As you may know, the ECJ ruling on early acceleration clauses came out yesterday (Case C-421/14 - [please click on the link to access the ruling]). At a high level, this ruling determines that:
- It is for the relevant court to determine whether early acceleration clauses are abusive in the context of contracts with consumers, having regard to the balance between the parties, including the consumers' ability to prevent early acceleration relative to the whole contractual relationship (e.g. in a contract with a repayment schedule including a significant number of instalments, it may be abusive to have one single instalment missed as a trigger for acceleration).
- The court must look into those clauses and whether they are abusive on its own motion (even if the borrower is not fighting that argument and even if the creditor is not using that clause to accelerate the loan).
- If the court determined that a clause is abusive, all it can do under Directive 93/13/EEC is to remove/delete that clause (but it may not "interpret" how the contract would need to survive).
The second and third points above are very relevant. In order for early acceleration clauses to provide access to mortgage foreclosure proceedings what section 693 of the Spanish procedural law requires is that (i) they are set out in the contract and (ii) (since 2013) that the borrower misses at least three payments. So, the ECJ ruling would mean that, where an early repayment clause is declared to be abusive and so treated as if it had never been included in the contract, requirement (i) above might be deemed not to be met and so the creditor would not have access to fast track foreclosure proceedings. The creditor would need to go through ordinary proceedings for the court to terminate the contract based on breach, and only then could it turn to foreclosure if the borrower did not pay up.
The Spanish Supreme Court had already resolved in the past (resolutions of 23 December 2015 and 8 February 2016) that early acceleration clauses based on a single payment being missed were abusive. However, it had also tried to justify that, rather than those clauses being struck off in full, those should be read down the lines of section 693 of the Spanish procedural law. Otherwise, that would mean that no early acceleration would be possible for the creditor, and that would in turn be imbalanced as between the parties. The theory behind abusive clauses is they need to be removed – but provided that, without them, the contract continues to make sense. In its ruling of 18 February 2016, the Supreme Court stated that if the consequence needed to be to simply remove the clause from the contract (rather than replacing it with section 693), that would be such a material change to the contract that creditors should in theory be entitled to seek termination due to the balance of the contractual positions having been torn apart. Termination would in turn imply return of all monies lent to borrowers (where, unlike early termination based on breach of a number of payments, there would not be an ability for the borrower to "catch up" and cure that breach etc.).
In other words, basically, the Supreme Court had warned that if the reading of Directive 93/13/EEC was such that the clause was simply deleted, consequences for the mortgage market could be catastrophic. And, what the ECJ said yesterday is precisely that: the clause simply needs to be deleted and cannot be replaced by section 693 of the Spanish procedural law.
Based on the above, and the potential impact of this decision on the mortgage market (bank ratings, securitisations, etc.) as per the forecast in those previous Supreme Court decisions, we would expect that we will see a legal reform to fix and clarify this rather soon. But, for now, it is where we are.