LAW 57/68 NEW DEVELOPMENTS
A little over a year ago I wrote about a peculiar old law in Spain that could come very handy for those Moroccan Real Estate developers who channelled their money through the Spanish Banking System, whether it was to the developers themselves or the client’s lawyers.
There have been considerable developments since then and in the next few weeks I will be posting here with full fully and will try to guide the reader through the details and offer all the legal angles available.
Suffice to say for now that we are concerned here only with those Spanish developers who built in Morocco through a Moroccan subsidiary and only in those cases where client deposit was transferred to Spanish accounts
As I will be gradually deciphering this law in plain English, I think that the best thing would be to follow the blog for the next few weeks and you will be ongoingly notified automatically.
WHAT IS LAW 57/68
Spanish Law 57/68 has been talked about a lot recently but there is a big mystery behind this piece of legislation, it has been, and it will ever be, the great unknown.
Ley 57/68 (27th July 1968) is very old, it goes right back to pre-democracy days and it’s even signed by General Francisco Franco, of all people. It is one of the very few laws, if there are any, that remain in place today.
It deals with deposits paid by purchasers to property developers when buying off-plan and the spirit behind it is to stop “the justified social alarm in public opinion provoked by repeated misuses even when misdemeanour is evident” so said the legislators of the day. This legal measure pretended equipping buyers with guarantees when handling over considerable sums, sometimes their lifetime’s savings, to potentially unscrupulous builders frequently delivered the finished product late, sometimes years, or not finishing it at all. It looks that things have not changed much!
The law is composed of very few articles, only seven, but has the moral superiority of legal precedent to fall behind.
Law 57/68 is a pioneer in Spain when it comes to protecting property purchaser’s rights, it established certain responsibilities for developers and builders who sold off-plan. One of these responsibilities was opening a separate bank account to receive customer deposits, keeping these apart from day to day transactions. Disposal of these funds only had one aim, the progressive funding of construction. Another interesting disposition, specially for the time was the necessity of client funds being protected by an insurance policy or a guarantee, usually from a bank. It was the responsibility of the guarantor to return funds to buyers if the completion was late or was not done at all.
Unfortunately, due to the recent financial crisis and the subsequent Spanish property market’s big bang, this veteran of the legal spectrum came back to life. It has converted itself into a law for everyday use today despite having been once repealed.
Courts and Tribunals are issuing positive verdicts on behalf of clients all over Spain now. Bank are being sentenced under the umbrella of Law 57/68 as I write (18/07/2018)
Up until 31st December 2015 the law was a “free lunch” for distressed buyers. Despite the brevity of the law (seven articles) it managed develop itself magnificently under something that’s not always usual in codified law countries, precedent and case law. The Spanish Supreme Court encouraged the application of precedent giving buyers total protection in almost all cases.
However, since 1st January 2016 this same protection, although still in place, is regulated by “The First Additional Ruling” of Law 38/1999 of 5th November. These bye-laws (ordinances) dealt with building regulations (Law 20/2015) thus substituting the old 57/68.
These boring facts can be summarised as follows:
- The new regulations go further in the development of those guarantees offered by Law 57/68. Insurance and Bank Guarantees is now a MUST when it was not in the past.
- It ensures the quality of information given by property developers to their future clients when it comes to off-plan sales. In addition, the developer must issue the client with the necessary safeguards, usually a Bank Guarantee (Aval Bancario).
NOT SO POSITIVE ASPECTS:
- The Bank Guarantee does not necessary safeguards the full amount spent in the purchase of an off-plan property, it only guarantees deposits paid to the developer from the very day they obtained the building permit from the local authority. In theory this means that if there is no building licence, the law cannot be applied but in practice a building licence is nowadays always forthcoming sooner or later. Here, buyer’s deposits are only guaranteed from the day of issue of that permit, any deposits made before that will almost always be lost in the event of any irregularities. As always, people will get into unnecessary trouble if they don’t check out this simple fact.
- Care must be taken that with this new law, as a Bank Guarantee now has a “shelf life” of two years, whereby this didn’t exist before. So, if a buyer does not make their claims to the developer within two years of the start of irregularities, the bank Guarantee will be void. Surprisingly, there is no mention in the law about insurance, in other words, there is no specific validity period for these policies. It is assumed, this would be in line with Article 23 of the “Insurance Contracting Law” or, more likely, there is no validity period when we talk about “Surety/Bond Insurance” (Seguro de Caución).
