On 11 September, the Spanish Supreme Court, in a plenary meeting, has issued ruling number 463/2019, stating its criteria on the effects of nullity of early termination clauses included in consumer mortgage loan agreements. In this decision the Supreme Court has followed the most recent case-law of the European Court of Justice (ECJ) on the matter (i.e. decision dated 26 March 2019 regarding cases C-70/17 and C-179/17 and decisions regarding cases C-92/16, C167/16 and C-486/16). The Spanish Supreme Court ruling was eagerly awaited as there are currently thousands of suspended or dismissed mortgage enforcement processes in Spain as a result of the absence of interpretative criteria from the Supreme Court on the practical application of the ECJ rulings by the Spanish national courts.
According to the aforementioned decisions, the ECJ determined that (i) a national court cannot revise or integrate an unfair early termination clause in order to make it valid and, hence, the clause should be disapplied; but (ii) (and only) in cases where the elimination of the unfair clause, would also entail the annulment of the contract in its entirety because the contract cannot subsist without the unfair clause and the annulment of the entire contract would entail adverse consequences for the consumer, the ECJ understands that the national court may replace the abusive clause with a supplementary provision available under national law (under Spanish law, these provisions would be article 693.2 of Civil Procedural law or article 24 of the Real Estate Credit Act (RECA).
Spanish Supreme Court case-law
Applying the aforementioned ECJ rulings to the case at hand the Supreme Court has stated that:
1. In order to determine if a mortgage loan agreement can subsist without an early termination clause found to be an unfair clause (and therefore annulled) it is necessary to carry out an objective analysis that takes into account the interest of both parties, borrower and lender, and not only the consumer’s interest. A mortgage loan agreement is a complex agreement as a result of the security granted, the real estate mortgage, that is accessory to it. In such agreement the borrower obtains financing at a lower price in exchange for the granting of a highly effective security (a real estate mortgage), which the lenders rely on in the event of a default.
Therefore, the Supreme Court considers that a real estate mortgage loan agreement cannot subsist if the enforcement of the mortgage granted as security of the loan becomes impossible or extremely difficult as a result of the elimination of the acceleration clause, as the lender would have never granted the loan if the mortgage security would not be enforceable. As a consequence, mortgage loan agreements cannot survive without an early termination clause where the latter has been declared null, as the suppression of the acceleration clause affects the mortgage security and therefore the economy of the agreement and its subsistence.
2. The foregoing reasoning would result in the annulment of the entire loan itself, which would trigger the obligation of the borrower to reimburse the entirety of the loan with immediate effect. This implies very unfavourable consequences for the borrower as it would have the obligation to immediately repay in full the amounts owed under the agreement and lose all the enforcement protections foreseen for consumers under the mortgage special foreclosure procedural rules set out in the Spanish Civil Procedural Law.
3. Consequently, following ECJ case-law, it is possible that national courts replace the early termination clause declared unfair with an existing alternative national legal provision. Under Spanish law, in the view of the Supreme Court, such provision is article 693.2 of Civil Procedural Law as amended by law 1/2013, which set out the requirement of a minimum of three unpaid instalments in order to accelerate a real mortgage loan (Law 1/2013). However, that provision has to be construed in the light of article 24 of the RECA in order to determine if the early termination by the lender is justified according to the seriousness of the borrower’s default. The Supreme Court understands that the seriousness of the breach of payment must be evaluated on the grounds of the total amount of the loan and the number of instalments pending from reimbursement, as well as the ability of the debtor to cure the breach, in order to evaluate the right of the lender to accelerate. The Supreme Court therefore confirms that the applicable evaluation criteria is the criteria currently set out by article 24 of RECA.
The Supreme Court understands that it is possible to take as reference RECA provisions (even considering that this law has entered into force afterwards) since it is an imperative legal provision which provides more protection to consumers.
Article 24 of RECA allows the lender to accelerate consumer mortgage loan agreements (i) after a payment default equal to 3% of the total loan amount or 12 monthly instalments if the default occurs in the first half of the term of the loan or (ii) after a payment default equal to 7% of the total loan amount or 15 monthly instalments if the default occurs in the second half of the term of the loan.
4. Finally, the Supreme Court reminds that including early termination clauses in mortgage loan agreements is not per se unfair, but it is necessary to carry out all applicable transparency controls since the potential unfair nature of these clauses derives from the particulars of each provision.
Legal consequences for on going mortgage foreclosure procedures
The Supreme Court, on the basis of the foregoing reasoning, provides the following express guidance rules in respect of on-going mortgage foreclosure proceedings, provided that the relevant real estate property has not been yet delivered to the acquirer after the foreclosure:
- Proceedings in which the mortgage loan was accelerated on the basis of an unfair acceleration clause declared null before Law 1/2013 entered into force: they must be dismissed.
- Proceedings in which the mortgage loan was accelerated on the basis of an unfair acceleration clause declared null, after Law 1/2013 was in force and the default of the borrower was not compliant with the required seriousness and proportionality criteria (which as per the foregoing reasoning should be evaluated in the light of the provisions set out under article 24 of RECA): they must be dismissed.
- Proceedings in which the mortgage loan was accelerated on the basis of an unfair clause declared null, after Law 1/2013 was in force and the default of the borrower was compliant with the seriousness and proportionality criteria foreseen under article 24 of RECA: the proceedings can continue.
It is important to note that the Supreme Court has been careful in expressly stating that in those cases where the enforcement proceeding is to be dismissed in accordance with the foregoing criteria, it will be possible for the lender to file a new foreclosure action, always provided that the default of the borrower on which the new foreclosure action is based is now compliant with the terms and conditions foreseen in article 24 of RECA. In these cases, the principle of res judicata will not be applicable since it will be a new foreclosure action based on the application of the law (in particular article 24 of RECA). It must be noted that article 24 RECA is applicable to mortgage loan agreements which had not been accelerated before the RECA came into force last 16 of June.
The approach of the Supreme Court in this landmark decision can be considered positive, even more if we take into account the previous rulings of the ECJ on this matter, in particular as it provides a set of very specific practical guidance rules to be applied by the lower courts on on-going mortgage foreclosure proceedings, which fill the gap deliberately left open by the legislator in RECA, as RECA does not apply to accelerated loans at the time it entered into force. We expect that many lenders, in an attempt to accelerate recovery, withdraw on-going enforcement proceedings that started on the basis of unfair early termination clauses declared null or those brought as a consequence of a default that was not compliant with the criteria of article 24 of RECA. In those cases, once the initial process is closed, it will be possible to file a new foreclosure action once the relevant default becomes compliant with the acceleration requirements set out by article 24 of RECA.