Bank guarantees and deposits: Law 38/1999 explained

When you buy off-plan and hand over money before the building is finished, there is an obvious risk: what if the developer goes bust and your home is never built? The legal answer is clear: your money is protected. But only if the developer meets their legal obligations — and verifying that they do is your responsibility as a buyer.

The law: mandatory protection

Law 38/1999 (LOE), updated by Law 20/2015, requires any developer receiving deposits before delivery to guarantee them via:

• Individual bank guarantee: a bank issues a guarantee ensuring refund if the developer fails. The most common instrument. The bank is the guarantor.
• Surety bond: an insurer issues a policy covering the same risk. If the developer does not deliver, the insurer refunds you.

Both cover: the full amount of deposits paid, legal interest from each payment date, and are triggered if the developer fails to deliver on time or fails to start construction within the agreed period.

What the guarantee must contain

The guarantee must be individual per buyer — not a generic one for the entire development. It must include: buyer details (name, ID), developer details, property identification, guaranteed amount (matching your payments), issuing bank/insurer, issue date and validity.

How to verify the guarantee exists

1. Request a copy from the developer before making any payment. They are legally obliged to provide it.
2. Verify authenticity by contacting the issuing bank or insurer directly. Call, provide the guarantee number and confirm it is valid and in force.
3. Check it covers your amounts. The guaranteed amount must match or exceed your total deposits.
4. Update with each payment. Each new instalment should trigger an update to cover the new total.

If the developer cannot provide the guarantee, or the bank does not confirm authenticity: do not pay. It is that simple. Absence of guarantee is the gravest warning sign in off-plan purchases.

What happens if the developer goes bankrupt

With bank guarantee

1. Notify the issuing bank/insurer in writing (registered post recommended).
2. Request guarantee execution — i.e., refund of guaranteed amounts.
3. The bank/insurer must pay within a reasonable period (generally 30-60 days).
4. You receive total deposits plus legal interest.

The process is straightforward in theory. In practice, banks sometimes resist (request additional documentation, argue delivery deadline has not lapsed). A lawyer accelerates resolution. Spanish case law strongly favours buyers — courts have repeatedly condemned banks refusing to honour guarantees.

Without bank guarantee

If you paid deposits without a guarantee existing:

• Your money is not protected by the automatic guarantee mechanism.
• You have legal action against the developer (if they exist), but in bankruptcy you enter as an ordinary creditor — likely recovering only a fraction.
• You also have legal action against the bank that should have required the developer to establish the guarantee. Supreme Court case law has condemned banks financing developments without verifying guarantees were in order. This route can be more effective than claiming against a bankrupt developer.

Special deposit account

The law requires deposits to go into a separate special account opened exclusively for that development. The developer cannot mix buyers' money with their general funds.

Special cases

'Under the table' payments (no invoice)

If you pay part of the price without an invoice (outside the legal circuit), that amount is not guaranteed. No legal protection. Also illegal (tax fraud). Do not do it.

Pre-contract reservation

The reservation amount (€3 000-10 000) should also be guaranteed. If the developer asks for a reservation without providing a guarantee, they are technically breaking the law. The Supreme Court criterion is clear: all amounts delivered on account of a future home must be guaranteed.

VAT on deposits

Deposits include VAT (10 %). The guarantee must cover the full amount (base + VAT).

What to do if the developer is delayed but not bankrupt

Two options:

1. Wait: if you trust the work is progressing and delivery will happen (late). The contract should include delay penalties.
2. Terminate: if delay exceeds the maximum agreed term (including margin), you can terminate and request full refund plus interest. The bank guarantee covers this — contact the bank and request execution.

Frequently asked questions

Is the guarantee free for the buyer?

Yes. The cost is borne by the developer (typically 1-2 % of the guaranteed amount), included in the sale price. The buyer pays nothing extra for the protection.

Can I lose my reservation if the guarantee is not established?

If the developer does not establish the guarantee, they are breaking the law. You can claim a refund. In practice, you may need a lawyer if the developer refuses. But the law is on your side.

Does the guarantee expire?

It must remain in force until delivery (public deed). If construction extends beyond expected, the guarantee must be renewed. Periodically verify it remains valid — especially if the project exceeds 2 years.

Do I need a lawyer to execute the guarantee?

Not mandatory but highly recommended. Execution can be done directly with the bank, but if the bank resists (not uncommon), a lawyer expedites the process and, if necessary, files a judicial claim. Lawyer costs (€500-2 000) are generally recovered through legal interest.

Do foreign buyers have the same protection?

Yes. Law 38/1999 protects all buyers regardless of nationality or residence. A Russian, British or German citizen buying off-plan on the Costa Blanca has exactly the same legal protection as a Spanish citizen.

If you are evaluating an off-plan purchase on the Costa Blanca, explore our available properties or contact us for a personalised consultation.