In the aftermath of COVID-19, several families are struggling to make ends meet and pay their mortgage instalments.
Given the challenging financial situation, the most serious since The Great Depression, it is foreseeable many borrowers will fall into arrears with their lenders in Spain in the near future.
For all those who’ve slipped into mortgage arrears in Spain, or are likely to, and are thinking of handing back the keys as a solution, there’s a formal legal procedure to do it known as dación en pago (‘datio pro soluto’). Article 140 of Spain’s Mortgage Act allows a borrower to cancel a lenders’ debt by handing in exchange the encumbered asset.
This solution of last resort puts an end to many borrowers’ growing nightmare, as the mortgage debt mounts up exponentially over time eventually becoming unbearable.
You simply cannot hand back the keys to a lender; it needs to be done following a formally legally established procedure, witnessed by a notary public. If you simply leave the keys on the counter, your lender is forced to follow a full-blown repossession procedure, which attracts great expenses for them. Your lender will blacklist you with all major credit-rating agencies and this will seriously hamper your borrowing ability in the future in your home country, or elsewhere.
A dación procedure puts an end to this nightmare, ringfencing your assets.
In plain English, ‘dación en pago’ (or dation in payment) means handing back the keys to a lender, and in exchange a lender discharges in full the mortgage liability not holding a borrower liable in the future. They will renounce pursuing the debt in your home country, or elsewhere, against any other assets you may hold.
Why hand back the keys? Unlimited personal liability
The reason why struggling borrowers follow a dación is because on being repossessed in Spain, if the property slips into negative equity (meaning you owe more money than what the property is worth), a lender can actually pursue the borrower for the difference (art. 579 LEC), even abroad, in your home country.
A dación is particularly interesting procedure for those holding property, whether in Spain or abroad. What a mortgage borrower seeks on following a dación is to set a legal firewall that will avoid a lender jeopardising the remainder of his assets. It is basically ringfencing the family’s financial assets by (legally) drawing a line on the sand. If you hold no assets, then you may wish to skip this article altogether.
Following article 1911 of the Spanish Civil Code, a borrower’s liability is personal and unlimited with all his assets, both now and in the future. In other words, the debt goes personally against the borrower on the balance owed to a Spanish lender. The property itself, the collateral, is accessory and was only guaranteeing the bank loan, which is the principal.
Many defaulting borrowers realise with shock and horror post-auction, that in despite of a lender having repossessed their Spanish property, they are still being chased in their home country or elsewhere for the outstanding debt. As they owe, in addition to the mortgage loan shortfall, the repossession associated expenses, lawyer’s fees, court agent’s fees and on top the mortgage default compound interest. The compound default interest on average is over 20% p.a. which only adds more pain on the long run as the overall debt builds exponentially over time.
That is why many defaulting borrowers in lieu of being repossessed, and face all the above legal and financial dire consequences, would rather sell the non-performing mortgage loan as a distressed asset (fire sale) or else follow a dación procedure if they are unable to find a buyer in time to avoid repossession.
- No-negative equity rule: the property should not be in negative equity (in fact, I advise it should have at least over 20% equity).
- No repossession procedure underway: it is critical a lender has not started repossession proceedings against the property.
Dación en pago procedure
The outline on how it works would be as follows:
- A borrower must be up to date with his mortgage repayments as well as with the Community fees and local taxes. The latter can actually be negotiated with a lender.
- The borrower’s legal representative contacts the lender and proposes a dacion en pago procedure.
- The lender will require the property to be reappraised. You will be required by your lender to pay this in advance. It amounts to approximately €350.
- If on average the new valuation of a property covers the outstanding mortgage loan plus 12% of the associated legal expenses, the lender accepts to take the possession of the apartment, cancelling your debt and will waive taking legal action both in Spain and abroad in your home country. As a rule-of-thumb I would personally advise the buffer of equity to amount to at least 20% of the property value for it to be successfully accepted. The higher the positive equity buffer, the more likely a lender is to accommodate to the idea of a dación.
- Your lawyer, in tandem with the lender, will draft a special deed to be witnessed by a notary public.
- The deed is signed at a notary, and the borrower formally surrenders the keys in this act, leaving the property clear of furniture and tenants. The property will now be lodged under the lender’s name.
A dación en pago works similar to a conveyance procedure only that instead of getting paid in exchange of signing your property away you are fully discharged of the mortgage liability being allowed to simply ‘walk away’ from the problem - without legal repercussions.
- 6 to 11% Property Transfer Tax (ITP) contingent on the autonomous region of Spain where the property is located
- Plusvalía tax
- Lawyer’s fees
- Notary fees
- Land Registry fees
- Gestoría fees (may not apply)
All the above expenses should ideally be negotiated by your lawyer to be paid for by the lender (except the lawyer’s fees). A lender, on becoming the new owner, will contribute towards the Community fees just like any other member in a Community of Owners. That is the reason why there must be sufficient equity in the property to offset, not only the associated completion expenses and taxes, but also the community ongoing maintenance costs and property taxes until a lender manages to sell on the property. Banks are not real estate agencies and do not cherish having large stocks of unsold properties on their books; that is not their core business.
Signing the notary deed and frequent mistakes
You can either sign a dation in payment personally or else instruct a lawyer to sign it on your behalf.
However, I just cannot stress enough the importance of instructing your own lawyer. He will act as a translator and also verify that indeed your debt with the lender is fully discharged on you signing this deed relinquishing ownership. Besides, your lawyer will be able to negotiate with the lender on your behalf, as some lenders will try to make borrowers pay for some (or all) the associated expenses.
I have witnessed cases in which borrowers - acting without a lawyer - were purposely tricked into signing before a Notary what they thought was a dación, but was in fact only an assignment of rights and assets (datio pro solvendo) which does NOT extinguish the debt. This did not fully discharge the mortgage liability, which remained very much outstanding. Meaning the lender can – and will – pursue them abroad for the outstanding debt which mounts up exponentially over time. It is standard practice these debts are sold in block to local debt-collection agencies for a fraction of the book value. E.g. a Spanish lender sells the defaulted loan to a local UK company who will in turn chase you in England on the arrears against your main home and assets.
Another frequent mistake is that a notary is not there to give you legal advice, as they act impartially to either party. Their main role is to witness the deed and ensure taxes are paid to the state. Don’t rely on a notary to act as your own personal solicitor, because they won’t.
- A dacion fully discharges your mortgage liability, bringing closure to the matter.
- A dación en pago avoids jeopardizing your assets in your home country; you will not be chased abroad on the shortfall and expenses.
- Following a dacion avoids being blacklisted by major credit-rating agencies, such as EXPERIAN, ASNEF, RAI etc.
Dación en Pago - conclusion
A dación en pago is a win-win for both parties.
A borrower is free at last having managed to successfully secure his assets, whether in Spain or abroad, from a lender or any law firm or debt collection agency hired to pursue the outstanding debt.
A lender on the other hand will now own the property outright and will have successfully waived a lengthy, protracted and expensive court procedure (bank repossession) without having to set aside the mandatory provisions before the Bank of Spain to make up for this dubious loan which affects its liquidity ratio. A repossession procedure lasts 2 years minimum and may easily entail for the bank expenses running up to 20% of the properties’ value. These provisions set aside by lenders are being looked upon closely by credit-rating agencies post-credit-crunch as they hinder their borrowing ability and ultimately dent their share value.
At LNA we can represent you handing back the keys for a very competitive fee, regardless of your property’s location in Spain, we act nationwide. We have 17 years’ experience signing them, ask us free of compromise. Larraín Nesbitt Abogados, small on fees, big on service.
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