For many years developers based in Spain, both homegrown and foreign, have wandered about Morocco intensively. Most of these companies funded themselves the traditional way, that is, construction or project finance from a bank even if their collateral (land, etc) was in a different country. The big boys had virtually no problem in obtaining loans, obviously because of other assets in Spain. However, the problem came with the smaller ones or foreign developers who, operating under a S.L company, most of the time had little or no assets to fall back on.
To build in Morocco these companies had to do it through a Moroccan subsidiary (S.A.R.L) but these were merely a vehicle for the day to day, the bulk was in Spain.
These developers insisted, for most of the time, that buyer’s off-plan deposits came to Spain when given Morocco’s exchange control regulations that’s unlawful. All construction funding had to come to Morocco or any off-plan buyer would have lots of difficulties in repatriating the proceeds of an eventual future sale. Unfortunately, there is no proof that ALL client deposits came to Morocco at all, in fact in my view, funds to Morocco were the bare minimum, enough to pay wages and suppliers and that is it. To complicate things even more, many foreign buyers used their lawyers to channel those funds to the developer, which is fine, but for some reason the money almost always ended up in the developers account in Spain. I don’t know if it’s a case of the lawyer being instructed to do so or simply that they should have known better.
AND WHERE DO YOU COME IN?
If you bought off-plan Moroccan Property from one of the big players things are, on paper, more straightforward, you should have had some sort of guarantee (even if the property is in a foreign country). I know, people didn’t always ask for a bank guarantee and some developers took advantage of that ignorance and just tip toed the issue, However, you advisor or lawyer should have had none of it.
I have always been astonished about the care-free, ease and non-challenge that people bought property abroad, specially during the boom years but I’m even more astonished, now the market’s recovering, that they are doing it again.
Right, look at this scenario: You bought property In Morocco from one of the smaller developers and to pay your off-plan deposits you were asked to pay it to bank X in Spain or to do it through your lawyer, again in Spain. The rest is history, the developer went bust and with you having parted with your money and with nothing to show for it.
CAN YOU RECOVER YOUR MONEY IN SPAIN UNDER 57/68?
In theory, yes… because under the law, the bank should have ensured that funds were applied properly. That is, sent to Morocco. Is there proof this was done. NO.
WHAT DO YOU NEED TO DO?
If you are an existing client, we at NHI know perfectly well how you paid your off-plan deposits. All you have to say that you’re in. If you not a client, we’ll ask you for documents.
Just before you move forward, there a couple of minor, big, things that, beforehand, we must do on the ground in Morocco:
- Scan the Moroccan Companies House and establish the link between the Spanish S.L and the Moroccan S.A.R.L. This is never usually a problem as we know most of the developers in Morocco and know well enough where they are came and are coming from. The problem is not the legal links but getting people to fish out the information from who knows where, this is still not very clear in this part of the world. And please don’t say why not download it from the internet because I mentioned that to a registry civil servant in Morocco and he almost died from a fit laughing.
- Ensure there is build licence, remember what we said about this. Again, in my experience this is not a big deal, most foreign developers were pushed to get one quick. The problem? As above, think internet…
If you want more personalised information. Don’t hesitate:
Getting a mortgage in Morocco has never been easy for foreigners whether they were residents or not. As in many other areas the cultural gap always seems to creep up. Must be this innate Moroccan ability to charm birds off tress but even in the best of times (2005-2007) the hour of truth always imposed itself and all the previous promises from banks, developers and agents alike went from the original ne pas de problèmes to a straight non. Many investors thought that when they got their letters of intent from their bank that was it but alas this is another world and paper doesn’t necessarily hold water (o promises) here. Ask the many distressed developers who attained fantastic promises of finance in writing with the honest intention of perhaps also making it extensive to their clients and see, just see how it all came to nothing.
For this modest writer there has never been a credit crunch for private individuals in Morocco simply because there has never been credit! At least my long and personal experience says so. Put it this way, banks or any other institution for that matter are not really there to help (and then help themselves in a macroeconomic way), the whole scene works how can I say, in a more… micro way.
