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Spanish creditors and mortgage lenders pursuing debts and borrowers abroad

Spanish creditors and mortgage lenders pursuing debts and borrowers abroad

Spanish lenders are getting better at pursuing debts across European borders. Lawyer Raymundo Larraín Nesbitt gives us a legal overview on how rulings from EU Member States can be enforced in other Member States on civil and commercial matters following either a European Enforcement Order (EEO) or Council Regulation EC No. 44/2001.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of May 2014

The EEO is the legal procedure of choice followed by Spanish creditors on amounts owed, for example, in a Community of Owners or by those borrowers who’ve fallen into arrears on servicing their monthly loan instalments. And vice-versa as it is also the chosen procedure followed by UK creditors to pursue and claim Spanish assets from ex-pat debtors.

The European Enforcement Order (EEO) and Recognition and Execution of EU Member State Rulings (EC No. 44/2001)

I am always surprised by comments made by European non-residents regarding their sense of impunity on defaulting, for example, a Spanish mortgage loan agreement. Some debtors harbour the impression that Spanish creditors either cannot pursue their home countries’ assets or else that they will lack the necessary commitment to allocate resources and time to the task. Whilst this may be true in some cases (small amounts owed) the truth is that this is a serious error of judgement which may come back to haunt them for the remainder of their life. This blunder may stem from their lack of knowledge on how European legislation and its implementation work out in practice.

After the rampant property folly of the past decade, fueled by ultra-low interest rates and easy credit, it comes as no surprise that thousands of borrowers are struggling to make ends meet in Spain or even find themselves trapped in negative equity with Spanish real estate. This situation has been aggravated compounded by the strengthening of the Euro against other currencies (Sterling Pound), high levels of unemployment, 2008’s financial meltdown, post-credit-crunch (liquidity shortage; the lowest on record on a fifty-year period), falling property prices across the board and finally amid sovereign-debt concerns.

Scores of non-residents have been unwittingly caught by the above negative scenario in Spain and have decided to flee the country so as not to face their financial commitments. As a result they may now find their home assets jeopardised (even their main abode) under the threat of Spanish creditors actively pursuing debts abroad using European legislation.

Having in mind specifically British and Irish nationals, I’ve written this short article to explain just how a legal matter arising in Spain may affect you and your family’s assets back home. Examples of such are:

• Defaulting on mortgage loan instalments on a second home in Spain.
• Falling in arrears with your Community of Owners.
• Outstanding amounts owed to developers on buying off-plan property (forced completion).
• Unpaid personal loans.
• Pursuing negative equity abroad: post-auction shortfall on Spanish bank repossessed property.

I must add that recent Spanish lower court rulings (not legally binding) are increasingly reluctant to the idea of pursuing borrowers for negative equity following a social outcry on grounds of the unfairness of an alleged rigged procedural system biased towards lenders. Should this trend catch on by higher courts and become consolidated it may eventually put an end to pursuing negative equity abroad. In the interim UK courts may take into account these low court Spanish rulings on deciding whether or not to refuse an EEO in such cases.

European Legislation

It soon became apparent in a close-knit Europe that legal cooperation is essential to facilitate free-trade commerce. Member States cannot afford in today’s world to shut themselves out going independent (much less stand alone and disjointed before the fledgling shadow of looming expansionist threats from territory-hungry countries led by power-lusted leaders fixated on a bygone era).

Having this in mind European legislators have wisely devised two legal mechanisms to streamline and implement swift legal procedures within Europe given all the cross-border legal issues that arose each year. These set of laws cover only well-defined civil and commercial matters.

i. The first one is Council Regulation (EC) Nº 44/2001, of 22nd of December 2000. Broadly speaking, this is used for court rulings which are deemed final and cannot be appealed. This procedure requires intermediate proceedings known as “exequatur” to be enforced which makes it more cumbersome and time-consuming than the one outlined below. It is hands down the more convoluted of the two which largely explains why lenders and creditors in general are more prone to use the below-listed EEO instead. In any case it has been superseded by Regulation (EC) 1215/2012 which shall apply to all legal proceedings instituted after the 10th of January 2015 and, amongst other key novelties, its main highlight features the abolition of the exequatur procedure.

ii. The second mechanism is the European Enforcement Order (EEO) Council Regulation (EC) 805/2004, of 21 April 2004. The EEO was devised some years later as a streamlined version of EC No. 44/2001 for uncontested claims and where a claim for the payment of a specific sum of money had fallen due. This procedure does not require an “exequatur”. It has proved wildly popular with Spanish lenders pursuing mortgage-related claims abroad for the reasons I explain further below in detail.

