To our former clients it has come as a bit of a surprise that the Courts in Cordoba have all, invariably, ruled against them: the reason for their surprise? That they were told they had a strong case by a Fuengirola-based lawyer.
The developer for Altos de Alcaucin had finalized the construction on time and seemingly in accordance to the plans given to the buyers, and was hoping they would make arrangements to complete. Buyers on the contraty wanted to pull out as their hearts were no longer in this part of Spain. They sought legal advice from us and we said there was no case to be had. They then went to a see a lawyer that had the opposite opinion…
The contract in question stipulated that that in the event of the buyers failing to pay any of the instalments, as agreed to in the contract, they developer would be entitled to rescind the contract and return 80% of the sums received up to date, keeping 20% in concept of penalty. When our clients, due to the adverse economic climate, chose to invoke this stipulation to pull out, notwithstanding the developer’s complete fullfilment of their obligations, we advised that it was not in the essence or nature of such convention the right to pull out in case of convenience, but rather the developer’s prerrogative to do so, should he chose to.
Unfortunately for our clients they were herded away by the very unnatural legal thesis that this was a Get Out Clause and could enforce it. Far from it, 2 different Courts held that:
- That the prerrogative to rescind the contract is only available to whoever meets their contractual obligations, and not to who defaults and invokes its own default.
- That the penalty clause is a legal tool that serves one of two purposes: to coerce the party to the contract to fullfil the obligation he has entered into and to fix, in advance, the sum of damages caused by reason of default. According to the Court, the bursting housing bubble has prevented that such clause is used for one of the above two purposes and paved the way for it to be used incorrectly and unfairly: as a get out clause for buyers for whom the purchase is no longer a profitable venture.
- That, having the Courts the right to modify the penalty clause by either reducing (when excessive) or increasing it (when notably small compared to the default in question), in the light of the circumstances, it is clear that the 20% penalty clause is clearly insufficient to cover the losses incurred by the buyer when defaulting, as it does not cover the real estate commission paid to the intermediary, bank interest and the loss of value sustained by the property (the Judge puts it at 15%, according to the Ministry of Housing).
Luckily for them the developer counter-sued to retain the full deposit, and not to force the buyers to fullfil the contract. Unluckily, there are costs incurred in that the developer could chase them for.