This has been real life for me but let’s see how Bloomberg, obviously more concerned about the really big boys, described Morocco’s so called “credit crunch”. So… if Bloomberg says so it must be true. I have to be honest I never got near these players so I couldn’t say, but have my doubts though. In an article that appeared in January 2013 but probably still applies today (September 2013). The first very surprising paragraph bluntly tells us that Morocco’s drive to emulate Dubai’s by turning itself into a playground for rich Europeans was halted due to the lack of investment in the luxury resorts as from the beginning of the global financial crisis as “cash strapped” banks (my inverted commas – I know I’m a tough nut) were hit. This is partially true, Morocco’s Plans Azurs; that is government tourist development and infrastructure plans, had that aim but making comparisons with Dubai and putting the spotlight on the banks is going a bit too far. More to do with the aforementioned financial crisis and how it affected everybody I would say.
The figures are there, the country’s tourist visits climbed to 9.3MM in 2011, very close to the projected 10MM under Plan Azur 2010 but, and here is the but… 83% of those visitors were from Europe who were specially hit by recession in their own countries immediately after that. In any case, I’m pretty sure that the bulk of the aforementioned tourists were that, tourists per se and not necessarily international investors or individual buyers. I am pretty sure that the buyers stopped coming around 2008/9.
Nonetheless, Bloomberg did confirm that homebuyers and companies grew at the lowest pace in a decade last year (2011) through to November according to Central Bank data in September (2012). But grew nonetheless which is shocking but what Bloomberg doesn’t say is who these homebuyers and companies are whether domestic or international. They add that due to this, said Central Bank allowed its supervised banks to reduce reserves to increase liquidity or money in circulation, which in itself is a contradiction in balance sheet terms.
Morocco, like Dubai (here we go again) was in the midst of a major tourist expansion when the global financial crisis stuck, causing investment to tumble, affecting property developers with banks and investors increasing their Real Estate debt. Big boy developer finance apparently surged in the two years before the market stalled in 2009 and with much of the debt maturing this year (2013) it will initiatively lead to the usual vicious circle of distressed property offloads a la southern European and bank balance sheets full of nasty bad and doubtful debts. Bloomberg innocently calls this outcome “property sales”. You bet…
So here we appear to have a certain overexposure to commercial real estate mainly tourism-related which will limit bank advances in 2013 coupled with the fact that the Moroccan market isn’t mature enough to recover all these projects which in themselves are too big and ambitious to be completed by Moroccan players. And… there is no EU to come to the rescue.
Mortgages peaked at 57% in the first 11 months of 2007 and lending to developers jumped almost six-fold in that period (I must have lived in a different planet – how scary) but according to Central Bank data and like in Dubai (uugggg) projects stalled in the midst of the great US housing slump and the subsequent ignition of the global crisis.
Here is another one: The Arab spring caused mayhem in a number of North African countries but thankfully left Morocco aside but nevertheless the country paid a certain price with economic growth slowing to 2.9% in 2012 as compared with 4.9% in 2011. In addition to this we had Morocco’s chronic decease, droughts, which caused agricultural output to drop by 8.4% in the third quarter of 2012 which obviously had an effect on the country’s trade deficit, down 11.9% in November.
Like in those economies once highly dependent in Property and Tourism such as those of southern Europe we apparently have a situation of overexposed banks in the real estate sector whose priority in to complete those projects they are already involved in and forget everything else. Unfortunately for the banks those Projects were mainly targeted to foreigners that have simply stopped investing.
The Plan Azur 2010 provided for the building of six mega-resorts together with the infrastructure around them. The crisis prompted foreign investors to look for an exit halting further development. Amongst those projects was Mediterrania-Saïdia, the only one by the Med, as the rest were planned for the shores of the Atlantic. What should really have been the playground of the jet setting rich shuttling to its 800+ berth marina from relatively nearby Marbella has become semi deserted with only 3 of its 9 luxury hotels operating and that in turn are now relegated to cater for Spaniards from the enclave of Melilla a few kilometers away on super budget weekends all in.
The Central bank also say some, for me, very puzzling things. Like for example that private sector lending increased (yes increased) by 2.8% the lowest rate since 2002 when it was 1% with loans for housing rising 6.8% for the eleven months through November again the smallest increase since 2002. The reserve ratio of banks was thus cut from 4% to 2% to counteract “liquidity shortage”. Almost needless to say, banks now have a very selective (if at all) approach to request for funding.
