DACION EN PAGO: handing back the keys and the property to the bank in settlement of the mortgage loan.

Dear Sirs. We are a British couple and we purchased a property in Oliva (between Alicante and Valencia) 5 years ago. The exchange rate together with the economic crisis that affects both the UK and Spain mean that we can no longer afford the mortgage. The Spanish bank is not prepared to accept the house or its keys back in settlement of the loan. We have spent all our savings and cannot find anyone who is willing to buy the property for the balance outstanding. We have been unsuccessful in trying to let the property. What can we do and what are our rights?

Dear readers,

Thank you for your inquiry, unfortunately this is a very common type of consultation that we regularly receive.

Giving the keys of the property back to the bank and/or trying to pay the loan off with the property mortgaged is known in the Spanish system as DACION EN PAGO. At the beginning of the crisis some Spanish banks were willing to accept it, now it is very difficult to find banks prepared to agree with it, even when the real value of the property is far higher from the amount due to the bank.

It could be argued from the legal point of view that it should be possible to force a bank to accept a property back in payment of the mortgage loan debt, since on the mortgage loan deed appears the valuation or survey of the property carried out by the bank, fixing and accepting the real value of the property. The reality has been that some judges and courts have stated that the bank cannot be forced to accept the transfer of the property as payment of the mortgage loan, which meant that many people lost their houses at public auction, and if the funds obtained did not cover the loan debt, the bank claimed for the difference. Thus, the borrowers end up with no property and still keep part of the debt.

Please note however that there recently appeared on the Spanish press a COURT DECISION from the Provincial Court- Audiencia of Navarra ( Second Section) ratifying another issued by the court of first instance and instruction No. 2 from Estella / Lizarra, which may mean a change in the treatment of a DACION EN PAGO and the mortgages executions.

Summing up the Court Order, the background was more or less as follows: the property owners took out a loan of 70,000 E, and the bank appraised the property’s value at approximately 76,000 E, but they were not able to pay the loan back, and the bank began the mortgage execution where finally at the public auction the bank was awarded the property for the value of 43,000E, asking the court to continue the execution against the debtors for the rest of the bank credit, i.e: 27,000,E(70,000E funds owed – 43,000 E value of the property at the auction).

The court and Audience mentioned come to say that regardless of the final value of the property set at the auction ( 43.000E) it should be taken into account that when the bank granted the loan, the property was valued by them at 76,000 E, more than what was owed as principal, and it has not been proved that the current value it is less, therefore, as the bank was awarded with the property in the auction, bearing in mind the valuation done, it should be understood the bank has been repaid for the principal of the claim- debt (not including interests and legal and court costs), understanding the court that the bank has been paid in full having no right to claim for the 27,000E difference.

In addition, the Provincial Court-Audiencia made a moral reflection noting that if, as many analysts said, the global crisis is partly the responsibility of the financial system who make the property market and prices collapse, with practices such as sub-prime mortgages, etc. the banks’ behavior could be morally criticized.

For all these reasons, we understand that this is a really important precedent, and although it seems has been appealed and we need to see the final resolution, it may mean a solution to problems like yours.

For those who are interested, you can see a copy of the order of the Audiencia Provincial of Navarra, within the contents of the Spanish newspaper El Mundo, on the following link:
http://estaticos.elmundo.es/especiales/2011/01/suvivienda/autoapnavarra . pdf

If you are in this or a similar situation and if you need our legal assistance, please do not hesitate to contact us.

The information provided on this article is not intended to be legal advice, but merely conveys general information related to legal issues.

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