Conversion of a floating mortgage into an ordinary mortgage or a maximum mortgage

Written on 19 Jan 2018

The issue raised is the transformation of a floating mortgage into an ordinary mortgage through the determination of the debt effectively secured without the need to cancel the original (floating) mortgage and constitute a new (ordinary) mortgage, thereby avoiding any damages to the security interest or the accrual of stamp duty.

The floating mortgage, regulated in article 153 bis of the Mortgage Law, is a mortgage that can secure one or several, present or future, obligations without the need for the existence of a causal link or an amendment agreement between them. According to doctrine, the distinguishing feature of this type of mortgage (with respect to an ordinary mortgage) is that the mortgagor does not have to individualize a portion of the total mortgage liability for each obligation secured by the floating mortgage.

There are several options to transform a floating mortgage into an ordinary mortgage governed by article 142 of the Mortgage Law. One option is through an extinctive amendment replacing one security for another, which implies that the former security expires and a new one is created. However, this operation would also trigger stamp duty as well as a risk of rescission in accordance with Spanish Insolvency Law (due to the re-opening of the claw-back period of 2 years in relation to the new (ordinary) mortgage granted).

To avoid the generation of prejudicial consequences due to the extinctive amendment replacing one type of mortgage (floating mortgage) with another (ordinary mortgage), there is the possibility to resort to the mechanism of determining the obligations in a new public deed (loans, credits, financing transactions) ultimately secured by the floating mortgage. In this way, the desired effect is achieved through a mere determination of the secured obligation, which will cease to “float”.

Through this simple transaction, the conversion of the floating mortgage into an ordinary mortgage is achieved without the need to carry out an extinctive amendment of the floating mortgage and its unreasonable consequences (mainly for the secured creditor).

Notwithstanding the foregoing, and as it is usual in such complex matters, to determine the validity and the correct execution of the mechanism described above, it will be necessary to have a prior consultation with the competent property registrar and obtain their approval.