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.
Conclusion
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)
Contact us for further information.
