Foreclosure of the mortgage for overdue and unpaid principal
It is a jurisprudential criterion already established in our courts that, when a clause of early maturity of a loan secured by mortgage does not conditions such early maturity to the non-payment of a number of installments stipulated and reasonable in relation to the total amount of the loan, but allows the lender to terminate the legal relationship and claim the total amount of the loan without being subject to temporal or quantitative proportionate criteria, the aforementioned clause must be deemed null and void. There is also a general consideration that nullity is not affected by the lender’s application of the clause, so that nullity must be declared, including ex officio, even if the demand for execution for the full amount of the loan, based on the early maturity clause, has been filed when the borrower’s default was already significant, both in terms of the number of unpaid installments and of the amount that these installments were. In other words, if the early termination clause is void because it is unfair, its voidness contaminates any exercise made of it, even if the exercise is proportionate and reasonable, as the clause should have been.
However, the case-law is no longer as uniform as regards the consequences of the nullity declaration for unfairness of the early termination clause, but it oscillates between two clearly differing positions.
The first of these considers that, in any case, the early maturity clause declared null and void «constitutes the basis of the execution», in terms of article 695.1 4th of the Spanish Civil Procedure Code (hereinafter LEC, its acronym in Spanish), since the enforceable resolution formulated under the early maturity clause refers to the entire loan, and not only to the due and unpaid installments. This interpretation determines that, in view of the unfairness of the early maturity clause, the only possible decision is to refuse the execution of the foreclosure and to close the foreclosure proceedings, as the aforementioned 695.1 4th provides for in these cases by. A clear, complete and reasoned exponent of this position, citing the most important jurisprudential background on these issues, can be seen in the AAPr Barcelona 93/2017, of 15 March.
The second is reflected, also with breadth and clarity, in the AAPr Valencia 474/2017, of 12 April. This decision states that, if the unfairness of the early maturity clause results in the serious and repeated default of the borrower, the execution must be rejected for the total amount, but the performer must be allowed, within the same process, to adjust the claim to what is actually due and payable at the time of filing the claim. In my view, this approach is based on an erroneous consideration, which is contained in the order referred to above and in others which resolve in a similar way. It is stated that the nullity of the early maturity clause cannot determine that the performing party loses the possibility of exercising the real action characteristic of the foreclosure process, so that it is necessary to find a solution which, avoiding the foreclosure to be based on an unfair clause, also prevents the clearly delinquent debtor from benefiting from the delay resulting from the fact that the performing party has to resort to an ordinary procedure, because of its enforcement proceedings has been closed because of the declaration of invalidity of the unfair clause. The reality is that such a declaratory process would not be necessary, nor would there be a delay such as the one mentioned above, since if the foreclosure process were to be closed because what the performing party asks for is based on an unfair clause, the latter could re-initiate it with a petition that is lawfully adjusted, without the first filing preventing the action based on the mortgage guarantee of the loan from being exercised again. This means that the closing of the first foreclosure lawsuit because it is based on a clause declared null and void does not prevent the creditor lender from filing a new and sustained foreclosure lawsuit on a claim that allows the foreclosure proceeding to proceed. There is no kind of res judicata or similar thing that exhausts the creditor’s enforceable action for the fact that the claim sought for the total amount of the loan, which is due in advance, has been closed. Of course, the creditor will have to go to a declaratory process if he wants the resolution of the legal transaction and with it the return of the full benefit, because that will not be possible to obtain through foreclosure anymore, but not because of the closing of the foreclosure claim, but as a consequence of the declaration of abusiveness of the early expiration clause itself.
Thus, the first paragraph of Article 693 of the LEC acquires a leading role that it had not had until now, since when the clauses of early maturity inserted in the loan with mortgage guarantee run the risk of being declared abusive, or when in fact they have already been annulled by their abusiveness, the creditor who wants to make use of the particularities of the foreclosure process can only file an foreclosure claim under this rule, provided that the general conditions to access this specific procedural channel for the security right -Article 682 LEC- and also those established in Article 693.1 itself – the expiration and non-payment of at least three monthly installments or part of the equivalent obligation and the specific provision of this consequence in the articles of incorporation and in the Register – meet.
These precautions are relatively reasonable if it is taken into account that in these cases, one of the basic assumptions of forced foreclosure, i. e. to assign assets of value proportional to the debt being enforced -Article 584 LEC- is disregarded. Debt derived from the maturity of three or more installments of principal and interest will, in most cases, be much lower than the value of the mortgaged asset as collateral for the loan, and still the sacrifice of the asset can be determined. Forced foreclosure, in these cases, has some particularities that need to be considered.
The asset is transmitted with the burden of the part of the mortgage credit that is not yet due (693.1 LEC). In other words, the foreclosure security under which it is foreclosed on will not be cancelled, because the foreclosure is not discharged by the full obligation it guarantees, but only by the losing party.
Of course, registered encumbrances prior to that of the enforcing creditor are also retained, and the asset is likewise transferred with them. There is no doubt or specialty in this case regarding what happens in general (666.1 LEC).
However, it is possible to consider what happens with post-foreclosure encumbrances, which as a general rule are cancelled after the asset is sold as a result of the encumbrance by the performing creditor (674 II LEC). Since in this case the performer’s load is not cancelled, but transferred, are the subsequent loads transmitted as well, in this case surviving the realisation of the property? I think the answer is absolutely no. When an asset is compulsorily realized under article 693.1 LEC, the asset is acquired encumbered with the charge by virtue of which it is executed because it is not fully enforced; but this circumstance does not affect subsequent credit holders, who, when registering their right, know of the existence of a prior charge whose enforcement may determine the transfer of the asset free of subsequent encumbrances. The Registry performs its function with respect to subsequent receivables in exactly the same way as when the previous charge is fully discharged and extinguished.
Article 692.1 LEC provides that the price of the auction shall be used to pay the principal of the claim, the accrued interest and the costs incurred to the plaintiff, without the delivery of the credit to the creditor for each of these items exceeding the limit of the respective mortgage coverage. The first impression can be carefree: normally, and since only part of the obligation is executed, we will be far from exceeding the mortgage coverage. However, I think that, given that neither the loan nor the mortgage guarantee is extinguished, but rather transmitted with the asset, the limit that mortgage coverage implies cannot be exhausted for the benefit of the participants in this first release of the guarantee, but that the proportion of this coverage corresponding to the part of the loan that is being foreclosed must be calculated and acted upon accordingly.
This means that, if the amount owed exceeds the mortgage coverage limit, the performing party will have to wait to be completely satisfied until the loans registered after his or her own are paid in order to dispose of the remaining balance. And this, of course, provided that the debtor is the owner of the mortgaged property, and never in cases where foreclosure is projected on a non-debtor mortgage. The possibilities for full recovery in foreclosure and the relationship of these possibilities to the composition of the debt of the foreclosure process can be clearly analysed in the AAPr Madrid 422/2016, of 17 November.
Written by Pilar Peiteado, Universidad Complutense de Madrid