By 2016, interest rates set by the European Central Bank reached historic lows. For this reason, a mortgage loan has become a more common way of financing the purchase of real estate. However, it is to be expected that, at some point, the current interest rates will be subject to alteration. Consequently, mortgage loan agreements usually contain a provision authorizing the bank to unilaterally increase the respective interest rate. Hence, it is particularly significant that one of the most frequently used banking products on the Slovak market is the mortgage with variable interest rates, with their possible fixation during the subsequent 3-5 year period.
With this in mind, we would like to draw your attention to a significant ruling issued by the Regional Court in Žilina on 10 February 2016 (the "Decision") that could have a fundamental effect on this practice in Slovak banks. Under the respective provisions of the above Decision, the relevant court has assessed the validity of several articles of a standard mortgage loan agreement concluded between the bank as a creditor and the natural person as a debtor. Within its reasoning, it was pointed out by the court that a mortgage loan agreement shall be considered a consumer contract under Section 53 (1) of the Act No. 40/1964 Coll., the Civil Code, as amended, thus the particular provisions of the mortgage loan agreement shall meet the special criteria set forth under Slovak consumer law.
In the light of this, the court has declared 24 provisions of the mortgage loan agreement invalid. However, for the purposes of this article, we would like to focus solely on the particular provision of the assessed agreement regulating the right of the bank to unilaterally increase the interest rate as follows: "The bank has the right to appropriately change the interest rate […] if there is any alteration of the risk associated with the client. The amendment of the risk on the side of client may be related mainly to the change in a degree of risk according to the rules set by the NBS (the National Bank of the Slovak Republic). […] The bank may proceed with appropriate alteration of the interest rate automatically without concluding any amendment to the mortgage loan contract".
In its justification, the ruling emphasised that the respective provision allows for different interpretations that may lead to arbitrariness from the bank regarding the unilateral alterations of the interest rate and thus may significantly disadvantage the consumer. The vagueness of this provision was particularly underlined in the use of the term "risk associated with the client", which was not specifically defined. The absence of such a definition was deemed to cause unreasonable uncertainty for consumers, as they were left with no possibility to predict future interest rate modifications. The Regional Court, unlike the first instance District Court, concluded that the provision is an unfair contract term according to Section 53 (4) (i) of the Act No. 40/1964 Coll., the Civil Code, as amended, and is therefore null and void.
It should be noted that the effect of declaring relevant provisions invalid is not limited to the particular case under review: in accordance with Slovak consumer law, banks cannot enforce this provision in all concluded agreements which contain such provisions. Based on information provided by Association of Bank Clients (an organisation representing the customers in the current proceeding), this should be the case for approximately 5,000 clients.
Furthermore, the Decision refers to the fact that the above provision represents a part of a standard mortgage loan agreement applicable to almost every client of a bank and that a unilateral amendment of the interest rate was until now the usual market practice of the banks. In addition, as mortgage loan agreements are usually concluded for a longer period of time, such amendments may result in serious detriment to the consumer.
The Decision of the Regional Court as the second instance court is effective; however, there is still a legal way to reverse the ruling, i.e., by filing an extraordinary remedy, which is subject to proceedings before the Supreme Court.
Moreover, the Decision represents the first one of its type issued by the Slovak courts so far, thus, from today's perspective, it is unpredictable how the matter will further develop. Notwithstanding the above, this Decision might encourage other bank clients to claim damages based on the same grounds as in this case.