Abuse of early termination clauses

Written on 27 Feb 2017

As a result of the judgment of the Court of Justice of the European Union of February 2017 on the abuse of early termination clauses, the Supreme Court has raised a new issue to the Court to clarify the extent of the abusive nature of such clauses.

On 26 January 2017, the Court of Justice of the European Union issued a judgment on the nullity of certain early termination clauses, inter alia, for breach of the debtor´s payment obligations. The judgment discussed the contradictions between certain national regulations and case-law and Directive 93/13/CEE on unfair terms in consumer contracts but left relevant issues which need clarification.

By means of this judgment, the Court of Justice of the European Union (“CJEU“) set out the criteria to be followed by the national courts to examine the potential abusive nature of the clauses contained in mortgage loans entered into between banks and consumers. The main requirement of this examination is that there shall be a significant imbalance (to the detriment of the consumer) between the rights and obligations of both parties, bearing in mind the bank´s position and the imposition of clauses on consumers as if they were general conditions, depriving the consumer of the possibility of negotiating them. In the specific case of early termination clauses (those that give the bank the right to accelerate the loan in the event of a default by the debtor and allow them to enforce the mortgage) it is additionally required that such a default affects a main and principal obligation of the contract (such as the obligation to pay) and that it is sufficiently serious in view of the duration and amount of the loan.

The legal consequence of declaring a clause to be of an abusive nature is the nullity thereof. However, this would be pending clarification of the scope of said nullity, an issue which was submitted to the CJEU by the Spanish Supreme Court (“SC“) by resolution of 8 February 2017. In this resolution the SC questions the nullity of the entire clause and raises the possibility of making a partial declaration of its abusive nature, maintaining the validity of the part of the clause that is not deemed abusive. The question  asked to the CJEU is whether, in those cases in which the abusive nature of the clause is found within the requirements for accelerating the loan (e.g. those which only take into account a default in  a single monthly payment), the declaration of nullity would exclusively affect those requirements or, if not, the whole clause.

The main effect of declaring a clause null and void is that it will be deemed not to have been included in the contract, which means that the lender would lose its right to accelerate the loan (even in the case of a payment default by the debtor). Likewise, if the clause is deemed not to be included in the contract this would mean that the lender would also lose its basis for applying for the enforcement of the security which has, without a doubt, been the main condition for the granting of the loan. In this case, where should the bank go in order to find out when and how to enforce? The only option would be to possibly have to wait until the final maturity date to enforce the mortgage, obviously an unsustainable situation for the lenders in the case of mortgage financing for 20, 25 or 30 years.

In this chaotic scenario it is not surprising that the SC asks for clarification in this regard, even more so bearing in mind that a generalised trend to declare this kind of clauses as null and void (and therefore to dismiss the foreclosure proceedings derived thereof) would deprive not only the lenders (the banks) of their rights, but also, in certain circumstances, the owners of dwelling houses which are charged to secure such loans. In this situation such debtors/owners would be deprived of the advantages granted to them through the enforcement procedure (for example, releasing the asset through the deposit of amounts that by principal and interest were due on the date of the filing of the claim; or release of the outstanding liability in the case of insufficient conclusion of the enforcement procedure, if the corresponding conditions established in the Civil Procedure Act (“CPA“) are met), which they could not enjoy in an ordinary procedure.

For all of these reasons, although common sense should make us think that the nullity of a clause should obviously be limited to that part that is effectively null and void (and not to the whole or the rest of the clause, if it can remain without the null part – severability provision -), given the different judicial interpretations concerning disputes with banking entities in Spain (preferential bonds, mortgage formalisation expenses, SWAPS, “floor” clauses, etc.), it is important that, from a distance, the CJEU puts an end to these doubts and provide stability to the financial markets so necessary in this phase of economic recovery.