Mortgage enforcement proceedings in Spain in the aftermath of the European Court of Justice (ECJ)

June 2013

The ECJ judgement of 14 March 2013 (C-415/11) ruled that certain provisions of Spanish law¹ do not comply with the Unfair Terms in Consumer Contracts Directive 93/13/EC. As a result of the judgment, enforcement of securities against consumer borrowers will be more difficult. Although the consequences are yet to be understood in full, the decision is likely to affect all banks granting loans to consumers, and also hedge funds investing in mortgages in Spain.

On 8 August 2011, the Juzgado de lo Mercantil No 3 de Barcelona (Commercial Court No 3, Barcelona) formulated a series of pre-trial questions to the ECJ with the objective of determining whether certain aspects of Spanish mortgage enforcement procedure, when consumers are involved,² were compatible with the Unfair Terms in Consumer Contracts Directive 93/13/EC (Directive 93/13). The particular aspects of Spanish enforcement procedure in question were:

1. the limited grounds on which a mortgage debtor could resist enforcement (apart from showing that there was in fact no debt due, the other grounds were purely based on formal requirements, eg the mortgage loan filed by the bank in the enforcement proceedings is not an original document formalised before a Notary Public);
2. the fact that judges were not able to stay enforcement proceedings pending the outcome of any separate proceedings challenging the validity of certain mortgage terms for being, for example, in breach of consumer laws; and
3. whether, in light of Directive 93/13, certain terms contained within typical Spanish mortgage loans were unfair (eg terms relating to default interest and the right to early acceleration in certain circumstances).

The case arose out of a Spanish enforcement proceeding involving Mohamed Aziz, a Spanish resident who was evicted in January 2011 after failing to make payments on a EUR 138,000 loan. His bank took enforcement measures and his house was put up for auction. No bids were made and, under Spanish law, the bank took ownership of the property for 50% of its value. Mohamed Aziz contested the final ruling on the ground that he was not able to challenge the existence of abusive terms in the loan, and that Spanish laws were therefore not compliant with the requirements of Directive 93/13.

The ECJ ruled that a correct implementation of Directive 93/13 must grant a consumer the opportunity to seek the suspension of any enforcement procedure whilst a consumer questions the validity of the contract that is being enforced, or any of its terms. The ECJ further considered that it is for the national courts to assess whether the specific clauses contained in a mortgage loan are fair.

Comment

There has been much discussion in Spain about the implications of this decision.
Under the previous rules in the Spanish Civil Procedure Act (SCPA), a judge hearing enforcement proceedings was only allowed to evaluate whether the formalities of the proceedings were correctly observed, not the fairness of the provisions of the mortgage loan. Following this ECJ judgment³ these rules have been amended. The changes to the SCPA reflect the main conclusions reached in a recent conference on the implications of the ECJ’s ruling on this issue, which was chaired by the President of the Civil Chamber of the Spanish Supreme Court. The main changes in the SCPA are:

1. in any enforcement proceedings a judge must analyse the fairness of the contract. The judge undertakes this analysis even if not specifically asked to by the borrower.
2. if a court hearing enforcement proceedings finds that the contract contains an unfair term, it must inform and give the parties five days to make submission on this; and
3. if a clause is found to be unfair, then the enforcement proceedings will not continue if the proceedings were based on such a clause. Although the court hearing the enforcement proceedings may stay the proceedings if it deems that a clause is unfair, this court does not have the competence for declaring that clause to be unfair. The parties to the enforcement proceedings must initiate separate proceedings to argue their case concerning fairness/ unfairness of the clauses.

The amendment of the SCPA will only impact on enforcement proceedings that are pending, but not to those that have already concluded.

This ruling of the ECJ and the changes to the SCPA may reduce appetite to invest in a structure with assets including Spanish mortgages granted to consumers. Enforcement proceedings in Spain are likely to be less straightforward from now on, since consumers may allege the existence of abusive terms in the loan with the aim of delaying enforcement. It remains to be seen to what extent the Spanish courts will stay enforcement proceedings if allegations made by a borrower in enforcement proceedings clearly lack any merit. 

Further information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 (0)20 3088 3710.

Footnotes