A dación en pago procedure means handing the keys back to a lender. It involves signing a deed before a Notary public whereby a struggling borrower relinquishes ownership in exchange for being fully discharged of his mortgage liability.
Lawyer – Abogado
8th of December 2013
For all those who’ve slipped into mortgage arrears in Spain, or are likely to, and are thinking of handing back the keys as a solution, there’s a formal legal procedure to do it known as dación en pago (‘datio pro soluto’). It is one of the proposed solutions I highlight in next month’s article on Bank Repossessions in Spain. Article 140 of Spain’s Mortgage Act allows a borrower to cancel a lenders’ debt by handing in exchange the encumbered asset.
Dación en Pago: Definition
In plain English, a ‘dación en pago’ (or dation in payment) means handing the keys back to a lender, and in exchange the lender will discharge in full the mortgage liability not holding a borrower liable in the future. They will renounce pursuing the debt in your home country or elsewhere against any other assets you may hold. This solution of last resort puts an end to many borrowers’ growing nightmare as the mortgage debt mounts up exponentially over time eventually becoming unbearable.
Why hand back the keys?
The reason why struggling borrowers follow a dación is because on being repossessed in Spain if the property slips into negative equity (meaning you owe more money than what the property is currently worth post-auction) a lender can actually pursue the borrower for the difference (art. 579 LEC). As I analyse in detail on next month’s article on Bank Repossessions in Spain it is extremely easy to slip into negative equity territory post-repossession. Hence why the last thing a Spanish family does is stop servicing their mortgage.
A dación is particularly interesting for those holding property, whether in Spain or abroad. What a mortgage borrower seeks on following a dación is to set a legal firewall that will avoid a lender jeopardising the remainder of his assets. It is basically safeguarding the family’s financial interests by (legally) drawing a line on the sand. If you hold no assets then you may wish to skip this article altogether.
Following article 1911 of the Spanish Civil Code a mortgage loan borrower’s liability is personal and unlimited with all their assets, both now and in the future. In other words, the debt goes personally against the borrower on the balance owed to a Spanish lender. The property itself, the collateral, is accessory and was only guaranteeing the bank loan, which is the principal.
Many defaulting borrowers realize with shock post-auction, that in despite of a lender having repossessed their Spanish property, they are still being chased in their home country or elsewhere for the outstanding debt. As they owe, in addition to the mortgage loan shortfall, the repossession associated expenses, lawyer’s fees, procurador’s fees and on top the mortgage default compound interest. The compound default interest on average is over 20% p.a. which only adds more pain on the long run as the overall debt builds exponentially over time.
That is why many defaulting borrowers in lieu of being repossessed, and face all the above legal and financial dire consequences, would rather sell the non-performing mortgage loan as a distressed asset or else follow a dación procedure if they are unable to find a buyer in time to avoid repossession.
1. No negative equity rule: the property should not be in negative equity (in fact, I advise it should have at least over 20% equity)
2. No repossession procedure underway: it is critical a lender has not started repossession proceedings against the property
The outline of how it works would be as follows:
1. A borrower must be on time with the repayments as well as with the Community fees and local taxes. The latter can actually be negotiated with the lender.
2. The borrower contacts his lender and proposes it to them.
3. The lender will typically require the property to be reappraised. You will be expected by your lender to pay this in advance. On average it amounts to 350€.
4. If on average the new valuation of a property covers the outstanding mortgage loan plus 12% of the associated legal expenses the lender will accept to take the possession of the apartment, cancelling your debt and will waive taking legal action both in Spain and abroad in your home country. As a rule-of-thumb I would personally advise the buffer of equity to amount to at least 20% of the property value for it to be successfully accepted. The higher the positive equity buffer, the more likely a lender is to accommodate to the idea of a dación.
5. The day of signing the deed at a Notary, the borrower will surrender the keys, and leave the property clear of furniture and tenants.
6. The property will now be lodged under the lender’s name.
A dación en pago works basically the same as a conveyance procedure only that instead of getting paid in exchange of signing away your property you are fully discharged of the mortgage liability being allowed to simply ‘walk away’ from the problem (without legal repercussions).
