ECJ upholds Spanish mortgage holders’ rights

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 March 14th, Spanish campaigners against home evictions claimed another victory with the decision of the European Court of Justice (ECJ) 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 ruling has sparked debate as to whether it has any implications for mortgage holders in arrears in Ireland.

The case before the court was based on the Unfair Contract Terms Directive 1993. This directive, which has been implemented in Ireland, 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.

Consumer loan agreements
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, ie 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 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 the irreversible loss of their family home.

In the Aziz case the European Court of Justice decided 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 procedures are in place to allow borrowers in Spain to challenge the terms of their mortgage agreements on the basis they are “unfair”.

This is a right already available to Irish consumers, although the Unfair Contract Terms Directive is rarely relied upon in Irish litigation.

Convincing
This does not mean, however, Spanish or Irish borrowers will necessarily succeed in convincing a court that individual terms of their mortgage agreements are unfair, and indeed evidence from the UK suggests consumers may have sizeable obstacles to surmount in proving a term of a loan agreement is invalid under the Directive.

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.

In particular the court emphasised the national courts must consider “to what extent the contract places the consumer in a legal situation less favourable than that provided for by the national law in force” (para. 68) and whether the bank could “reasonably assume” the consumer would have agreed to the term in question in individual contract negotiations (para. 69).

The saga of the Spanish home evictions is thus likely to continue until any such judgment is forthcoming.

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

Dr Cliona Kelly lectures in contract and commercial law at Cardiff Law School.