Justice on the Costa del Sol
By Julio Prieto
An ECJ ruling offers hope to property owners suffering financial injustice from Spanish banks, says Julio Prieto Roman
As lockdown eases, the initial phase of travelling abroad has begun with the UK government putting ‘air bridges’ in place with destinations such as Spain, France and Greece.
For many years, Spain has been the number one location for British holiday homebuyers; and with the ability to start moving freely again, people can visit their second homes. They’re even considering whether they would want to stay there if a second lockdown occurs.
However, given the financial challenges many people are experiencing due to covid-19, it is foreseeable that UK residents with holiday homes in Spain will have to remortgage their properties. Some may even fall into arrears or enter into negative equity with their lenders in Spain.
Mortgage contracts on Spanish properties have been a headache for borrowers for some years now, due to the abusive nature of Spanish bank clauses in relation to a specific mortgage clause on residential homes known as a floor clause (Cláusula Suelo) or IRPH. This is a mortgage rate index which was applied in Spain by the Spanish Central Bank at higher interest rates than interbank benchmark rate Euribor.
Good news for consumers came in March this year in the form of a landmark decision handed down by the European Court of Justice (ECJ). The ruling will help consumers who have suffered because of Spanish banks’ abusive behaviour to gain justice.
Solicitors can also expect more favourable rulings to consumers from the Spanish Supreme Court and the ECJ on other matters related to mortgages in Spain. For example, the bank’s opening fees; whether or not stamp duty tax should be paid by the bank or the client; the legal costs in multi-currency mortgages and bank products related to mortgages such as life insurances, home insurances; and the so-called ‘revolving credit cards’ that have been tagged as usury interest cards.
The ECJ’s March ruling relates to hundreds of thousands of homes that were sold in Spain, mainly in 2007/2008, in which Spanish banks were advising IRPH to be utilised over Euribor. Unbeknown to consumers at the time, the index rate calculated using IRPH incurred substantial additional costs to the consumer. This was further exacerbated by the fact that the rates on these mortgages did not fall as much when borrowing costs were cut by the European Central Bank.
With mortgages representing more than 40 per cent of the banking sector’s total loans in Spain, Spanish banks have been abusing the economical pull of these; and UK-based individuals who have taken out mortgages on their Spanish properties (as well as hedge funds investing in mortgages in Spain) have been particularly susceptible.
As a result of IRPH, consumers face negative equity; high interest rates (either with floor clauses or IRPH); multi-currency mortgages; evictions and repossessions; and having been mis-sold insurance products with the mortgages.
Crucially, the ECJ found that EU consumer law requires such a contract to be intelligible and for its rate to be calculable by an “average consumer”. The ECJ sent the dispute back to Spain’s national courts, meaning that local judges will be deciding on a case-by-case basis whether or not the mortgages that were priced in this way are deemed fair, based on whether they were understandable and transparent.
Spanish judges will make their decisions based on the following:
1) The parties involved all agreed on the same kind of mortgage loan. This is vital because the bank cannot impose and make mandatory this kind of interest in a contract. Spanish law does not oblige banks to apply the IRPH in their mortgage loans imperatively.
2) The national courts of a member state must verify the transparency and intelligible language of contractual terms related to the main object of a contract.
3) A contractual clause setting a variable interest rate in a mortgage loan needs to be formally and grammatically understood for the average consumer, who is well-informed and reasonably observant, to be in a position to understand the specific functioning of the method used for calculating the interest rate. The consumer has to assess, based on clear and comprehensive criteria, the potential meaning and the economic consequences of such a clause and its future financial obligations.
4) In this case, irrespective of the agreement between the consumer and the bank, if a mortgage loan cannot continue after the IRPH has been declared abusive, the judge will be able to replace this IRPH with another type of interest to prevent the customer from being exposed to an unfavourable situation.
The ECJ’s decision has opened a new window of opportunity for borrowers to claim against their banks in Spain. Solicitors should be familiarising themselves with this judgment when advising clients in relation to mortgage clauses on their holiday homes.
Understanding the background to this case will help. The term ‘Bankxit’ was coined in the early 2010s and referred to Spanish banks trying to avoid EU law. But in April 2015, the judge of the Granada Commercial Court raised the issue of the limitation of retroactivity to the ECJ and the Spanish banks finally began to worry – especially when Europe then made Spanish banks put aside a significant lump sum to cover the costs of claims.
