Early Cancellation Stipulation
The European Union Court of Justice’s General Attorney recommends to delcare them null and void in full. The consequence is that this stipulation do not exist. But the rest of the contract remains in force.
You can read the article in Spanish here. Usually, the Court follows the recommendation of the General Attorney. This is very good news for consumers.
Why this is very good news for consumers?
In short, it is likely that most mortgage contracts in Spain include a clause regarding the early cancellation of the mortgage. The standard stipulation said that the non-payment of just one whole monthly mortgage repayment, or even just some of the capital or interest, would mean that the bank is able to cancel the contract before the agreed final term. Ant then the bank can ask for all the capital, the overdue interest, penalty interest, legal fees, etc.
What is more, in the case the debtor was not able to fulfil this payment, the bank could start a court procedure to repossess the property. And this is a very straightforward procedure for the bank because it is just an enforcement procedure as a mortgage deed is like a judge ruling. And a judge ruling is directly enforceable. The banks often took advantage of this special and fast procedure to repossess the property and reclaim the money from the unpaid loan. It was common for banks to use the early-cancellation clause to engage these procedures. So when a debtor defaults on one month repayment, or even two or three or ten the bank cancels the contract on the grounds of this clause. The bank then asks for the full amount of money owed along with interest and legal fees.
So, just imagine that that early-cancellation clause was no longer valid, and the banks could not use it. This would mean that every single repossession procedure that had applied this clause (almost all of them) would be based on one that is null and void and cannot be used at all since it is abusive. And, there is no doubt that it is an abusive clause as it is in no way proportional. For instance, let’s say the bank lent a customer €100,000.00.
This clause says that the bank could engage this clause if the mortgage holder defaults on just one monthly repayment or even just part of it. This is what the clause actually says, and this is basically why it is abusive. The general rules are for contracts’ cancellation requires that one of the parties breaches the contract in a way that frustrates the expectations of the other party. That is, the breach must be relevant. And defaulting on the payment of one, two, three or even several months is not really relevant when taking into account how many months it takes to buy a house.
And what will happen now with all the pending repossession procedures?
The majority of courts put all the procedures that had engaged this clause on hold (almost all of them) whilst waiting for the final decision of the EUCJ. But if the outcome is as recommended by the General Attorney many repossessions procedures could be ruled null and void. The banks then will have to start the procedures all over again if the repayments defasult is not relevant enough. Each court will assess this relevance on a case to case basis.
Actually, the new regulations to come will set fixed default percentages to avoid this insecurity from then on.
What about the completed repossession procedures that resulted in the owners being evicted?
This is a very good question. My opinion is that those who have already been evicted due to a repossession procedure that was based on the early-cancellation clause will be able to ask the State for compensation as the European Law regarding this clause had been wrongly applied. And the question now is, how can you compensate a family that has been evicted from their home because of this? How much would a just compensation be? How much is the suffering of that family or person worth? What about in those cases where the debtors committed suicide because of all the stress? How much is this worth?
I have no idea. The only rule will be to consider all the circumstances in each specific situation. What I can say is that if the EUCJ finally declares the early-cancellation clause null and void in full, the banking Spanish system will be flooded with a new wave of lawsuits, which looks like it could be really tough going.
Thank you for your time and attention and I hope this information is of use. You are very welcome to share if you liked it.
Please, note that this is general information. This is not specific legal advice. It is advisable to seek legal advice for any specific legal issue.