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HIDDEN DEFECTS ON HOUSES. RESPONSIBILITY AND PROCEDURES

HIDDEN DEFECTS ON HOUSES. RESPONSIBILITY AND PROCEDURES 1973 1315 TLA

In the property buying and selling process, it is very important to take into account the responsibilities assumed by sellers and builders in the sale of property to buyers.

It is very normal to find properties in the market that are sold with defects, in which the buyer does not know very well how to act, nor what are the rights as per law when they find problems or constructive defects that have not been detected before the sale.

It is important to establish what are the rights and obligations from the sellers, and from the builders, as well as from the buyers who acquire properties in Spain. That is why we have created this report to clarify concepts and procedures when confirming a visual or hidden defects.

DEFECTS:First, let’s identify what we understand by “defects”. We understand defects or constructive defects any type of deficiency that we find in a construction and that reduces its quality. This this defect, must result in such a way that the owner cannot enjoy and use the property in a normal way.

In addition, we can identify that a defect, or a constructive defect can be considered as “serious” or “grave” in the event that, if the buyer had discovered it before the sale, he would have rejected the purchase, or would have been the result of negotiating the price with the seller.

TWO TYPES OF DEFECTS: Visuals and Hidden

Visible defects are those that are easily detectable by means of a visual inspection, either in the construction process of the building, or through a visual inspection by the buyer. That is, they are easily detectable by anyone without building knowledge or preparation.

These visible defects are not the responsibility of the seller. Therefore, the seller has no responsibility for visible defects that could have been discovered in this way by the buyer, especially if they do not affect or vary the price of the property.

Hidden defects, in instance, are those that have not been possible to detect by the construction process, because they are not easily visible. In the case of new constructions, these defects have not been detected by the different professionals, such as architects, inspectors, etc. during the construction process.

Not all defects can derive in responsibilities. For this to be the case, the effect must meet these conditions:

  • That it was not easily detectable
  • That the buyer did not know about it
  • That it existed before finalizing the purchase

As an example, we are going to list which are the most repeated hidden defects in the casuistry:

  • Damages that affect the structure of the building. These are work defects that substantially affect the stability and structure of the building.
  • Problems of leaks, waterproofing, which cause leaks in the house.
  • Problems of settlement of buildings. Once a building is constructed, it can present some cracks, fissures, etc that appear due to a bad settlement of the building, and produced by a bad basement.

RESPONSIBILITY

When considering responsibility for hidden defects, it is necessary to distinguish between houses built of new construction, and sale homes.

In new homes, the guarantee and the right of the buyer to claim for hidden defects is divided into three types:

  • ONE YEAR: Problems in finishing as interior pavements, exteriors, carpentry, new appliances, etc. ONE YEAR from the date of construction, or SIX MONTHS from the date of purchase/completion.
  • THREE YEARS: For defects produced at the property and that directly affect and degrade their habitabilityIn this case, it is a matter of problems that affect hygiene, health, health, water tightness, healthiness, etc.
  • And for problems that affect the structure of the building such as the foundation, pillars, beams, floors, etc., TEN YEARS. These defects must be such that they must compromise the stability of the building.

In newly built properties, it is mandatory in Spain to submit a DECENIAL INSURANCE (or TEN YEAR’S INSURANCE) that covers the structural damage of the building for 10 years. These defects are covered in such a way that, if some of these defects appear, the buyer must inform his insurance, so that they may claim and use the ten-year insurance previously provided by the promoter or constructor of the building. In this way, buyers are guaranteed, as consumers of new construction homes, which are duly covered during TEN YEARS for these defects.

Here it is necessary to say that in the case of the houses in “AUTOPROMOCIÓN” (Self-promoter), contracting the decennial insurance is not obligatory, but voluntary. A construction is in self-promotion when the final consumer of the building is the same owner of the plot, and hires the builder only for the purpose of building the house. In this way, the owner of the plot assumes the position of «promoter» of the works, and he is the one that performs the hiring of different professionals such as architects, builders, etc.

In these cases, given that the home is not going to be sold in the market in search of buyers, but will be used only by the same owner, the Spanish law allows the promoter to hire ten-year insurance or not. In case the owner chooses not to contract said insurance, if he decides to sell the property during the guarantee period of 10 years, he must inform the eventual buyers that the house does not have such insurance, and the buyers must expressly accept this situation.

This in terms of the NEW properties…., but, what happens in RESALES?  Do sellers have any responsibility for hidden defects?

The answer is affirmative. Sellers who sell resale homes are also responsible for hidden defects that these properties may have. This responsibility is about the hidden defects that exist in the property and that, during SIX MONTHS, the seller will be responsible for any type of the defects mentioned above, and that could be detected before six months from the completion of the sale.

