Some considerations on the Law regulating Real Estate Credit Contracts

Written on 25 Feb 2020

The most notable novelties introduced by Law 5/2019 of 15 March are the restriction of the power of lenders to declare the early maturity of credits or loans, the prohibition of capitalisation of interest on arrears, and the new mortgage foreclosure system.

The new regulation introduced by Law 5/2019, of 15 March, regulating Real Estate Credit Agreements (“LCCI”) is intended, among other things, to put an end to the abuse of early maturity clauses contained in most deeds of mortgage, by virtue of which lenders could declare the early termination of the loan secured by the mortgage for breach to pay even one of the instalments, i.e. on the basis of parameters of low severity in terms of amount and/or time.

Although, according to its subjective scope, the LCCI only applies to loans and credits secured by mortgage where the debtor is an individual, we believe it is important to highlight these issues in anticipation of a possible future extension of the subjective scope to legal entities.

To this end, the LCCI amends the Mortgage Law and the Civil Procedure Law and establishes, as requirements for the early termination and exercise of the mortgage action, the following:

  • The borrower must be in default in the payment of the loan principal or of the interest.
  • The unpaid amounts in the first half of the term of the loan must be at least 3% of the amount of the loan granted, while in the second half of the term of the loan it must be at least 7%. This requirement will be understood to be fulfilled when the unpaid instalments correspond to twelve monthly instalments or a term equivalent to twelve months in the first half, or fifteen in the second half of the loan (increasing the three monthly instalments established by Law 1/2013).
  • Additionally, when requesting payment from the borrower the lender will be obliged to give the borrower at least one month to comply, and to notice that if the borrower fails to comply, the lender will demand full repayment of the loan.

It is worth highlighting the retroactive nature of the LCCI with regard to the early termination clauses in contracts executed before its entry into force (that is, before 16 June 2019), unless the early maturity would have occurred prior to the entry into force or the debtor were to claim that more favourable contractual terms were signed.

With regard to default interest, the legislator has opted for a more rigid regime by establishing the sum of the remuneration interest plus three percentage points as default interest, over the period in which they are due, without the possibility of graduation by parties or of capitalisation.

Finally, we would also like to highlight the modification of the bid price for non-judicial sales procedures introduced in the Mortgage Law (applicable to any mortgage), establishing a bid price that may not be lower than the value indicated in the appraisal. The legislator thus omits the risk of deviation from the property market price in non-judicial procedures. This is even more serious for this type of contract which is, by definition, long term (between 20 and 40 years), since it cannot be guaranteed that in 20 years the property will be worth at least the appraisal value calculated at the time the financing is granted. The recent credit crunch is an example of this…