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Securing a debt against a Spanish property

Securing a debt against a Spanish property
Transcript: 

Hi.  I’m Jonathan Eshkeri, English solicitor and Spanish abogado, practising law in London and in Tarragona, just south of Barcelona.

During the 60s, 70s and 80s and even more so in the period between the early 90s and the crash in 2008, the purchase of homes in Spain became extremely prevalent amongst Brits.  Even after the crash there is a healthy appetite amongst Brits for Spanish property. The result is that a huge number of UK nationals now own property in Spain, very often unencumbered.  It stands to reason that a proportion of those property owners incur liabilities which they can’t discharge and they may even be declared bankrupt as a result. Sometimes properties are purchased in the name of companies registered in foreign jurisdictions, such as England & Wales, or Scotland, or perhaps in the name of a Delaware registered company.   

The question for the creditor, the Trustee in Bankruptcy, the AIB’s agent in relation to Scottish sequestrations, or the Liquidator in relation to company insolvencies, is how to register an interest in the asset and then realise it if necessary, without huge difficulty, delay or expense.  As many of you will already know or will’ve heard, recovering assets in Spain is usually difficult, slow moving, and expensive. It can also be difficult to identify professionals with suitable experience in the market and an understanding of your needs, in terms of responsiveness and competitive pricing.

I’d like to take you through the broad steps necessary to register an interest in Spanish assets, with a heavy focus on real estate, and then to realise the asset successfully and cost effectively if needs be. If you’re watching via our website www.solicitorsinspain.com then further down the page you’ll find some bullet points setting out each step, and below that a transcript of everything I’m saying, in case you find that easier to follow, either now or later on.  Of course, I’ll be more than happy to speak with you either on the telephone or in person about a specific matter when I’ll be able to provide you with a lot more detail.

The starting point will be registering your interest in the Spanish asset, and in order to do that we’ll need a court order of some sort, or the consent of the owner of the asset.

This is one of three videos considering how to realise Spanish assets and how to secure any debt owed by way of a charge registered against a Spanish asset.

In this video I shall be considering how a lender or a creditor can secure a debt against a Spanish property with the consent of the borrower or debtor.

You may be owed money by someone who has been promising to pay for some time and who has a Spanish property.  You may suggest to him that he gives you a charge over his property to secure the debt that he owes you. The terms of the deal may be that he has a period of time within which to pay you without interest, but that if after that period he has not repaid the debt then interest is payable at a rate to be agreed, further to which you may foreclose on the charge and force a sale of the property in order to realise the asset and receive the debt owed to you.  

Similarly, you may be a lender who is seeking to provide finance to a party who either has his own Spanish property against which to secure the debt, or who has identified someone who for whatever reason is prepared to offer her property as security for the debt.

Whatever the circumstances, the procedure is fairly similar.  Taking first the scenario of a lender and a borrower, if there is a loan agreement drafted in another jurisdiction, then the provisions of that loan agreement will provide us with the information that we need in order to draft a mortgage document in Spain, called in Spanish a “préstamo con garantía hipotecaria”.  We’ll need to know the term of the loan, the initial interest rate, the ongoing interest rate, the penalty rate upon default, the maximum period during which the penalty rate can be charged, and the amount to include in relation to costs in the event of foreclosure, in addition to full details of the parties and full details of the asset to be charged, naturally.  We will also need a valuation of the property carried out by a Bank of Spain approved valuer, for mortgage purposes. The valuation is key because it provides the parties with an auction value, which becomes relevant in the event of foreclosure, as the lowest value at which the property can be sold at public auction is determined by reference to the auction value. I’ll say more about that in a few minutes.  If you’re lending funds to one party and taking security over the property of a third party, then the process is practically identical, save for the drafting of the mortgage document. In that scenario, the Spanish mortgage is called a “hipoteca unilateral”, or unilateral mortgage, because the mortgagor is giving a mortgage to the mortgagee without any consideration at all.

The mortgage documentation must be signed before a Notary, usually in Spain.  The borrower and the lender either need to be present themselves, or they each need to engage someone to represent their respective interests.  If we are acting for the lender then we act on their behalf at the completion meeting. It may be that the completion of the mortgage happens simultaneously with the purchase of a property, so that the purchase funds are provided by the lender.  We’re able to receive the lender’s funds into our client account and make payment of the funds to the borrower by way of banker’s draft at the completion meeting, which is common practice in Spain. In order to sign documentation on behalf of the lender we need a power of attorney. The power of attorney can be signed before any Notary Public anywhere in the world, provided it’s then legalised, either by having the Hague Apostille attached in countries that are signatories to the Hague Convention, or by the established procedure for legalising documents in any other country.

