January 20, 2017
The government in Madrid has passed a decree setting out a timeframe for lenders to identify property owners entitled to compensation for Spanish mortgages.
During the Spanish property boom of the early 2000´s thousands of UK investors bought a property in Spain – taking advantage of low introductory interest rates on mortgages being offered by Spanish banks. What many people did not realise was that the once the introductory interest rates had expired, their mortgage agreements included a “clausula suelo” or lower cap on the minimum interest rates that banks could charge.
Consequently, when EURIBOR rates were slashed following the collapse of the property market in 2008, many property owners discovered they were paying the same – if not more – than before in repayments. Many property owners complained they had been treated unfairly, as the lower interest rate cap had never been explained to them. They also felt that the cap was only briefly mentioned among lengthy and complicated terms and conditions.
Some investors attempted to recover compensation for Spanish mortgages on the grounds that they were unfairly sold to them. However, courts often found in the lenders´ favour – agreeing it was the purchaser´s responsibility to read and understand the terms and conditions of the mortgage agreement. This situation continued until May 2013, when Spain´s Supreme Court ruled that BBVA´s lower cap clauses were unfair and said the clauses should be voided in ongoing mortgage agreements.
Following the Supreme Court´s ruling, more than fifteen thousand property owners brought a class action claiming compensation for Spanish mortgages. The claim was resolved in April 2016, when Judge Carmen Gonzalez found in the property owners favour and said that “quantities improperly charged” since May 2013 should be refunded. Her ruling attracted the attention of European Commissioners, who felt that, if a clause in a mortgage agreement was to be voided, compensation for Spanish mortgages should be paid for the entirety of the agreement.
Spanish banks argued against the Commissioners´ opinion – stating that, if they paid compensation for Spanish mortgages for the entirety of every agreement with voided clauses, their liabilities would exceed €4 billion. It was claimed by many in the banking sector that this level of compensation for Spanish mortgages would cripple the industry. The EU Court of Justice disagreed, and ruled in December that compensation for Spanish mortgages should be paid on full to each qualifying mortgagee.
Afraid that Spanish lenders could be faced with up to 2.5 million compensation claims at the same time, the Spanish government has announced a process for banks to pay compensation for Spanish mortgages over a three-month period. Banks are to identify each mortgage agreement containing the lower cap clause, and write to each customer with an offer of settlement. Property owners than have fifteen days to decide whether the offer of compensation for Spanish mortgages is appropriate.
If the offer of settlement is considered inappropriate and no agreement can be reached within three months – or property owners are not contacted within the three month timeframe – the “extra-judicial procedure” will be considered concluded. After this time, property owners will be able to claim compensation for Spanish mortgages through the courts. As some lenders have already stated they will not fully comply with the decree, and others are likely to mitigate their liabilities with inappropriate offers of settlement, we advise those affected by lower cap mortgages to seek professional legal advice from a solicitor familiar with the Spanish real estate market.