The above two legal mechanisms are binding laws for all Member States (except Denmark) including the United Kingdom (England & Wales, Scotland) and the Republic of Ireland.

Pursuing a Spanish Debt in the United Kingdom or in the Republic of Ireland

I. Council Regulation (EC) Nº 44/2001, of 22nd of December 2000

It boldly tackles the issue of recognising fellow EU member’s court rulings and enforce them in other EU Member States. The purpose of this regulation is to have these binding rulings directly applicable within the EU without any special procedure being required. By virtue of a principle of trust these rulings would be automatically and ‘immediately’ enforceable in another Member State without the law court being given the chance to review or challenge the foreign ruling being executed. In practice it takes several months, under a year, hinging upon the complexity of each case.

So basically there is almost no possibility for a UK or Irish High Court of Justice (Court of Session would be Scotland’s equivalent) to raise its own motion on grounds for non-enforcement or review of the matter at hand. Exceptions would be following Article 34 if the foreign ruling goes against the Public Order of the Member State being requested to recognise and execute the fellow EU Member State ruling or if the defendant has not been notified correctly of the legal proceedings being held against him.

Where to Sue?

As a general rule the criteria to sue someone, in accordance with Article 2 of this law, would be their domicile. So for example if you are domiciled in England, you ought to be sued in England & Wales, not in Spain.

However, for particular matters this general rule is waived i.e. repossessions

Case Study on Spanish Mortgages and Bank Repossessions

A mortgage against Spanish real estate is in legal terms a “Derecho Real” or right in rem. Following the above Council regulation, in Article 22 it stipulates that:

“The following courts shall have exclusive jurisdiction, regardless of domicile:

1. In proceedings which have as their object rights in rem in immovable property or tenancies of immovable property, the courts of the Member State in which the property is situated”

Following the above, a Spanish bank would sue you in Spain on defaulting a mortgage loan as the underlying property (immovable asset) is located in Spain.

On slipping into arrears on your Spanish mortgage, lenders may start to take legal action against you after three months (Law 1/2013). A lender will wait until you are technically labelled as “moroso” (defaulter) which takes place after 90 days of non-payment. For more details on a repossession procedure please follow my link on Bank Repossessions in Spain.

All those who sign a Spanish Mortgage deed, whether as borrowers or acting as guarantors (“avalistas”), may be held personally and unlimitedly liable for the mortgage loan with all their assets, both now and in the future, in compliance with Article 1911 of the Spanish Civil Code and specifically with Article 105 of the Spanish Mortgage Act.

Almost all Spanish Mortgage deeds establish that for legal notification purposes the borrower will be notified at the Spanish address on which the mortgage has been placed against, as it’s logical. This means that if you live for example in Ireland and your bank knows your Irish address and even spams you regularly with letters offering you additional non-requested financial services on repossessing you they would only notify you by recorded delivery at the mortgaged Spanish address. The fact that you receive no notification in Ireland or in the UK from the Spanish lender on initiating repossession proceedings, despite them knowing your home country’s address, does not invalidate the repossession procedure in any way. It will suffice prove of the lender having sent you by registered post notification of the start of legal proceedings against you.

Following my article on repossessions a lender would sue you in Spain. There is honestly little that can be done on falling into arrears other than paying all the owed amounts lump sum. These amounts may be considerable, as after 3 months of arrears the lender may tag on the bank’s lawyers fees (ranging between €10,000 – €15,000), court agent’s fees (several thousand), default compounded interest (ranging typically between 15-25% pa) as well as the arrears themselves.

You can at anytime stall a repossession procedure before there’s a ruling so long as you lodge the full requested amount lump sum before the court ruling hearing your case. Make sure you pay the correct amounts requesting from your lender a full breakdown of what’s owed calculated on a given date. Assistance by a Spanish lawyer is highly advisable.

Once a lender has attained a ruling against the borrower, which spans on average 1-3 years given how clogged law courts are in Spain, there are two possible outcomes:

a) If a lender adjudicates itself the property post-auction and there is an excess of equity the matter is settled and no-one will pursue you abroad.
b) The second option, likely the most common for technical procedural reasons explained in detail in my article on Spanish bank repossessions, is that post-auction there’s a shortfall on the amounts owed to a lender. Hinging solely on a lender’s decision (which will have a direct correlation on the amount owed by a borrower and any assets he owns within Europe) they may decide to pursue him for the shortfall in his home country.