Let’s take the scenario of a debtor and a creditor where the creditor isn’t a bank or a finance house. There may be an agreement in place between the parties as to repayment of the debt, but very often there’s no such document in existence.  We’ll need to know the term of the loan, the amount of the loan and the interest rate to be paid, if any, as well as penalty interest to be paid and the period over which it’ll be paid, and the costs relating to foreclosure if necessary, in order to draft what is called a recognition of debt and mortgage, or in Spanish a “reconocimiento de deuda con garantía hipotecaria”.   As with a mortgage for the purposes of lending funds, here too we need a Bank of Spain approved valuer to value the property for mortgage purposes to ensure that the parties are agreed as to the auction value in the event of a forced sale.

Once the documentation has been signed, whether a mortgage or a recognition of debt, it needs to be stamped and registered.  Stamping the document will require a tax payment to be made if tax is payable. That is not always the case. In respect of a mortgage or a recognition of debt where neither party is lending money in the course of business, then no tax is payable.  Where a lender is a finance house, or a bank, then tax is payable at 1.5% of the total value of the loan. The total value of the loan must therefore be fixed, so an all moneys loan is not possible per se.

Where a charge is required over more funds than one is lending at the outset, a document known as a “hipoteca de máximo” is needed, or perhaps a “hipoteca en garantía de cuenta corriente de crédito”.  The first is used in many circumstances, for example where in the UK we would be considering an equity release mortgage. The latter may be used to secure an overdraft facility, for example. In both cases, however much money is drawn down upon signature of the mortgage documentation, liability to tax will be based on the total possible value of the loan, which is the total amount of money that can be drawn down against the facility, plus interest, penalty and costs.

Whichever type of mortgage is used, the total value of the loan will be the sum of the maximum amount to be drawn down, interest over a defined period, penalty interest over a defined period, and foreclosure costs.  So, in the case of a loan of say €100,000, the total value of the loan may be €150,000, when taking into account interest, penalty interest and the costs of foreclosure. If the mortgage produces a tax liability, then the tax of 1.5% will be on a total of €150,000 in this example.

If either interest payments are not made according to the mortgage conditions, or a loan is not repaid at the end of the term, then the chargee can choose to foreclose on the mortgage.  The Spanish civil justice system is famous for moving at an astonishingly slow pace, so before a chargee commences foreclosure proceedings we always recommend trying to convince the debtor to agree to repay the debt.  That is certainly the policy of the Spanish banks. Foreclosure is a last resort, but if you do decide upon that route then the next step is to apply to court to enforce the charge. Once the court makes an order in your favour you must then apply to the court to order the sale of the property at public auction.  

A date will be arranged for the public auction of the real estate in question.  That means that an auction will be arranged for that asset only. Any interested parties will need to attend the auction, which very often take place in an office in the court building and will be run by two civil servants.  No judge will be present. There is also an option to attend an auction by way of the court’s internet portal. Anyone attending to bid will need to have either deposited funds with the court amounting to 5% of the auction value of the property, or deposited a bank guarantee with the court to the same value.   

The auction value of the property will be determine by a valuation of the property carried out by a Bank of Spain approved valuer, for mortgage purposes, as I mentioned just before.

Anyone attending the auction will be able to bid for the property.  The lowest price at which a bidder will be able to own the property will be as little as the total value of the debt secured against the property, subject to the way in which other bidders behave, including the person forcing the sale of the property.

If nobody attends the auction, or nobody bids successfully for the property, then the party enforcing the charge can be awarded the property for as little as 50% of the auction value if the property is not the primary residence of the debtor, or as little as 60% of the auction value in the case of a primary residence. The property may then be registered in the name of the creditor, who’ll have to pay transfer tax as if he or she was purchasing the property.  It’s for that reason that sometimes people or banks who are awarded property in this way don’t register the property in their name until they find a purchaser.

At E&G Solicitors in Spain we have been advising and assisting clients with securing debt against Spanish real estate since 2004.  Please be in touch with me directly for specific advice in relation to your matter. You can find my details on our website, www.solicitorsinspain.com.  Thanks for watching.

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