Dozens of Spanish banks in have been told to pay compensation for floor capped mortgages in Spain or face legal action by up to 2.5 million property owners.
During the international property boom, thousands of UK investors and families looking for a holiday home in the sun bought a property in Spain. Many took advantage of mortgages offering a low introductory interest rate followed by a variable rate linked to EURIBOR. What many did not realise was that the mortgage agreements included a “clausula suelo” or “floor cap” clause that stipulated if the EURIBOR rate went below a certain level, lenders could apply a minimum interest rate.
The EURIBOR rate was slashed in 2008 following the worldwide collapse of the property market. However, rather than charging less interest on the outstanding property loans, more than forty Spanish banks applied a similar or higher interest rate as before – causing considerable financial hardship for property owners, multiple mortgage defaults, and 90% of evictions. Many property owners felt they had been treated unfairly, as the “floor cap” clause had never been explained and was often only briefly mentioned among lengthy and complicated terms and conditions.
Attempts to recover compensation for floor capped mortgages in Spain were initially unsuccessful. Courts often found in favour the banks, who argued it was the purchaser´s responsibility to read and understand the terms and conditions of the mortgage before agreeing to it. However, in May 2013 – during a court case against Spain´s second-biggest lender BBVA – Spain´s Supreme Court ruled that BBVA´s floor cap clauses were unfair, and – although not prohibiting them – ruled that the clauses should be voided in all past and current mortgage agreements.
As a result of the Supreme Court´s ruling, 15,000 property owners brought a class action claiming compensation for floor capped mortgages in Spain. In April 2016, Judge Carmen Gonzalez found in the claimants´ favour and said that “quantities improperly charged” since May 2013 should be refunded. The verdict caught the eye of European Commissioners, who felt that, if the unfair clause was to be voided, it should be voided from the beginning of the agreement and compensation paid in full.
Spanish banks contested the Commissioners´ view – arguing that, if they paid compensation for floor capped mortgages in Spain from the start of every eligible mortgage agreement, their liabilities would exceed €4 billion. The banks claimed the liabilities would cripple the already unsteady banking sector. The Commissioners disagreed and, in December last year, the European Court of Justice ruled that compensation for floor capped mortgages in Spain should be paid in full.
Conscious of the potential for up to 2.5 million claims, the Spanish government acted quickly and last week announced the process through which banks would pay compensation for floor capped mortgages in Spain over a three-month period. The process starts with the lenders identifying which customers signed mortgage agreements containing the contentious clause. Banks then have to write to each customer with an offer of settlement.
If the offer of settlement is considered inappropriate and no agreement can be reached within three months, or mortgagees are not contacted by their lender within three months, the “extra-judicial procedure” will be considered concluded, allowing property owners to pursue compensation for floor capped mortgages in Spain through the courts. As ever, we advise those affected by this latest development to seek professional legal advice from a solicitor familiar with the Spanish real estate market.