It’s sad – but Spanish realism now can avoid a huge loss later
I am all too often instructed these days by British Nationals whose investment in a holiday home in Spain has turned sour.
The typical scenarios usually have all or a combination of these factors
• The end of a fixed mortgage term - when a replacement loan is either unavailable or far more expensive
• The loss of employment, which means that a foreign second home is now a luxury that cannot be afforded
• The onset of ill health means that regular air travel is now impossible
• The fall in value of the Spanish property (and fear that the value may soon fall further) means that the second home is now a source of huge worry and no longer a pleasure
There have of course been recessions and credit crunches before and history does seem to show that a property owner who can afford to hold his nerve and wait, will eventually find values rising again. But this is of no comfort to an owner who cannot afford to pay increasing mortgage payments. Simply sitting it out should be no more an option than sticking one’s head in the sand but sitting it out and worrying (and doing nothing) is exactly the worst thing to do and also it’s what most people do.
If the above describes the problem you are facing – what action should you take? The obvious choice is to sell the place. This is easier said than done in the present market – the risk is that high fees might be incurred on estate agency and marketing costs, for no result.
In Spain, there may be another option – one which does not exist in UK to the same extent. In UK, mortgage borrowers in distress can be very unhappy to learn that they cannot expect simply to return the keys to the Bank and then be able to walk away from the debt. In Spain however, this might be possible and increasingly often I am notarising Spanish Deeds to do exactly that.
The detailed information below is provided by a lawyer practicing in Spain - Mr Raymundo Larrian Nesbitt. You can find out more about him and read his own article if you follow the link I have placed in the “Links” section of my main website.
There is provision for this procedure enshrined in the Spanish Civil Code
Article 1175 of the Spanish Civil Code says
Payment by assignment of Property
The debtor may assign his property to creditors in payment of his debts. This assignment liberates the former from liability to the net amount of the property assigned unless there are stipulations to the contrary. Agreements in respect to the effects of an assignment, entered into between the debtor and his creditors shall be made in accordance with …………………..the Code of Civil Procedure
The Spanish phrase for this procedure is “Dación en Pago”.
The difference from English law is that once the dacion en pago has taken place then the debt is wiped. The Bank now owns the property. If the Bank cannot sell it or it makes a huge loss, there is no comeback to the original mortgage borrower. Contrast that with UK where, even after a Bank may have accepted the keys and taken over the property, still the mortgage debt is continuing to rise until the property is eventually sold, perhaps many months or even years later. In Spain the opposite is the case – the slate is wiped completely clean and the former owner/borrower can consign the whole affair to history. He can “move on” as our Government likes to say!
Although this is a procedure where it is not absolutely required that you instruct a lawyer to act for you, my advice is that you certainly should NOT deal with a dacion en pago by merely sorting it out with your Bank direct.
In this procedure as with all financial matters, it is well worth having professional advice. There are rules to be adhered to, and there is the possibility of negotiation. Who will pay for the valuation fees, the Registry costs. Perhaps if the property is well out of negative equity you can negotiate that money is payable back to you at the time of an eventual sale. You need proper advice- especially at what can be a very stressful and indeed emotional time.
However you cannot leave it until matters have gone too far. First – the Property must not be in negative equity prior to the negotiations beginning and Second – the Bank must not have already started legal proceedings against you for repossession of the property.
These two rules taken together underline the importance of acting in time. If you can see now that you are heading for trouble because your Spanish mortgage is simply too expensive, do take legal advice NOW. Sad as it is to cut your losses and to acknowledge to yourself that the Spanish dream is over, early recognition of the reality of the situation can result in being able to hand back the house, hand back the debt, hand back the worry and the sleepless nights and walk away free. The alternative might be to cling on to an increasingly worthless property which you never visit and which is eventually repossessed anyway: leaving you still responsible for an ever increasing debt you cannot afford, a debt which the foreign Bank can in due course attach to your assets in UK or anywhere in the world.
For Spanish property owners in financial difficulty the dacion en pago might just turn out to be a lifeline. And lifelines should be seized whilst there is still time.