The Dación en Pago Explained
Raymundo Larraín Nesbitt - Lawbird Legal Services
28th of March 2009
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 dacion en pago (datio pro soluto). This was one of the proposed solutions I highlighted on my previous article relating to Bank Repossessions in Spain. For a property owner, a dacion en pago means basically handing back the keys to their lender and involves signing a Deed at a Notary Public in exchange of being discharged for the remaining mortgage debt. The catch is that the property must not be in negative equity.
What is a Dación en Pago Anyway?
In plain English, a dacion en pago means handing back the keys to the lender, and in exchange the lender will fully discharge all mortgage debt, not holding you liable in the future. The lender will also renounce pursuing the debt in your home country or elsewhere against any other assets you may hold. This procedure is based on Art 1175 of the Spanish Civil Code, which establishes that a borrower can cancel his creditors’ debt handing in exchange any of his assets.
This solution of last resort puts an end to many borrowers’ growing nightmare as the mortgage debt mounts up and becomes unbearable.
But Why Would Anyone do This?
Struggling borrowers decide to hand the keys back to the bank in order to avoid being repossessed. Repossessed properties are usually left in negative equity, meaning you owe more money than what the property can raise in an auction. If after this you are in negative equity, the lender can actually pursue you abroad in your home country for the difference. The property itself, the collateral, was only guaranteeing the bank loan.
Following Art. 1911 of the Spanish Civil Code, once the property has been repossessed, you will be held personally liable with all your assets, both now and in the future, for the difference between what you owe the bank (plus the repossession associated expenses, lawyer’s fees, default compounded interests, etc) and what the property is worth after the full repossession procedure is over. The same principle applies in the United Kingdom.
Is this only in theory? I’m afraid not. Many defaulting borrowers have now realized with shock that this is indeed happening; despite that the lender has repossessed their Spanish property, they are still being chased in their home countries or elsewhere for the outstanding debt.
Therefore, those in lieu of being repossessed should rather either sell the non-performing mortgage as a distressed asset (of which there are now many websites available) or else follow a dación en pago procedure if they are unable to find a buyer in time
How does a Dación en Pago Work?
For the lender to accept it two things are required.-
- The property must not be in negative equity.
- The lender must not have started a repossession procedure against the property.
The outline of how it works is as follows:
- The borrower must be on time with the repayments as well as with the Community fees and local taxes. The latter can actually be negotiated with the lender.
- The borrower approaches the lender and proposes this procedure.
- The lender will require the property to be reappraised. You will be expected by your lender to pay this in advance. On average it's approximately 350€.
- If on average the new valuation of the property covers the outstanding mortgage loan plus 13% of the associated legal expenses the lender will accept to take the possession of the apartment, cancelling your debits and will waive taking legal action both in Spain and abroad in your home country. As a rule-of-thumb the cushion of equity should amount to at least 20% of the property value.
- The day of signing the Deed at the Notary, the borrower will surrender the keys, and leave the property clear of furniture and tenants.
- The property will now be lodged under the lender’s name.
What Expenses are Involved?
A dación en pago is a conveyance procedure. Therefore, all the costs that have to do with the purchase and sale of a property are applicable, namely 7% Transfer Tax, Notary and Land Registry fees on the “buyer’s” side (the lender), and Capital Gains Tax and Plusvalía Municipal Tax on the “seller’s” side (the borrower). All these expenses have to be negotiated to be paid for by the lender. Additionally, on the bank becoming the new owner it will have to contribute towards the Community Fees, like everyone else. This is why there must be sufficient equity in the property to offset not only the associated completion expenses and taxes but also the community maintenance costs until they sell on the property.
Like in many other procedures, it is not a requirement to engage the services of a lawyer to arrange a dación en pago. However, we just cannot stress enough how important it is to appoint a lawyer who will verify that indeed your debt with the lender is being effectively fully discharged on you signing this deed relinquishing ownership. Also, your lawyer will be able to negotiate with the lender, as some banks will try to make borrowers pay for the associated expenses. Finally, a lawyer can serve as a translator in case your command of Spanish is not adequate enough. A translator is a requirement, as the notary will have to ensure you understand what you are signing. Always remember that Notaries are not there to provide you with legal advice, as their duty is to act impartially to either party.
What Happens if the Bank Refuses to Accept a Dación en Pago? Can I Challenge It?
Yes you can, but being practical we wouldn’t recommend it. I would consider viable this option only if the bank had turned the proposal down unjustly when there is clearly more than enough equity to offset it against all the expenses. Note that it is pointless to challenge their refusal if it’s apparent you are in negative equity. It will be expensive, time consuming and fruitless.
A dación en pago is a win-win for both parties. The borrower is free at last and has managed to secure successfully his assets whether abroad or in Spain from the lender or any law firm or debt collection company they may hire to pursue the outstanding debt.
The lender on the other hand will now own the property outright and will have successfully waived a lengthy, protracted and expensive court procedure (repossession) without having to apply the mandatory provisions before the Bank of Spain to make up for this dubious loan which affects their liquidity ratios. These provisions set aside by banks are being looked upon closely by credit-rating agencies post credit crunch and may ultimately affect their share value.
Lawbird is a firm of lawyers with a broad experience in Spanish Property Law. If you are struggling to pay your mortgage perhaps we can help. The following services may be of interest:
- Mortgage Subrogation
- Mortgage Novation
- Dación en Pago (Handing Back the Keys to the Bank)
for further information.
Discuss this Article
Sat, Apr 4th 2009, 19:48
Wed, Dec 14th 2011, 09:23
Hi, could you tell me if legal fees from my lawyer...should be paid by myself or the lender??we have been granted dacion en pago,but have not been told what the valuation of my property was.The bank have agreed to pay outstanding electricity,ibi...but we have legal fees of 1,800euros.