- 7 to 10% Transfer tax depending on the autonomous region of Spain where the property is located
- Plusvalía tax (Municipal Added Value tax)
- Notary fees
- Land Registry fees
- Gestoría fees (may not apply)
All these expenses should ideally be negotiated to be paid for by the lender. A lender, on becoming the new owner, will contribute towards the Community fees just like any other commonholder in a Community of Owners. That is the reason why there must be sufficient equity in the property to offset, not only the associated completion expenses and taxes, but also the community ongoing maintenance costs and property taxes until a lender manages to sells on the property. Banks are not real estate agencies and do not cherish having large stocks of unsold properties on their books; that is not their core business.
Signing the Notary Deed
You can either sign a dation yourself or else appoint a lawyer to sign on your behalf. It is not compulsory to hire a lawyer for a dación en pago in Spain. What is compulsory is that you appoint a translator to act on your behalf should your command of Spanish not be high enough.
However, I just cannot stress enough how important it is to appoint a lawyer. He will act as a translator and also verify that indeed your debt with the lender is being fully discharged on you signing this deed relinquishing ownership. Besides, your lawyer will be able to negotiate with the lender on your behalf, as some lenders will try to make borrowers pay for some (or all) the associated expenses.
I have witnessed cases in which borrowers, acting without a lawyer, were misled into signing before a Notary what they thought was a dación but was in fact only an assignment of assets and rights without fully discharging the mortgage liability which remained very much outstanding.
The Notary is not there to give you legal advice as they act impartially to either party.
If a Bank refuses it – Can I Challenge it?
Yes you can, but being practical I wouldn’t recommend it. Only if a lender had turned down the proposal unfairly when clearly there was more than enough equity to offset it against all the expenses would I consider it a viable option. What’s important to note is that a dación is not a borrower’s right. What many fail to understand is that on accepting a dación this entails ongoing maintenance costs and expenses for a lender. So it only makes financial sense for a bank to accept it if a property is significantly into positive equity territory so as to offset the expenses of running the property until the time a buyer is found.
It is pointless to challenge their refusal if it’s apparent you are in negative equity or close to it. It will be expensive, time-consuming and fruitless. Besides, lenders in general have shut the door on daciones en pago. The property must be significantly in positive equity territory for them to accept it.
In some borderline cases in which a lender may be reluctant to accept the dation en paiement because there’s a small shortfall of a few thousand Euros I advise a borrower to shoulder the difference so the dation is accepted. The alternative is a full-blown repossession procedure with all the legal and financial consequences this entails (unlimited personal liability).
Bad credit stands at a staggering 13% for Spanish banks. This helps to explain why lenders have been understandably reluctant to accept them over the last years (because of widespread negative equity due to bloated property appraisals; ironically commanded by lenders themselves for the purpose of securing a mortgage loan).
The Government realizing this was the case tried to pass a piecemeal law that ‘forced’ lenders to accept a borrower handing back the keys in restricted cases. So much so in fact that less than five hundred families have qualified to take advantage of it since the law was passed in March 2012. The Government is now working to lower the yardstick to allow yet more families to qualify and benefit from a dación en pago. For the time being this measure can be safely labelled as ineffective due to its negligible overall impact. You can read further in my updated article The Dación en Pago: Finally a Borrower’s Right.
Dación en Pago – Conclusion
A dación en pago is a win-win for both parties really.
A borrower is free at last having managed to successfully secure his assets, whether in Spain or abroad, from the lender or any law firm or debt collection agency hired to pursue the outstanding debt.
A lender on the other hand will now own the property outright and will have successfully waived a lengthy, protracted and expensive court procedure (bank repossession) without having to set aside the mandatory provisions before the Bank of Spain to make up for this dubious loan which affects its liquidity ratio. A repossession procedure lasts 2 years minimum and may easily entail for the bank expenses running up to 20% of the properties’ value. These provisions set aside by lenders are being looked upon closely by credit-rating agencies post credit-crunch as they hinder their borrowing ability and ultimately dent their share value.
Lifetime Loans or Reverse Mortgages in Spain Explained – 21st February 2011
Advice to Struggling Mortgage Borrowers in Spain – 8th March 2011
Spanish Mortgage Loans: Beware of Abusive Clauses – 8th January 2012
Spanish Mortgage Loans: An Overview – 21st February 2012
Mortgage Collar Clauses Revisited (‘Cláusulas Suelo’) – 8th December 2013
Bank Repossessions in Spain – 21st February 2014
Bad Debtor’s List (‘Fichero de Morosos’) – 8th April 2014
Spanish Creditors Pursuing Debts Abroad – 8th May 2014
Dación en Pago Explained or How to Hand Back the Keys – 8th December 2014
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