In its heyday mortgage rates ranged from 5.5% to 6.75% whilst developers offered finance at rates ranging from 6.21% to 7.75%. However I have met very few foreign clients that have obtained finance from banks, promises yes, finance no, and certainly none that have got it from developers.
Obviously developers as at today (2013) have totally rationalized their approach to building mostly to pay off or restructure their loans as they mature. The general bottom line is to offload their assets before they get in even more trouble.
Another thing altogether is the incentives offered by the Moroccan Government to encourage the building of low cost subsidized housing in a nation of 32MM people. FOGARIM is a state fund that guaranteed mortgages as long as 25 years for low-income workers. The loans cover as much a 100% of the purchase price applied to homes that don’t exceed 200,000 Dirham.
Spanish developer Fadesa, the original Fadesa that is, who were awarded for a song the Mediterrania-Saïdia Plan Azur project by the government in 2003 was also asked in return to contribute to the building of social housing as well as the improvement of general infrastructure and even a clinic in Saïdia town. Le Jardins de Moulouya a complex of over 22 hectares and only 1Km from the beach were thus built under this umbrella. This idea was quickly picked up by the relative higher earning Moroccan expatriate workers in Europe who saw it as an investment opportunity. The idea was good and well intentioned but like many other things it may not have achieved its aim.
Coming back to the King backed Plan Azur 2010 which came under the wing of Vision 2010 tourism strategy originally sought to more than double the number of visitor beds to 230,000 up to 2010 only achieved under half that amount when the crisis started in 2008 starving the market of takers. Needless to say the six mega resorts under the plan suffered the consequences of this scenario with about half now being built. We are now in a position where the government has to reset the Vision and make it 2020 to meet the goal.
Property owners in some parts of the kingdom including Marrakech are facing the value of their properties, many in semi deserted resorts with relative unused golf courses going down in price with villas now at 50 or even 70% of their original “happy days” price. Some homes in the centre of “can’t go wrong” Marrakech that were priced at 20,000 Dirham per square metre can now be bought for about 12,000 or even as low as 8,000 Dirham per square metre.
However, the Taghazout Plan Azur Atlantic coast project has now been restarted under the new Plan Azur 2020 with a new goal to double tourists by that year according to the government. It remains to be seen how the present signs of recovery in Europe, Morocco’s main source of visitors, will affect the revival of the Kingdom’s tourist industry since France, Spain and Italy provided the bulk of pre-crisis visitors and potential investors.
The customers have changed, there are fewer foreigners buying but this is cyclical and one would hope the trend will change, say some experts in Morocco but… Will it ever be the same again?
The bulk of this piece is taken with permission from the Bloomberg article of January 2013 with my own comments thrown in, mainly to balance up some data typically offered by foreign journalist from their Kuwait desks.
I cannot offer a firm conclusion of how things will evolve with the Moroccan tourist and real estate market because I am still not sure even that I try to get as much information as I can. To offer a firm forecast would be misleading and commentators should know better. One hope is Europe’s recovery in the next few years but I would tend to think that people have learnt their lesson by now. It will be stupid to hope for the riches of the good years but this goes for Europe too.
The macro project to be developed around the shores of Mar Chica in the Nador Province of North East Morocco. It is expected for the project to be finished and operating by 2025. The question we all ask is… Is this going to be another Mediterrania Saïdia? In any case it is designed to raise the level of prosperity in the area and counterbalance the differences with the neighbouring Spanish Enclave of Melilla, just a few Kilometres to the north. At present, crisis notwithstanding, the Spanish city still provides a lifeline to it’s long suffering hinterland.
A few kilometres south of the Spanish enclave of Melilla is what locals call “La Mar Chica” (The little Sea) a salt water lagoon about 25 kilometres long and covering an area of 4000 hectares. It has a semicircular shape only 8 metres deep separated from the Mediterranean by a narrow sand strip of about the same length with an estuary in the middle of about 120 metres.
There are plans to develop the area around it including the sand strip culminating in 2025. It will create 7 cities with all the facilities and will no doubt rival Mediterrania-Saïdia the macro complex 80 Km to the east.
Watch this space.