Thu, Dec 15th 2011, 09:54
Yes, it is the borrower who has to pay the legal fees for the solicitor´s services.
Tue, May 15th 2012, 12:00
Hi, We've been told that the bank has agreed and signed a Dación en Pago last week but one of the three people named on the deed (and the key holder) knew nothing of the negotiation and has not signed anything - can the bank and other party do this?
Wed, May 16th 2012, 12:01
This is absolutely possible, as the deeds must have been signed via a Power of Attorney. Once you have confirmation that the deeds have been signed, this will mean that all the owners were present and if not, it means that one of the owners was represented via a valid Power of Attorney.
ALAN GREEN Says:
Wed, Aug 29th 2012, 18:56
Hi, Can you tell me how long the Dacion en Pago procedure takes please.
Thu, Aug 30th 2012, 14:31
If the bank finally decides to accept it, the average amount of time is between 6 months and a year, though it can vary among provinces.
Fri, Sep 14th 2012, 00:20
If I decide to go down the Dacion en Pago route, do I have to continue to pay the mortgage, community fees etc until a decision is made?
Thu, Sep 20th 2012, 14:03
Hello G. Morris,
Before answering your questions, it is important that you understand the Dacion en Pago is only processed if the bank allows for it after checking your financial and personal situation and that they do not have any legal obligation to accept it. In the meantime, that is, while you are negotiating it, we do not recommend you to stop paying the mortgage and other fees related to the property if possible, as in case they deny the Dacion and for instance start the repossession process, your debt will have increased.
I recommend you to contact a solicitor that can negotiate with your bank in your behalf, as if Dacion en Pago was not finally accepted, at least new mortgage conditions or a Novacion could be possible.
If you wish to discuss your particular case, you can contact me by email after clicking on my profile.
Forum Guest Says:
Wed, Apr 10th 2013, 17:49
We only have old age pensions have no money in the bank and no assests at all we are on housing benifit. If bank reposses our flat in spain will we still be held resposnsible for any money the bank do not achieve when they sell our flat.
Tue, Apr 16th 2013, 15:22
Yes, if the bank eventually decides to repossess your property if there has not been any chance to negotiate a Dacion en Pago - which may be a good try if you can prove you have no assets and live on housing benefits without any other type of sources of income - you will certainy be held responsible for any remaining debt after the bank sells the property.
jeannie m. villegas Says:
Fri, Jun 7th 2013, 10:24
if we are let to sign the dacion en pago in june 2011, my mother died july 2011, it was not then implemented since 2013, but they sold the property to somebody without prior notice to us and we was just informed latter after everything was cleared, what will be my right as 1 of the co-makers of the loan, and do i still have the chance to get back the property as well???
jeannie m. villegas Says:
Fri, Jun 7th 2013, 10:30
oh, i forgot to indicate that my mother was the principal borrower and i & my husband are the co-makers. my sister decided to sell it to somebody interested. the process was already done when i was informed. what is the best way for me to do to get back the property??? thnks
Mon, Jun 10th 2013, 11:37
Please explain in more detail the current situation and sequence of events so we can understand the case.
Also, please feel free to send us an email including documentation if you require a more detailed reply to your query.
You can contact me by clicking on my profile.
jeannie m. villegas Says:
Sat, Jun 15th 2013, 05:42
hi patricia, thanks for the reply. our house and lot title was mortgaged at d bank and dacion en pago was signed by my mom as d principal borrower i and my husband as the co-makers. jun 21, 2011. it was not surrendered at d bank. mom died july 17, 2011 and we were not able 2 pay amortizations. we are waiting for the bank notice to give us any updates but unfortunately my sister found a buyer w/o telling me they had already paid the bank april 15, 2013 and deed of sale was made right after everything was settled in the bank and the documents. now the buyer wants us to leave the house by august. do i still have the chance or the right to repurchase the property from the buyer? because on the deed of sale it was only my sister who signed, the title still in the name of my mom. thanks...
Mon, Jun 17th 2013, 14:32
I am afraid I do not understand very well your message. If a Dacion en Pago was signed, this means the bank had to take possession of the property and therefore your sister would have not got a right to sell a property that was no longer your mother´s. As we still do not have a clear picture of the situation, I kindly ask you to send us the Dacion en Pago documentation as well as documentation related to the sale of the property so we can check it and offer our piece of advice.
You can send us the documents by email, bu clicking on my profile.
Forum Guest Says:
Fri, Jun 28th 2013, 05:12
hi patricia, thanks for all the comments!!! i'd love to send you infos on the problem, but i hardly cant access your account. we signed the dacion en pago doc june 2011 but the bank did not take possession of the house and the interest still continues to increase. mom died july2011 and we hardly cant cope up for the payments because we spent much to her medications and burials. the bank manager told my husband that we can still retrieve the title if we pay it full or even the corresponding interest. then my sister entered into transactions with the bank manager and found a buyer. i told the buyer we will be paying for it maybe in 3 months because we need to find the corresponding amount. but without any notice, the bank manager had told the buyer and my sister that i do not have the right to get it at all because of the signed dacion en pago and that my sister can find a buyer who will pay the necessary charges at the bank. they then made the payments to the bank and the bank manager released to them the documents. the net step is that they went to an attorney for the deed of sale. now the title is in possession of the buyer. they only told me of that right after everything is done. i told the buyer i will pay her the expenses and she will have to return everyhing to me, they refused. what will be my standing then. do i still have the chance to retrieve the rights? what legal moves do i need to do? thankshnotswe
Fri, Jun 28th 2013, 14:08
I am afraid that the information you send is very confusing and we need to check documentation.
If you click on my profile and then click on my details, you will be directed to my email address.