Ruling on early termination clauses in mortgage agreements – Roca Junyent
By means of its ruling on March 14, 2013, the Court of Justice of the European Union (CJEU) had the opportunity to rule on the shortcomings of the Spanish justice system as it relates to the interpretation of Council Directive 93/13/EEC and establish the guidelines that the national court should follow to determine the unfairness of clauses in mortgage loan contracts concluded with consumers.
Among the clauses analysed were early termination clauses in long-term contracts for debtor defaults within a limited period. The CJEU advocated their validity if the following conditions were met: (i) the obligation breached is an essential obligation; (ii) the breach was serious in relation to the amount and term of the loan contract and; (iii) the consumer had a real chance of avoiding the effects of the breach.
The essential character of the failure to pay loan payments had already been ruled on by the Supreme Court in its ruling on December 16, 2009. However, in order for that clause to be valid in the eyes of the CJEU, it was necessary to reform the Spanish foreclosure procedure which had no mechanism for the consumer to avoid the effects of termination and did not provide for a minimum number of missed payments before the creditor could initiate foreclosure proceedings.
Thus, with the publication of Law 1/2013 dated May 14 concerning measures to strengthen the protection of mortgage debtors, the restructuring of debt and low-income leasing (Law 1/2013), Article 693 of the Spanish Law of Civil Procedure (LEC) was amended, allowing the debtor to release his property in cases of foreclosure on his primary residence and imposing a minimum number of missed payments which should appear in the mortgage deed for the creditor to be able to claim the debt in foreclosure proceedings.
Now, the problem consisted in marrying the early termination clauses due to a failure to pay one or more payments with European legislation, which required a serious breach in relation to the amount and term of the loan so as not to declare it unfair. Thus, the Court admitted their validity as long as the creditor would have exercised this right after a failure to pay at least three payments under the terms established by Article 693 of the LEC since it was deemed that the mortgage deeds that contained those provisions were in compliance with the law in force and, therefore, there was no denying their admission.
However, it was once again a preliminary ruling that prompted the CJEU to rule on the validity of the above reasoning and, by means of its Ruling dated June 11, 2015, it concluded that the fact that the early termination clause would not have been applied did not prevent the Court from determining its unfairness. Differing views emerged regarding this position and some of our national courts declared that the early termination clause being invoked upon one failure to make a payment was abusive, because its wording was abusive, regardless of the use the person invoking it would have made. However, other positions emerged such as that adopted by the Plenary session of the Provincial Court of Palma de Mallorca in its ruling no. 175/2015 dated November 24, 2015 of the Plenary session that, having analysed the clause “in abstract”, did not find it to be abusive.
However, undoubtedly the most significant interpretation of the Ruling dated June 11, 2015 was the one given by the Supreme Court in its recent Ruling no. 705/2015, dated December 23, 2015 by which it established that the unfairness comes from the terms under which early termination is allowed, not merely the fact that it is envisaged, which is not unlawful per se.
Thus, the Supreme Court established that if voiding the clause leads to voiding the entire contract which penalises the consumer, the voided clause should be able to be replaced by a legal provision. This will undoubtedly happen if access to foreclosure proceedings to enforce the loan is prohibited since the consumer has a number of guarantees aimed at the borrower which are lacking in the declaratory procedure that the creditor would be obligated to turn to if declared void. Thus, in the Supreme Court’s view, the Courts must declare the validity of the termination as long as the enforcing party meets the minimum conditions stipulated in Article 693.2 of the LEC and, also provided that the exercising of said power complies with the parameters established by the CJEU in its Ruling dated March 14, 2013.
Ana Colorado is a senior associate at Roca Junyent. She can be contacted at email@example.com