A judgment of the Court of Justice of the European Union (ECJ) confirms the possibility of replacing an unfair early termination clause in a loan agreement by the application of article 693.2 of the Spanish Civil Procedure Rules (LEC), declaring valid and not unfair to start mortgage foreclosure in the event of default of at least three monthly instalments.

The Grand Chamber of ECJ has issued its Ruling dated March 26, 2019 (“the Judgment”) considering two questions referred to in two Preliminary Ruling requests filed by the Spanish Supreme Court and by the First Instance Court no 1 of Barcelona, respectively, concerning the interpretation of Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts (the “EU Directive”).

In its Judgment, the ECJ departs from the Opinion of the Attorney General and partially confirms the criterion held by the Spanish Supreme Court, in which can be considered a “safety line” for the subsistence of the Spanish mortgage foreclosure proceedings, which are commonly used by claimants (financial entities and funds mainly) in the event of default of a consumer loan agreement secured by a mortgage.

The Judgment examines two questions:

(1) first, whether Articles 6 and 7 of Directive 93/13 are to be interpreted as meaning that, where an early repayment clause of a mortgage loan contract is found to be unfair, that clause may be maintained in part, with the elements which make it unfair removed, and,

(2) second, if it is possible to erase the unfair elements of the clause for this clause to partially survive, whether a mortgage enforcement proceedings initiated on the basis of that clause may nonetheless continue by means of the supplementary application of a rule of national law (article 693.2 of the LEC) because renouncing to such proceeding could be contrary to consumers’ interests.

As regards to the first question, the Judgment understands that, once a termination clause has been declared unfair, it is for the national court to exclude completely the application of the unfair term and therefore those unfair terms cannot be maintained in part. The ECJ state that the contrary would adversely affect the dissuasive effect aimed at by the EU Directive, i.e. deterring sellers or suppliers from applying unfair terms with consumers.

As regards to the second (fundamental) question, the Judgment understands that a national court may, in accordance with the principles of contract law, replace an early termination clause containing an unfair contract term with a supplementary provision of national law (article 693.2 LEC). For this substitution to be valid, two conditions would need to be met: (i) if the invalidity of the unfair term would require the court to annul the contract in its entirety and (ii), if the consumer would thereby be exposed to particularly unfavorable consequences, so that the consumer would thus be penalized.

The decisive aspect is that the Judgment understands that it is for the national courts to verify, in accordance with the rules of national law and adopting an objective approach, whether these conditions are met. In this regard, in those ongoing mortgage foreclosure proceedings in which a court has found a unfair contract term, the court would need to decide whether the removal of that term would mean that the continued existence of the mortgage loan contract is no longer possible and whether the annulment of the mortgage loan contract would expose the consumer concerned to particularly unfavorable consequences.

As regards to the latter aspect, the Judgment accepts the Spanish Supreme Courts´ arguments that such an annulment could have effects, in particular, on the procedural rights of consumers who signed this type of loan agreements, as, in the event of the annulment of the mortgage loan contracts, the banks would have to recover their claims by means of an ordinary enforcement procedure. This could involve a “deterioration of the procedural position of the consumers concerned”.

All in all, the Judgment rules that articles 6 and 7 of the EU Directive s must be interpreted, (i) that the EU Directive precludes an accelerated repayment clause of a mortgage loan contract that has been found to be unfair from being maintained in part, with the elements which make it unfair removed, where the removal of those elements would be tantamount to revising the content of that clause by altering its substance, and, (ii) second, that the EU Directive does not preclude the national court from compensating for the invalidity of such an unfair term by replacing that term with the new wording of the legislative provision on which it was based, provided that the mortgage loan contract in question cannot continue in existence if that unfair term is removed, and that the annulment of the contract in its entirety would expose the consumer to particularly unfavorable consequences.

After the Judgment, it will be for the national courts to decide whether they continue the mortgage foreclosure proceedings against consumers, which had been stayed in the light of these preliminary rulings. In adopting this decision, courts will be sensitive to claimants´ (i.e. mortgagee´s) arguments as regards to two core aspects: (i) that the contract cannot survive without the early termination clause containing the unfair term and (ii) the real unfavorable consequences the debtor would suffer if barred from continuing the foreclosure by means of the mortgage foreclosure proceedings. A thorough analysis of the underlying Spanish contracts and an in-depth knowledge of the pros of the mortgage foreclosure proceedings may tilt the balance in favour of re-activating the proceedings affected by the Judgment.