ECJ ruling on Spanish foreclosure procedure likely to cause delays

Case C-169/14, 17 July 2014

The European Court of Justice (the ECJ) has ruled that the Spanish system for appealing mortgage foreclosure is inconsistent with European law. This decision will impact on the length of foreclosure proceedings and consequently on the risks associated with investing in, or securitising, property portfolios associated with retail loans.

The ECJ ruled that Spanish foreclosure proceedings are inconsistent with Council Directive 93/13/EEC, dated 5 April 1993, on Unfair Terms in Consumer Contracts (Directive 93/13).

Under Spanish law a secured creditor cannot directly appropriate real estate assets given as security.

Should a secured obligation not be satisfied, a secured creditor has to commence foreclosure proceedings in the civil courts. Once a debtor is served with notice of these proceedings, the debtor may challenge the proceedings on limited grounds: (i) the obligations secured by the mortgage have already been fulfilled; (ii) the amount due stated in the claim is not correct; (iii) another mortgage registered prior to the registration of the debtor's mortgage takes priority; and (iv) the existence of an abusive clause in the mortgage deed. If the debtor's challenge is rejected by the judge, or if the issues raised are resolved to the judge's satisfaction, the foreclosure proceedings will continue. There is no appeal allowed to the debtor. However, if the debtor's challenge is successful, the creditor does have a right of appeal.

The ECJ has now condemned the inequality of appeal rights.

The ECJ considered the inequality of appeal rights to be a violation of the principle of equality of arms and Article 47 of the Charter of Fundamental Rights of the European Union, therefore jeopardising the fulfilment of the objective of Directive 93/13, which aims to address the imbalance between consumers and businesses (ie lenders) both in terms of the parties' bargaining power and the information available to each side.
Due to the erga omnes effect of the ECJ's judgment, and pending the amendment of Spanish procedural law to bring it in line with EU law, it is expected that the Spanish courts will begin to allow debtor's appeals against first instance decisions that reject foreclosure challenges.

Spanish rules may be amended in one of the following ways:

(1) by allowing a debtor to appeal an order dismissing their opposition to the foreclosure; or
(2) by removing the option for a creditor to appeal. This is a viable option given that EU law does not require access to a second instance appeal.

If option 1 is chosen, any appeal by a debtor would be likely to suspend the foreclosure proceedings. This will cause foreclosure proceedings to take longer than is currently the case. Most debtors would be likely to pursue an appeal, and the courts may take several months to render a decision on such an appeal.

Delays in enforcing consumer property security in Spain may affect the interest of those funds holding NPL portfolios in Spain or looking for loans with a Spanish real estate collateral, since it is likely that the average length of foreclosure proceedings in Spain would be increased following this ECJ decision. This may reduce the price offered by these funds to buy a NPL portfolio due to the risk of delay in the return of their investment.