Pursuing a debtor back at home

This is when Council Regulation 44/2001 comes into play. To follow this legal procedure, a Spanish ruling must be final, meaning it cannot be appealed to a higher court in Spain. As outlined above, there are very few reasons to appeal a repossession procedure as the matter is normally straightforward – the borrower has breached his fundamental obligation of servicing his mortgage repayments on time.

The lender will hire a local law firm to have the Spanish ruling recognised and executed in the borrower’s European home country. Some lenders may however decide to sell on their credit rights to a third party, such as a debt-collecting agency, who will from then onwards carry out a relentless chase up.

Some lenders are sending out nasty letters prior to obtaining a firm ruling in Spain. They are doing this to scare you into paying what’s owed hoping to avoid a protracted repossession procedure in Spain; it’s a bluff really as they cannot seize your home country’s assets until they have a ruling in Spain which is final (which takes on average 1-3 years).

Embargo and Execution

An embargo can only be placed on the portion of the house owned by the borrower. So if the property is owned jointly along with someone else and he/she did not sign the Spanish Mortgage deed, the charge only affects the borrower’s share. A sale of the house can be forced judicially if necessary (Oder for Sale). Bailiffs will embargo your worldly possessions to satisfy the debt.

If there is a first charge against the property, from a UK bank for example, the Spanish creditor’s charge will rank second place in priority.

Wages can also be embargoed leaving aside only the legal minimum stipulated by your home country laws. They will be paid directly to your creditor (Attachment of Earnings Order, AEO).

Bank deposits can also be frozen to satisfy the debt.

II. European Enforcement Order (EEO). Council Regulation (EC) 805/2004, of 21 April 2004

This Regulation offers significant advantages to creditors when compared with the exequatur procedure provided for in EC No. 44/2001 outlined above. Spanish lenders in particular are adept at employing EEOs as it has proved itself to be the swifter mechanism of the two as it does not require a ruling to be final (as opposed to EC No. 44/2001 which does and therefore takes longer to attain) nor is an exequatur required. In a nutshell the EEO greatly accelerates and simplifies access to enforcement in a Member State in which enforcement is sought by abolishing the exequatur (intermediate proceedings) thus saving time and expense.

EEOs are devised for uncontested claims where payment of a specific sum of money has fallen due. It proves ideal to chase secured debts such as those arising from mortgage-related debts.

Concept of Uncontested Claim

Pursuant to Article 3 a claim shall be regarded as “uncontested” if:

• the debtor has expressly agreed to it by admission or by means of a settlement which has been approved by a court or concluded before a court in the course of proceedings; or
• the debtor has never objected to it in the course of the court proceedings; or
• the debtor has not appeared or been represented at a court hearing regarding that claim after having initially objected to the claim in the course of the court proceedings; or
• the debtor has expressly agreed to it in an authentic instrument (i.e. a Mortgage deed witnessed by a Notary public).

Contesting a EEO

The competent court in the enforcing Member State may, subject to certain conditions, refuse to enforce a judgment if it is irreconcilable with an earlier judgment given in any Member State or in a third country. In certain cases, it can also stay or limit enforcement.

This is why I specifically mentioned earlier on that it’s important to keep tabs on the budding trend followed by Spanish law courts to dismiss chasing mortgage defaulters on grounds of negative equity borne by post-auction properties.

Pursuing a debtor in Spain

Likewise Spanish law firms are hired regularly by fellow European law firms and creditors to pursue assets located in Spain belonging to debtors using EEOs or else Council Regulation 44/2001. It works both ways as it’s a two-way street i.e. British creditors can enforce a EEO in Spain.

Conclusion: pursuing debts abroad is feasible albeit remains a matter of practicality

The urban legend that Spanish creditors cannot pursue, within the scope of the EU, debts abroad must be unreservedly quashed. Spanish creditors can and will pursue outstanding debts in the United Kingdom or in the Republic of Ireland. Another matter is if it is worth their while depending on the amounts owed. Bottom line is that it hinges really on a matter of practicality. In some cases it will be worth it and in others it won’t. On the former I strongly suggest hiring a lawyer to defend your interests.

It may take its time for a Spanish creditor albeit if they are resolute, and you own assets abroad, they’ll have their way eventually. And vive-versa, any British or Irish creditor can and will benefit from instigating European legislation to pursue and secure assets held in Spain by a debtor.

We know the costs of Europe. What are the benefits?” – Nigel Farage.

British politician and leader of the UK Independence Party (UKIP)

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Raymundo Larraín Nesbitt is a property-specialist lawyer based in the UK qualified to practise in Spain

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarising, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

2014 © Raymundo Larraín Nesbitt. All rights reserved.

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