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05 June 2023

Spanish banks shatter dreams

By Graham Norwood

It's only too easy for those of us in the property industry to judge the global slowdown in terms of lending criteria, share prices and completion numbers. But there is a human dimension, too.

Take, for example, the plight of Ruth Genda, a retired educationalist in her 70s from Leicestershire in the UK. She wanted a dream holiday home in Marbella for herself and her two grown-up children and put down a £75,000 (Dh407,055) deposit in 2003 ahead of the flat's scheduled completion in late 2005.

Construction work was delayed and then the flat was declared an 'illegal build' as the developer had not obtained formal permission. The property was completed but Ruth attempted to get her money back by calling in her Aval Bancario, or bank guarantee.

For four decades now, developers in Spain have been obliged by law to provide bank guarantees on off-plan purchases such as Ruth's. The guarantees mean that if a developer fails to build on time, or goes into administration and does not build at all, buyers should get most or all of their money returned.

But Ruth hit trouble when her bank refused to honour the guarantee, claiming it was not valid. She won an initial court case forcing the bank to pay up but the bank appealed and overturned the original result. A further legal review went in the bank's favour.

"We're not prepared or able to buy an illegal property. It can't be mortgaged and it can't be sold, because of its status. Our coffers are drained by legal fees and other costs and it's very likely that we'll lose our deposit," she says.

Ruth has gone on protest marches, met politicians and lawyers and launched an online petition on gopetition.com/ petitions/spanishbankguarantees.html. So far, nothing has persuaded the developer's bank to return her money.

Sadly, Ruth's plight is not unique.

At least 15 developers building holiday homes on the Costas have filed for bankruptcy in the past year. Thousands of homes remain part-built and thousands of buyers who paid 10 per cent-plus deposits do not know whether their properties will be finished or their money refunded.

As a result they are calling in bank guarantees but many are now discovering they were given faulty documents by developers, or have guarantees with conditions that make them worthless.

"Until recently some developers would regard it as an insult to be asked for them by foreign buyers and they just wouldn't issue them. In other cases they exist but may be out of date or worded in a way that make banks feel they need not honour them," explains Peter Ebders of the International Law Partnership, a British legal firm.

The Aval Bancario system was introduced in 1968 and for many years it worked well. As Spain's holiday home market boomed, few developers went bust and buyers accepted minor delays on completions. If a buyer did claim a refund, developers and banks gladly obliged knowing that rising values and strong demand meant that the subsequent unsold home would be snapped up quickly at a higher price.

But now Spain's property market is in freefall and developers and banks are in a panic. Ominously, Ebders says he knows of guarantees that have been issued and are correct, but are still not being honoured because banks do not want to pay out large sums when the financial system is chronically short of cash.

"The problem is widespread. It's scandalous," says Mark Stucklin, editor of Spanish Property Insight, a resource website for Britons buying in Spain.

The Bank of Spain says it is aware of the issue and has told individual banks to honour valid guarantees, but says it has no power to enforce the instruction.

In today's complex and recessionary world, a retired woman's lost £75,000 seems a minor matter. But to her, of course, it represents the difference between a relaxing retirement in the sun, and one where she will forever feel on the receiving end of an injustice, even if the housing market slowdown and banking crisis could not have been foreseen.

Perhaps the governments that have so rapidly spent billions on bailing out banks and stabilising markets should set aside some money to ease the lives of Ruth Genda and those like her caught up in a problem not of their own making.

Perhaps the Spanish property industry, and the banking system in particular, can learn that in future they should only make promises that they intend to keep.

- The author is property correspondent for The Observer