MORTGAGES: THE WELL-KNOWN ECJ RULING ON THURSDAY 14TH OF MARCH

About a month ago, the European Court of Justice (ECJ) ruling caused a great stir among Spanish media. This court judgment has been originated from a preliminary ruling handed down by the Mercantil Court nº 3 of Barcelona, as a result of the mortgage foreclosure procedure between an individual and La Caixa Bank. This preliminary ruling intends to clarify if Spanish legislation complies with the consumer protection requirements regulated by the European Directive 93/13/ECC. This Directive was approved to ensure consumers’ protection against their disadvantageous position with respect to a professional when contracting certain services.

In short, here below are the facts intended to be disclosed before the ECJ:

First: In regard of Spanish civil procedure in the matter of mortgage foreclosures, it was intended to be disclosed if Spanish regulations fail to comply with the aforementioned European Directive protecting consumers, because in Spain the “judgment debtor” cannot claim the existence of unfair terms set forth in this contract. In Spain, if judgment debtors want to claim the existence of unfair terms in this type of contracts, they should initiate different court proceedings which may not paralyse the mortgage foreclosure proceedings; for example, a situation may arise where a property is auctioned due to the unpaid mortgage and the judgment debtor may also obtain a favourable court decision declaring that the contract of that mortgage is null and void once that the property has been auctioned. This may arise because the mortgage foreclosure cannot be paralysed despite the contract may be considered to be null and void.

Second: regarding the substance of the matter, the concept of “unfair term” of the Directive is intended to be clarified in order to assess if the terms of the mortgage contract—subject matter of the main action and undersigned between an individual and a bank, are of unfair nature; these terms are the following: early termination of long-term contracts, fixing of default interests and the liquidity agreement. These are “cut and paste” terms (similar terms) appearing in any mortgage contract which anybody may have executed with a bank.

Regarding the first issue, the ECJ is clear and unambiguous declaring that the Spanish procedural regime reduces the effectiveness of the protection pursued by the Directive, because:

a) Possible unfair terms of the main contract cannot be challenged in the same mortgage foreclosure proceedings which may finish with the property put up for auction.

b)  Mortgage foreclosure proceedings cannot be paralysed by the courts, although they know that the judgment debtor has filed court actions challenging possible unfair terms.

It is worth mentioning that by virtue of a repeated European case-law, the national court is obliged to consider of its own motion the unfairness of all contractual terms under this Directive.

Regarding the second issue, the ECJ answer is not very revealing, or at least automatically, in order to know whether a term is unfair or not, as the ECJ considers that the national court is the only competent body to interpret and apply the national Law. However, the court ruling states that to decide if a term causes an imbalance to the detriment of the consumer in relation to bank—national regulations must be taken into account if that agreement is not signed between the parties, the court shall assess if this term leaves the consumer in a less favourable situation than this provided by the national Law in force in case this term exists. For example, if the term fixing the default interest in the mortgage contract (normally around 20%) is an exception and there is no other similar legal interest in national Law (i.e. default interest applicable to commercial transactions is at 7.75%), then this term may be considered to be unfair; an open-and-shut case, judge for yourself.

Finally and regarding ongoing and future mortgage foreclosures in Spain, it is worth mentioning that two rulings have been already issued in the last three weeks declaring mortgage contracts to be null and void, because default interests were unfair.

Author: Gustavo Calero Monereo, C&D Solicitors (lawyers)
Torrox-Costa (Malaga/Costa del Sol/Andalucia)