Two recent Supreme Court rulings, one from December 2015 and another from March 2016 (SCR of 21 December 2015 and SCR of 9 March 2016, respectively), oblige guaranteeing banks to refund deposits paid to the developer-constructor by purchasers of off-plan homes, in cases where the developer fails to complete.
Prior to the economic crisis that hit Europe, many people in Spain purchased properties off-plan (developments not yet built) and handed the developer-constructor advanced payments on the purchases, which were paid into accounts set up in banks or savings banks. Then the property bubble burst, many of these projects never materialised and millions of euros were trapped in the accounts since, in order to keep down costs of the developments, it was common practice for banks to grant loans without requiring guarantees or insurance.
Accordingly, insolvent developers, unfinished developments and families deprived of their "future" home and money became commonplace in Spain, with many cases ending up in the courts.
Traditionally, it was considered that those ultimately responsible, and those who should refund the funds to the investors who had paid the advances, were the developers-constructors that had been declared insolvent and failed to complete the development, with no liability for the bank or savings bank in which said advances were paid. Notwithstanding the above, Spanish law applicable at the time forced banks to supervise the funds advanced by homebuyers to the developers and builders of the homes, it being their responsibility to ensure that the advances were deposited in special accounts at the bank or savings bank in question, and separated from the developerconstructor's other accounts.
The rulings we are discussing today concern the joint and several responsibility of banks, as co-respondents along with the developersconstructors, which, due to their scant diligence and lack of caution when granting loans, must respond to buyers in the event of the insolvency of the developer-constructor, unable to restore these amounts.
After examining the special protection obligations granted to homebuyers by Spanish legislation, the Supreme Court has resolved that the guaranteeing bank or savings 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 consumers to be deposited in special accounts set up by the developers-constructors, even though it was the latter's obligation to set up such accounts.
Consequently, the Supreme Court has established the following doctrine: "In home sale-purchase transactions governed by Law 57/1968, credit institutions accepting buyers' 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-constructor seeks protection from creditors, buyers who have advanced amounts may claim back the amounts deposited in the bank or savings bank, rather than wait until the end of the bankruptcy process, when in any case they rarely recoup the advances paid to the developers-constructors.
Accordingly, banks and savings banks must respond jointly and severally with the developers-constructors, and must refund to the homebuyers the sums of money advanced by the latter for the construction of homes that were never completed, plus legally accrued interests since the first advance 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-constructor on the sale-purchase price of the home; hence, although these amounts did not feature in special accounts separated from the developer-constructor's other accounts in said banks, the bank did know what the deposits were and what their purpose was.
Accordingly, the Supreme Court rules that the banks and savings 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 denies that the banks are unconnected third parties, as they alleged, but specifies that, precisely because the credit institution 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-purchase 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-constructor 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.
Notwithstanding all of the foregoing, 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, and examined by the Supreme Court, granted forceful and imperative protection to homebuyers, enabling banks to respond jointly and severally with developers-constructors 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 and savings banks so that they are only liable in respect of developments with building permits, and reduces the period for wronged homebuyers to claim back the amounts advanced.