Are you struggling with your mortgage payments? Did you know there is a special legal procedure in Spain to hand back the keys to your lender, without attracting any penalties? Solicitor Raymundo Larraín explains to us how to formally surrender the keys to your lender securing your assets abroad and without attracting any taxes. Interested? Read on.
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Article copyrighted © 2008, 2010, 2013, and 2020. Plagiarism will be criminally prosecuted.
Original article from the 21st November 2008
By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Abogados
8th of July 2020
In the aftermath of the Covid-19 pandemic, families struggle to make ends meet and face their mortgage payments.
Given the tough financial situation we are in, the most challenging since The Great Depression, it is foreseeable scores of borrowers will fall into arrears over the next months. In this month's article, we focus on one of the proposed legal solutions for individuals who are struggling with debt in Spain. There are several other options you should consider first, and we will cover them in detail in next month's article. As advised, today's solution should only be regarded as your last option, as it entails surrendering your home keys to your lender and walking away from it all.
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’ waking 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 established procedure known as ‘dacion en pago’, witnessed by a notary public. If you simply leave the keys on the counter, you are defaulting on a mortgage loan, which has serious legal & financial repercussions, as explained below.
Your lender will be forced to follow a full-blown bank repossession, which attracts a great deal of expenses for them. What many borrowers fail to realize, is that the loan debt is not finished on handing back the keys. When a bank repossesses you, the value of the property can be for half, or less, of the appraisal value post-auction. Meaning, even after being repossessed you still owe your lender money. Your lender will chase you against your assets for the shortfall, even abroad.
Your lender will also blacklist you with all major credit-rating agencies, which will seriously hamper your borrowing ability in the future in your home country, or elsewhere. It will gravely affect your credit score, to the point that companies will refuse to issue you credit or debit cards, and you will even be barred from applying for membership from selected retailers i.e. gyms, clubs, golf clubs, commercial centres, etc.
A dacion 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 at a notary, 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 on why struggling borrowers follow a dación is because on being repossessed in Spain, if a property slips into negative equity (meaning you owe more money than what the property is worth), a lender will pursue the borrower for the difference (art. 579 LEC), even abroad, in your home country.
Following article 1911 of the Spanish Civil Code, a mortgage 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. Meaning a lender will legally pursue a borrower on the shortfall post-repossession.
A dación is particularly interesting 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.
Many defaulting borrowers realize with shock and horror only post-auction, that in despite of a lender having repossessed their Spanish property, they are still being chased in their home country for the outstanding debt. As they owe, in addition to the mortgage loan shortfall, the bank repossession’s associated expenses, lawyer’s fees, court agent’s fees and on top the mortgage default compound interest. The default compound 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 dire legal and financial consequences, would rather sell the non-performing mortgage loan as a distressed asset (fire sale) or else simply follow a dación procedure if they are unable to find a buyer in time to avoid repossession proceedings.
Bottom line, a repossession in Spain is something borrowers should avoid at all costs, and a dacion does just that.
- No-negative-equity rule: the property should not be in negative equity. 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 the idea of a dación.
- No repossession procedure underway: it is critical a lender has not instigated repossession proceedings against the property.
Dacion en pago procedure
The outline on how it works is as follows:
- Borrower must be up to date with mortgage repayments, community fees, and local taxes.
- Borrower proposes his lender a dacion en pago
- Lender requires a property reappraisal. Borrower pays for this (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 property, cancelling your debt and waiving any legal action against your assets.
- Your lawyer, in tandem with the lender, drafts 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 walk away scot-free from the problem - without any 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)
Ideally all the above expenses should be negotiated by your lawyer to be borne 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 ongoing community 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 through a power of attorney.
However, I just cannot stress enough the importance of instructing your own lawyer. He will verify the debt with your lender is fully discharged on you signing the deed relinquishing ownership, besides acting as a translator (mandatory). Besides, your lawyer will negotiate with the lender on your behalf who pays for the expenses, as some lenders notoriously make borrowers pay for some (or all) the associated expenses if unrepresented.
I have witnessed several 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.
The practical implication of this is that the mortgage liability is not fully discharged, remaining very much outstanding. Meaning lenders can – and will – pursue the borrower 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 hundreds of defaulted loans to a local UK company who will then (aggressively) chase you in England on the arrears, plus interests, and expenses against your main home and assets.
Another glaring mistake people often make is that they rely on Spanish notaries or lenders to act as their own private lawyers. Some borrowers are lulled into a false sense of security thinking that only because a Spanish notary or bank is involved that everything will be above board and they will look after their rights – crass error. A notary is not there to give you legal advice, as he acts impartially to either side. Their main role is to witness the deed and ensure taxes are paid to the state (they are after all civil servants working for the government). Don’t rely on a notary to act as your own personal solicitor, because he won’t.
You must instruct your own legal counsel to safeguard your interests.
- A dacion fully discharges your mortgage liability, bringing (legal) closure to the matter.
- A dacion en pago avoids jeopardizing your assets in your home country; you will not be chased abroad on the shortfall plus 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 stave off the problem by successfully securing 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.
In short, a dacion offers a way out for all those who’ve lost hope.
If you are struggling with debt, and feel the weight of the world upon your shoulders, give us a buzz. Our friendly staff will have a chat with you and guide you on the different options available to you. 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.
“A sad soul can kill you quicker, far quicker, than a germ.” – John Steinbeck
John Ernst Steinbeck Jr. (1902 – 1968). Was an American author who won the 1962 Nobel Prize in Literature "for his realistic and imaginative writings, combining as they do sympathetic humour and keen social perception." He is regarded as "a giant of American letters," and many of his works are considered classics of Western Literature. Amongst his vast works, the Pulitzer Prize-winning The Grapes of Wrath and Of Mice and Men stand head and shoulders above the rest and are considered masterpieces of modern US Literature. In these books he poured his soul to depict the class struggles of tenant farmers and migrants, often neglected by society, and the financial hardship they were forced to endure brought upon by The Great Depression.
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Article also published in Spanish Property Insight: Dacion en pago explained - handing back the keys.
Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.
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