Concerned over the systemic effects on its banking system, the Spanish government had called on the ECJ to limit the implications of its ruling on past mortgage contracts. However, the ECJ refused this because if the IRPH was rejected in a contract, the Spanish courts could replace it with another index.
The ECJ’s decision to remove the limit on retroactivity is a much-needed win for the consumer and will positively affect many of the estimated 500,000 British citizens who own property in Spain. The ruling shows that the courts and Spanish banks should not expect consumers of banking and real estate products to give up their rights; and rights should not be given unjustly to banks to bail them out.
Until now, the prospect of Britons recovering the money on their overpaid Spanish property mortgages looked bleak. In 2016 the ECJ’s advocate general, pressed by the banks, gave his opinion that European homeowners were not entitled to claim their money back retroactively, reiterating a 2013 cap on claims. This resulted in years of missed opportunities for justice for many Spanish and British homeowners, but fortunately the ECJ was not biased by this unfair opinion and ruled, instead, in favour of consumers who could claim the overpaid interest charged prior to 2013.
The exact impact of this recent ECJ ruling on IRPH will depend on the number of cases brought to the Spanish courts; how many mortgages are declared invalid; what rate the IRPH will be replaced with; and whether or not that will be retroactive. The ECJ explained that it will be up to local judges to conclude whether a different interest rate should be applied in cases where the sale of IRPH-linked mortgages was considered abusive.
One must bear in mind that the court’s decision did not prohibit the use of the IRPH out of hand. It argued that when deciding whether contracts were null and void, national courts had to consider whether essential information about the calculation of the rate was easily understood and available to consumers and whether past data was provided.
While this decision has shielded banks from a worst case scenario, that could have cost them billions if they had had to repay consumers’ excess interest and an additional penalty, it has opened the way for individuals to make claims to claw their money back. Listed Spanish banks, including Bankia and CaixaBank, still hold €15.5bn of these mortgages and they will be paying out from their bottom line to successful claimants.
Spanish banks may be hoping that the global pandemic might put the brakes on consumers taking legal action against them. However, it would be a mistake for solicitors to advise their clients not to take action now because the Spanish courts are not acting particularly quickly on these matters. Some Spanish courts have collapsed due to a lack of resources and, instead, special courts have opened up to deal with these specific claims.
This is the time for those affected to begin litigation to claim their money back from the banks. Travel restrictions should not dissuade claimants from doing so because they do not need to travel to Spain in order to litigate there.
Solicitors should specifically be looking at what would reasonably be understood by the “average consumer” in relation to these IRPH-linked mortgages; and how transparent the banks were when advising consumers to purchase them. They would need to demonstrate that these were, in reality, not easily understood; and that it was in the financial interests of the Spanish banks to withhold information about these types of mortgages.
The lack of transparency and the resulting inability of the average consumer to understand what they were purchasing is key to litigating successfully against Spanish banks. The banks will naturally be hoping that as few claimants as possible come forward to litigate against them, but consumers should not be intimidated by them.
Realistically, consumers who do take the banks to court should be looking to receive a refund on the excess interest above an equivalent Euribor mortgage rate, as well as a penalty interest to 20 per cent of all IRPH contracts.
Let’s not forget many UK residents own properties in other EU member states – France, Portugal and Italy are among the most popular – and this ruling also bodes well for UK residents who own properties with mortgages in these other jurisdictions. The ECJ’s decision on retroactivity covers all European jurisdictions which means it will also apply to other countries where similar kinds of issues are faced by consumers.
This ruling – which turned previous decisions on their heads – has been welcomed by UK residents owning properties abroad; and their solicitors who have spent years looking at how they can recover the costs owed to their clients.
The decision will also shed light on similar issues relating to products sold by banks in other EU member states, who rely on the
inability of the average consumer to understand the contracts, and which are not sufficiently transparent.
For those who have taken a financial hit as a result of covid-19 and are considering entering into mortgage agreements on their Spanish holiday homes, should feel reassured that the law will back consumers’ rights and help achieve justice.
Solicitors need to understand this ruling and its wider implications. They may also want to get in touch with a Spanish abogado to understand the nuances behind the decision and leverage their local knowledge to obtain the best results for their clients.
Julio Prieto Roman is a partner at Del Canto Chambers and is a Spanish abogado delcantochambers.com