The guarantees required of the developer under the LOE

The LOE (Spanish Building Act, Ley de Ordenación de la Edificación), enacted on 5 November 1999, established mechanisms by which the developer can be required to make the guarantees in favour of buyers effective for a certain period of time, in theory without having to bring a legal claim against it and without fear of the building contractor, developer or architects being insolvent when those guarantees have to be honoured. The legislator did so by laying down the remedy for non-compliance in article 20:

“Public deeds of Declaration of New Build of buildings for sale to private individuals shall not be authorised or registered at the Land Registry unless the arrangement of the guarantees referred to in article 19 is proven and certified.”

And until the limitation periods for the claims referred to in article 18 have elapsed, the developer’s entry in the Companies Register shall not be closed, nor shall the liquidation or dissolution of development companies be registered, unless the arrangement of the guarantees established by this Act is first proven to the Registrar in relation to each and every one of the buildings they have developed.

This means that if the developer wants to sell the flats by executing the corresponding deeds, it must first have registered the new build of the main property, building or development. And that registration must in turn show the insurance policies already paid in advance, and the guarantees, etc., covering the following contingencies:

Firstly, the guarantees for material damage caused by defects and mere construction faults established in article 19 are as follows:

a) Material damage insurance or surety insurance to guarantee, for one year, compensation for material damage caused by workmanship defects affecting finishing elements of the works (which may be replaced by the developer retaining 5 per cent of the material execution cost of the works).

b) Material damage insurance, surety insurance or a financial guarantee to guarantee, for three years, compensation for damage caused by defects in the building elements or installations that result in failure to meet the habitability requirements.

c) Material damage insurance, surety insurance or a financial guarantee to guarantee, for ten years, compensation for material damage caused to the building by defects originating in or affecting the foundations, supports, beams, floor slabs, load-bearing walls or other structural elements, and which directly compromise the mechanical strength and stability of the building.

Material damage insurance must meet the following conditions:

a) The insured parties shall always be the successive purchasers of the building or of part of it.

b) The premium must be paid in advance, before the New Build deed is registered.

Surety insurance must meet the following conditions

• a) the insured parties shall always be the successive purchasers of the building or of part of it
• b) The insurer undertakes to compensate the insured party upon first demand.
• c) The insurer may not raise against the insured party any defences it may have against the policyholder.
• d) Once the insurance cover has taken effect, the contract may not be rescinded or terminated by mutual agreement before the end of the agreed term.

The minimum sum insured shall be as follows:

• a) 5% of the final material execution cost of the works, for defects in finishes.
• b) 30% of the final material execution cost of the works, for habitability defects.
• c) 100% of the final material execution cost of the works, for structural damage.

5. The insurer may choose either to pay cash compensation corresponding to the valuation of the damage or to repair it.

6. Failure to comply with the above rules on mandatory guarantees shall in all cases entail the personal liability of the party required to take out the guarantees.

7. For the guarantees referred to in section 1.a) of this article, clauses introducing excesses or any limitation on the insurer’s liability towards the insured party shall not be permitted.

8. Where the insurance contract referred to in sections 1.b) and 1.c) of this article provides for an excess, it may not exceed 1 per cent of the sum insured for each registered unit.

Finally, section 9 sets out the excluded cover:

Unless otherwise agreed, the guarantees referred to in this Act shall not cover:

a) Personal injury or other financial loss other than the material damage guaranteed by the Act.

b) Damage caused to properties next to or adjoining the building.

c) Damage caused to movable property located in the building.

d) Damage caused by alterations or works carried out on the building after handover, except for works to remedy defects noted at handover.

e) Damage caused by misuse or lack of proper maintenance of the building.

f) The costs needed to maintain a building that has already been handed over.

g) Damage originating from a fire or explosion, except where caused by defects in the building’s own installations.

h) Damage caused by accident, force majeure, the act of a third party or the injured party themselves.

i) Incidents originating in parts of the works about which reservations were recorded in the handover certificate, for as long as those reservations have not been remedied and the remedial work recorded in a new certificate signed by the signatories of the handover certificate.

Unfortunately, although the intention of the law was good, the Second Additional Provision of the Act established that the

only mandatory guarantee is the one provided for in section 1.c) of article 19 (which insures structural damage for 10 years),

while the rest can only be required if so established by Royal Decree. So in reality the only damage that is

insured (by 10-year structural insurance, seguro decenal) is structural damage, and the rest must be claimed directly from those responsible.

Dpcon Reclamación Daños Constructivos.