Bank Guarantees and Sureties in Spain
Legislation and Obligations Regarding Bank Guarantees and Sureties in Spain
In Spain, developers are required to take out a bank guarantee (aval bancario) or an insurance policy (seguro de caución). This insurance protects the buyers’ deposits in the event of non-completion of construction, for example in the event of bankruptcy of the construction company. This obligation is established in Law 57/1968.
The law stipulates that all amounts paid by buyers before the completion of the house, including down payments, must be guaranteed. If the house is not delivered within the agreed period, or if the builder goes bankrupt, the buyer is entitled to reimbursement of the amounts paid, including the statutory interest.
Guarantee with the Project Developer
The project developer has insured itself against this risk with the insurance company Musaat. This means that when you buy a house and pay a deposit to the project developer, you automatically fall under the Musaat surety. This means that in the event of non-payment or delay by the builder, you can claim the surety. The advantage of this is that most buyers do not need a bank guarantee, since this surety is already insured.
If you still want a bank guarantee, you can request this after the reservation and first deposit have been made. Obtaining a bank guarantee can entail costs, because the builder often passes on these costs, since the insurance has already been paid.
Difference Between Surety and Bank Guarantee
The Royal Spanish Academy defines a surety as: "the obligation that one assumes to fulfill the same obligations as another person has promised, in case of non-fulfilment." The origin of the term comes from France, where the concept found its legal basis in the Ordinance of Commerce of Louis XIV (1673) and was later codified in the Code de Commerce of 1807. This legal framework was adopted worldwide.
A bank guarantee is a specific type of guarantee in which a bank, savings bank or credit institution guarantees the obligations of a third party. This means that the bank will pay the debt if the party that requested the guarantee is unable to meet the obligation.
Surety Insurance vs. Bank Guarantee
A surety insurance is a guarantee that ensures the fulfillment of an obligation by the insured. If the insured does not fulfill his obligations, the insurer will compensate the damage, after which the insured must repay the amount. It is a favorable alternative to a bank guarantee, since the costs for a surety are usually lower and do not impact the creditworthiness of the insured.
Benefits of Sureties:
Costs: Sureties are often cheaper than bank guarantees. There are no application, opening or cancellation costs.
Flexibility: The terms of sureties are usually more flexible than those of bank guarantees.
No impact on creditworthiness: Guarantees are not recorded as a risk at CIRBE (Centre for Risk Information of the Spanish Central Bank).
No fund blocking: No money is immobilized unlike bank guarantees.
Deductibility: The guaranteed amount is not included in liabilities and is a deductible operating expense.
Guarantee for government contracts and construction projects
Since 2017, Musaat has been offering advance payment guarantees for the purchase of residential and real estate properties. These guarantees are required in construction projects under Law 38/1999 on Building Regulations, which requires developers to provide a bank guarantee or surety to guarantee the payment of advance payments in the event that construction is not completed within the agreed time frame.
For public procurement, Law 9/2017 requires companies participating in tenders to provide a bank guarantee or surety to ensure that contractual obligations are met. The premium for sureties is adjusted to the risk of the company, with provisional guarantees requiring a one-off premium and definitive guarantees renewable annually.
More Information
For more information about sureties and bank guarantees, please contact your professional association's insurance broker or Musaat directly on 91 384 11 65/66 or [email protected] .
This article is intended as information and no rights can be derived from it. For exact information, we request that you ask your lawyer to check the latest information and policy conditions.