EU

ECJ Ruling Helps Spanish Mortgage Holders – Dr. Cliona Kelly

In November 2012 in Spain, public anger at the number of repossession orders issued against homeowners in arrears resulted in an agreement being reached with banks to suspend evictions of vulnerable consumers for two years. On 14th March 2013, Spanish campaigners against home evictions claimed another victory with the decision of the European Court of Justice in Aziz v Catalunyacaixa, in which the Court held that Spanish procedural rules which prevented borrowers in arrears from effectively contesting the fairness of their mortgage agreements were contrary to EU law. The Spanish government is now under an obligation to reform its legislation, and Spanish homeowners facing eviction may be able to delay that eviction until new rules are in place which allow an assessment of their contract terms to be made by the courts.

The case before the Court was based on the Unfair Contract Terms Directive 1993. This Directive recognises that consumers entering into contracts with businesses rarely read or understand the small print, and that even if they do, they often have no way of negotiating terms with the business. The Unfair Contract Terms Directive provides that, in a business to consumer contract, any term which is not individually negotiated is invalid, and thus unenforceable, if it is deemed to be “unfair”. A term is unfair if it “causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the  consumer”.  Each EU Member State is obliged to ensure that this protection for consumers is provided in its domestic law, and that “adequate and effective means” exist to prevent the use of unfair terms in consumer contracts.

This Directive applies to consumer loan agreements, and therefore an individual who takes out a mortgage on their family home can, if faced with an order for repossession, try to argue that a term of the mortgage agreement is unfair. Depending on the nature of the term, this has the potential to provide a defence against the repossession order.

However, under Spanish rules of procedure, a borrower in arrears is not able to contest the fairness of a term in the mortgage agreement in the main enforcement proceedings, i.e. those in which the court may order the repossession of their home, but is only able to do so in subsequent declaratory hearings. The difficulty here is that the court before which these declaratory proceedings are brought does not have the power to terminate the mortgage enforcement proceedings. Thus even if a term in a mortgage agreement is found to be unfair, the borrower would have no effective means of preventing irreversible loss of their family home. In the Aziz case the European Court of Justice decided that these Spanish procedural rules do not comply with EU law, as it makes the application of the protection offered by the Unfair Consumer Terms Directive “impossible or excessively difficult” (para.63).

The Spanish government now has to ensure that procedures are in place to allow borrowers in Spain to challenge the terms of their mortgage agreements on the basis that they are “unfair”. The Court in Aziz did not decide whether any terms in the  mortgage agreement before it were in fact unfair, but instead issued guidance to help the Spanish courts to decide the issue. The saga of the Spanish home evictions is thus likely to continue until any such judgement is forthcoming.

Mohamed Aziz v Caixa d’Estalvis de Catalunya, Tarragona i Manresa (Catalunyacaixa) Case C‑415/11, 14th March 2013.

This blog entry is based on a piece which appeared in the Irish Times on March 25th, 2013:

http://www.irishtimes.com/news/consumer/ecj-upholds-spanish-mortgage-holders-rights-1.1335418