On March 27 1999 the Supreme Court announced an important decision on the enforceability of clauses known as 'default events' in loans secured by a mortgage. These clauses are commonly included in credit agreements under articles of the Spanish Mortgage Act.
Default event clauses entitle lenders to terminate a loan agreement early and to request the total amount of the loan before the agreed expiration date, if (i) the lessee fails to fulfil an obligation in the loan agreement (eg, payment of the principal sum or the interest), or (ii) a predefined event occurs.
In a far-reaching decision the Supreme Court held that default event clauses were invalid, to the extent that they purported to oblige the lessee to prepay the total amount of the loan early. The court therefore declared the clauses to be null and void.
The action was brought by the company Promotora Formipe and the respondant was Banco Hipotecario de España.
The Supreme Court ruled in favour of the debtor and ordered the bank to indemnify Promotora Formipe and to pay the legal interest on the corresponding amounts and the costs.
The court reached this conclusion based on an analysis of articles of the Mortgage Act and the Civil Code.
Article 127. Under this provision the credit agreement must continue until the last day agreed. When a mortgage is enforced because of a failure to pay one or more instalment, the adjudicatee may choose between (i) receiving the asset charged with the mortgage or (ii) depositing an amount that corresponds to the debt secured by the mortgage and receiving the asset free of charges. The creditor must collect the money from the previously agreed deposit.
Article 135. This provides that if the mortgage is enforced because a payment obligation is breached and there are outstanding instalments under the terms of the mortgage, then the property will be transferred to the buyer together with the mortgage that corresponds to the outstanding credit.
The court interpreted these articles as meaning that the law does not allow the creditor to force the early repayment of the loan. This interpretation is supported by the Civil Code.
Under Article 1125 term obligations can only be required on the arrival of the expiration date. The term is understood in benefit of all the parties in the agreement. Exceptions to this rule (Article 1129, Civil Code) relate to the collateral granted by the debtor to secure the debt becoming partly or wholly unenforceable. The Supreme Court accepts that these exceptions will never apply to a loan insofar as it is secured by a mortgage.
For further information on this topic please contact Javier Perez-Arda at Garrigues & Andersen by telephone (+34 91 514 52 00) or by fax (+34 91 399 24 08) or by e-mail ([email protected]).
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