses or flats under construction for which they have signed contracts of sale with buyers, which have paid a deposit and are waiting for the building to be completed and for the property to be transferred to them.

The declaration of insolvency does not imply the automatic termination of the contracts signed by the insolvent developer; rather, such contracts continue in force and therefore each party must perform its obligations. Consequently, the developer must continue the construction of buildings that had been commenced and must transfer the properties to the buyers. However, in many cases the property company will be unable to continue building because of a lack of finance, which the banks may have refused to provide. So what happens to the developer's obligation to its clients to transfer ownership of the properties to them within a specified time?

In this situation, the receivers or the clients which have signed contracts with the insolvent developer must ask the court handling the insolvency proceedings to terminate the sales contracts on the grounds of breach of contract. If the court considers the breach of contract to be subsequent to the declaration of insolvency, the obligations arising from the contract of sale will be extinguished and the buyer will be entitled to a refund of the amount already paid, as well as compensation for any loss and damage incurred. The debtor's payment obligations will be charged to its estate – that is, such obligations will have preference over the debts affected by the insolvency proceedings. As a result, these buyers will be paid from the debtor's estate before the insolvency creditors and the debts will be paid when they fall due.

If the court considers the developer's breach of contract to have occurred before the date of declaration of insolvency, the buyer's entitlement to a refund of the amount already paid towards the price of the property is declared to be an insolvency debt. It will therefore be subject to the provisions of the scheme of arrangement signed with the creditors, or will be paid out of the proceeds of liquidation of the insolvent company if no arrangement has been reached with the creditors.

For further information on this topic please contact Claudi Garces at Ventura Garcés & López-Ibor Abogados by telephone (+34 93 241 97 40), fax (+34 93 209 83 91) or email ([email protected]).