To exercise the right of the buyer to claim responsibility for hidden defects, the following is necessary:

1.- The defect must be detected.

2.- Seller must be notified in writing, usually by certified mail, making him aware of the defects, explaining what the causes may be, and what is the means to repair the problem.

3.- In the event that the seller does not recognise his responsibility, buyer must obtain a written report from an independent professional, if possible an expert, who determines the problem, the defect, and which are the repair costs in an official report.

If the seller, received the report of an independent professional that establishes the causes of the problem, its repair, and the costs that this entails, and does not take charge of its repair, then the buyer must be advised by a lawyer in order to see what are the legal ways that exist to solve the problem.

Normally, it must be said that Tribunal claims derived from hidden defects of small consideration are usually expensive and long. Therefore, always advisable to try to reach an out-of-court settlement with the seller.

For serious cases, in which there is a real problem that affects the habitability, or the structure of the building, it will be necessary to defend the position of the buyer in the best possible way, always considering the possibility of going to Courts if not finding an agreement with the seller.

 

«Usufruct» is the right to enjoy, use and obtaining profit and rent from a property. 

«Bare ownership» is the right of property ownership which remain after the usufruct, and that does not give the right to use or to dispose on it while the usufruct right exists.

On many occasions we find that buyers, advised by their tax advisers, or guided by general information on the Internet, are advised to buy a property by acquiring the usufruct for theirselves, and their children acquiring the rest of the ownership of the property (this is what we call “bare” or “nude” ownership”).

They do this with the idea that usufruct may help to reduce inheritance tax, since it is a formula that allows the parents to:

Reduce inheritance tax: In the purchase, parents acquire the usufruct, which is usually a low percentage of the price of the property, and the rest is acquired directly by the children. Therefore, in the future, in case of death of the parents, children already own a high part of the property, so children only have to pay for the inheritance tax the part of the parents’ usufruct.

Keep the control of the property. The usufruct allows parents (or any other usufructaries)  to use the house at the parents’ wishes, excluding the possibility that the children may have the right to use it or to decide on it.

Therefore, once the parents pass away, the usufruct is automatically extinguished, and passes directly to the children, who become 100% owners of the property, and only pay the inheritance tax for the value of the usufruct that parents had .

Another option to reduce inheritance would be to divide the sale into percentages, that is, that each one bought a percentage of the property (for example 30 % for the parents and the rest to the children), but this does not give  to any of the co-owners the “right to use” and enjoy the property exclusively. That is, you can be a co-owner of a property with respect to another co-owners, but you, and all of them, will have the right to use the property in conjuction, without anyone having the exclusive right of usufruct, nor the exclusive use of the property.

However, although the usufruct is advisable to reduce the inheritance tax, we have to be clear that the usufruct, when acquired, can pay the purchase tax, and for this, we handle THREE ASPECTS:

– Acquisition of usufruct in purchases of resales

– Acquisition of usufruct in purchases of new buildings

– Acquisition of the usufruct by inheritance or donation

I.- USUFRUCT IN PURCHASE OF RESALE OR SECOND HAND

On acquisition of resale properties the tax is not the VAT (which is paid on acquisition of new buildings), but the “Transfer Tax” (ITP).

  • VAT is paid to Madrid, and it is usually the 10 % on properties
  • Transfer Tax is paid to the Region and varies from one to other: Valencia is 10%, Catalonia is the 10% -11%, Madrid 6%, Andalucía and Balearic Islands is an scale starting by 8%, etc.

So, when a resale property is acquired, the Transfer Tax is paid for the total value of the transaction, and each of the owners pays in proportion to the right acquired. To those who acquire the usufruct, the percentage that represents said right is calculated (normally related to the age of the usufructuary), and the rest of the co-owners are assigned the rest. Each of them pays the Transfer Tax in relation to the percentage assigned to them.

But, following tax normative in Spain, when the usufruct is acquired by the purchase of a resale, at the death of the parents/usufrucutaries, at the inheritance process, the children/bare owners will have to pay, again, the part of the Transfer Tax they did not paid when they acquired as it was paid by their parents.   This, although it seems incongruous because it seems to “pay twice” the Transfer Tax, the law is very clear about it. Thus the Law of the Transfer Tax, expressly establishes:

In the consolidation of the right of ownership, divided when acquired the property in usufruct and nude/bare ownership,  whenever the consolidation occurred due to compliance with the deadline of the right of usufruct, or death of the usufructuary, the bare owner will be required for the liquidation/payment of the Transfer Tax, for the 100 % of the initial value of the usufruct

So, in case the children acquire by death of the parents the usufruct, they will not pay inheritance tax on its value. The tax they will pay will be the Transfer Tax.


Let’s put an EXAMPLE:

A + B buys a resale property in usufruct for an amount of 150,000 EUR, the “nude/bare owners”  being their 2 children:  I and II.

