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Forward funding – or development – agreements, where a developer agrees to sell a pre-let property to a purchaser/fund, are becoming increasingly popular in Spain.

Title to the land is transferred to the purchaser at the outset and the developer then carries out the work. The purchaser pays for all development costs up to an agreed maximum. Any costs above this must be borne by the developer.

It should not be assumed that the risks are the same when a forward funding agreement based on English law is used in Spain. Certain issues should be borne in mind. For instance, reducing the cost of stamp duty (payable on the land value rather than on the property) is not a determining factor in a forward funding structure in Spain. The stamp duty payable on the first transfer of built properties is either 0.5% or 1%, depending on the region, whereas the stamp duty payable on the transfer of land may sometimes be higher: 1.5% or 2% in some cases.

Certain Spanish legal provisions consider the owner of land during a development as the "developer". The real developer is considered as the "delegated developer". The consequence of this is that the purchaser/fund that acquires title to the land at the beginning of the development is potentially liable for breaches of planning and environmental laws committed by the developer and, in addition, is jointly and severally liable for certain construction defects during the decennial – 10-year – liability period following completion.

Among other things, the decennial liability makes the owner of the land during the development potentially liable for damage to the building that affects the laying of foundations, supports, beams, wrought iron, retaining walls or other structural elements that might compromise the resistance or stability of the building.

Forward funding agreements have many similarities with building contracts and so in the event of a dispute between the parties to a forward funding agreement subject to Spanish law, it is very likely that the civil code governing building contracts will be applicable unless otherwise agreed by the parties. I recently advised a developer that had entered into a forward funding agreement prepared by an English law firm in accordance with their standard English law forward funding agreement. The agreement was subject to Spanish law.

When I got involved, the development was almost completed, but costs exceeded the maximum commitment and the parties were in dispute as to who should bear the overrun. One of the reasons why the costs were higher was that several variations had been made to the detailed design during the development. Some of these were requested by tenants and included in the lease agreements signed by the purchaser, some were requested by the purchaser through its project monitor and some were carried out by the developer with the purchaser's knowledge.

The only provision in the agreement dealing with variations stated that the developer could not make any variations unless they complied with certain requirements, including that the increased cost of such variations would not increase the purchaser's maximum commitment.

However, the agreement did not deal with variations requested by the purchaser or with those requested by tenants and accepted by the purchaser. This omission meant that article 1.593 of the civil code kicked in. According to this provision, the parties to a building contract may agree a fixed price on the basis of a detailed design, in which case the price will not change if labour or other costs go up, but the price will increase if there is a variation to the agreed design that increases the works, provided the owner has consented to the variation.

The question then was whether the purchaser had requested or given its consent to the variations. In fact, it was not difficult to argue the purchaser's consent given the flexible way in which the Spanish Supreme Court has interpreted article 1.593 in the past: the owner's consent does not need to be in writing. The consent may be deducted from clear facts such as the payment of the increased costs and the owner's knowledge of the carrying out of the variations through its project monitor.