On 11 September 2019, the Spanish Supreme Court delivered a highly anticipated judgment resolving one of the most disputed issues relating to mortgage loans in Spain.

The question was regarding the consequences when clauses that allow lenders to accelerate loans upon failure to pay just one or more instalments are declared unfair and, consequently, null and void under Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts. 

This has a big impact on the way mortgage loans can be enforced (i.e. whether or not the creditor can use the special fast-track mortgage enforcement proceedings under Spanish law). 

Short overview of the issue

Mortgages in Spain usually contain various events of default in which the borrower loses the right to use the loan for the initially agreed term. One of those events has typically been failure to pay one or more instalments, enabling banks to call in the loan and demand repayment of the debt in its entirety. 

The Spanish Supreme Court and the Court of Justice of the European Union (CJEU) have declared that accelerated repayment clauses which allow lenders to accelerate loans upon failure to pay one or few more instalments are unfair and legally void. 

In principle, if the accelerated repayment clause is held to be unfair, the mortgage loan cannot be accelerated unilaterally by the lender by making “fair” use of the void clause. Thus, it would not be possible to bring the special fasttrack mortgage enforcement proceedings to claim the total amount of the mortgage loan. Instead, the lender would have to start ordinary proceedings or the fast-track proceedings solely in respect of the defaulted payments.

In view of these consequences, the Spanish Supreme Court made a ruling on 23 December 2015. It considered that if the termination by the creditor fulfils the conditions required by case-law (basically, material breach) and the minimum requirements contained in article 693.2 of the Spanish Civil Procedure Rules (failure to pay at least three monthly instalments or equivalent), fast-track mortgage enforcement proceedings can continue, even if the default clause is void.

This decision was highly controversial, and many lower courts chose not to follow the approach. In this situation, on 8 February 2017 the Spanish Supreme Court itself requested a preliminary ruling from the CJEU. 

On 26 March 2019 the European court issued its ruling but did not entirely clarify the issue. As the question raised was largely related to Spanish legal matters, the court considered that the final response had to be provided by national courts, though subject to certain requirements. In short, the CJEU said that it was up to the Spanish Supreme Court to decide whether removing the clause would mean that the mortgage loan contract can or cannot remain in place and the consequences of this (suggesting, in the case it can remain, replacement of the clause with a provision of national law).

Adding to the confusion comes Spain’s recent Property Loans Act (Ley de Contratos de Crédito Inmobiliario – Law 5/2019), which came into force on 16 June 2019. 

Under article 24 of Law 5/2019, mortgage loans can be accelerated if the following requirements are met: 

(i) The borrower has breached its payment obligations in relation to the mortgage loan principal or interest. 

(ii) The unpaid obligations are equivalent to at least:

  • 3% of the principal borrowed, if the breach takes place during the first half of the mortgage loan term. This condition will also be considered met when the borrower is at least 12 months in arrears (or equivalent).
  • 7% of the principal borrowed, if the breach takes place during the second half of the mortgage loan term. This condition will also be considered met when the borrower is at least 15 months in arrears (or equivalent).

(iii) The lender has demanded payment from the borrower, which has not paid the due amount within a month, despite the lender’s warning that non-payment will force it to claim the total amount borrowed.

These new provisions are mandatory, cannot be modified by agreement between the parties and apply to all mortgage loans with the above characteristics that are terminated after Law 5/2019 came into force, even if the loan dates from earlier.

Supreme Court ruling of 11 September 2019

After considering the CJEU ruling from March 2019, the Supreme Court has concluded in its ruling dated 11 September 2019 as follows: 

- Continuity of mortgage loans and replacement of clauses with the provisions of Law 5/2019: 

Spain’s highest court says that declaring an accelerated repayment clause invalid could expose consumers to particularly damaging consequences, such as the obligation to repay the whole outstanding balance of their loan, losing the legal advantages conferred in mortgage enforcement proceedings, and the risk of enforcement of a declaratory judgment.

It therefore allows for the possibility of replacing the invalid term with a legal provision.

The Supreme court considers that the unfair provision should be replaced with art. 693.2 of the Spanish Civil Procedure Rules. However, for the assessment of whether the acceleration of a mortgage loan is justified the Spanish Supreme Court refers to the criteria established in Law 5/2019. Therefore, in practical terms, the requirements to be fulfilled are the ones set out in article 24 of this law, as a mandatory rule more beneficial for consumers.

- Judicial guidelines for mortgage enforcement proceedings in progress, in which lenders have not yet been given possession:

With regard to cases in progress, the Supreme Court has provided the following guidelines: 

  • Cases where the loan was accelerated before 15 May 2013 by applying a contractual term recognised as invalid should be dismissed.
  • Cases where the loan was accelerated after 15 May 2013, by applying a contractual term recognised as invalid: 
    •  If the debtor’s default does not meet the requirements of seriousness and proportionality in the case-law, having regard to art. 24 of Law 5/2019, these should be dismissed. 
    • o If the debtor’s default is of the seriousness described in art. 24 Law 5/2019, these may continue to be processed.
  • Dismissal of the above described proceedings will not prevent further applications for fast-track enforcement based, not on accelerated repayment under contractual provisions, but on the application of art. 24 of Law 5/2019 (as a legal mandatory provision).