The value of the usufruct is 60,000 EUR.

The value of the Bare ownership is 90,000 EUR.

For the transaction, 10% (Valencia Region) of the ITP (Transfer Tax) is paid, resulting in EUR 15,000. A + B pay 6,000 EUR, and I + II pay 9,000 EUR.

A + B die, so the usufruct of the property passes to their children. In this case, children  DO NOT PAY Inheritance Tax for the acquisition of the usufruct. What they pay is the Transfer Tax for its value. Therefore, they should pay 9,000 EUR. And, this, even if their parents already paid this tax for this value when they acquired the usufruct at origin.

Therefore, the acquisition of the usufruct, even in an inheritance process is not taxed by the Inheritance Tax, but by the “Transfer Tax “or “Purchase Tax”.


Therefore, the concept is not that, whoever first acquires the bare ownership and later consolidates the domain by termination of the usufruct does not make a first acquisition and, subsequently, a second acquisition of the usufruct. The concept is that the bare owner, when he purchases the property , and pays for it originally, makes a single acquisition, but must pay the entire tax for the total value of the property, and said payment of the tax is made in two distinct phases:

– A part is paid at the time of acquisition of the bare ownership, and corresponds to the value of the bare ownership.

– The other part is paid when the usufruct is acquired upon the death of the usufructuary, and corresponds to the value or percentage of the usufruct at the date of the original purchase.

II.- THE USUFRUCT IN PURCHASE OF NEW BUILDING HOUSES

When a new construction is acquired, the builder must be informed from the very beginning about the intention of the buyers that they are going to buy the usufruct and the bare ownership by separate. And this is because, as explained here, the usufruct pays Transfer Tax so, it does not pay VAT (which is the tax paid usually on the purchase of new buildings).

The art. 20.23º1 of the VAT Law, states that “the constitution and transmission of real rights of enjoyment use  that have as their object the dwellings, garages and their accessory annexes will be exempt from VAT.”

On the other hand the art. 4.4 of the VAT Law in relation to art. 7.5 of the LTPOAJD states that: “the constitution and transmission of real rights of use and enjoyment on real estate when they are exempted from VAT,  will be subject to Transfer Tax.

Consequently, the acquisition of the usufruct right in purchases of new buildings will be subject to Transfer Tax.


EXAMPLE: In the previous case:

A + B buy a NEW BUILDING property in usufruct for an amount of 150,000 EUR, the bare ownership is bought by their 2 children I and II.

The value of the usufruct is 60,000 EUR.

The value of the bare ownership is 90,000 EUR.

For this transaction the pay the following taxes:

– For the acquisition of the Usufruct: ITP (10%) = 60,000 EUR

– For the acquisition of the Bare ownership: VAT (10%) + 1.5% of AJD of the value of the bare ownership = 9,000 EUR (10% VAT) + 1,350 EUR (AJD -Stamp Duty)

A + B die, so the usufruct of the property passes to their children. Children, DO NOT PAY the value of the usufruct as an Inheritance Tax (ISD), but as a Transfer Tax. Therefore, they should pay 9,000 EUR (10% of ITP).

Therefore, as a conclusion, when a buyer has the intention to buy for them as a usufruct, and the rest for their children, it must be dropped that, in the case of inheritance tax, it is advisable, but instead , their heirs will have to pay the part of the Transfer Tax which was not paid on the day of acquisition as it was the “usufruct part”.

Also, in the case of NEW BUILDINGS, the builder must be informed of the usufruct intention from the first moment of the purchase, since the builder may not agree to organize it in that way.


III.- USUFRUCT PREVIOUSLY OBTAINED FROM INHERITANCE

The aforementioned refers to the usufruct obtained by PURCHASE OF A PROPERTY. In the event that the usufruct has been obtained by INHERITANCE or DONATION, upon the death of the usufructuary, the tax applicable will not be the “Transfer Tax” (ITP), as the acquisition of said right was not made by a purchase, but by donation or inheritance. In this case, the Usufruct will pay for the Inheritance Tax.

CONCLUSIONS:

– When the usufruct is obtained by the usufructuaries on the basis of a PURCHASE PROCESS, whether new or resale, the acquisition of said usufruct by the bare owners at the death of the usufructuary will pay ITP (Purchase / TransferTax), and NO Inheritance Tax.

– In the case of PURCHASE OF NEW BUILDINGS, the purchase in usufruct regime separated from bare ownership, produces the application of  2 separate taxes: Transfer Tax (ITP) for the value of the usufruct; and VAT+ AJD (Stamp Duty) that is applied to the rest of the purchase value for the bare ownership.

– When the usufruct is obtained by the usufructuary by inheritance or donation, it will be taxed by the Inheritance and Donations Tax on the death of the usufructuary.