Understanding the Enforcement Proceedings for Spanish Mortgages Overview of the Regulation after RD 8/2011
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Understanding the Enforcement Proceedings
for Spanish Mortgages
Overview of the Regulation after RD 8/2011
Banking and Capital Markets Department
1. Introduction have marked the areas where the changes have
been implemented together with a description
Spanish real estate is attracting an increasing of the former regulation). Please note that any
amount of interest from international investors. reference to approximate terms, other than
On many occasions the interest lies directly on those explicitly established in the Spanish
the potential acquisition of a real estate asset legislation, is based on our experience and shall
which is thought to be underpriced or otherwise be taken as approximate. For obvious reasons,
attractive but, on some other occasions, it is very difficult to predict the precise timing for
transactions including distressed debt acquisition each of the steps of the proceedings since many
and further foreclosure of security becomes an determining factors are not under the creditor’s
interesting possibility to approach an asset. control. This Note only refers to Spanish Law.
This note is an overview which does not consider
Investors generally find it difficult to understand all the different alternatives or outcomes. It shall
the procedure for foreclosure of security in not be relied upon in order to take decisions in
Spain and up to what extent such procedure particular matters. Legal counsel’s advice should
can be creditor-controlled. Issues such as the be obtained before acting.
impossibility of directly appropriating an asset,
credit bidding or grounds for opposition within a 2. Enforcing Real Estate Security
proceeding become fundamental in the analysis.
Also various press releases, some controversial The main principle is that according to Spanish
Court rulings affecting the recourse against the law a secured creditor may not directly
debtor for amounts not covered by the security appropriate real estate assets given as security
and the enactment of Royal Decree 8/2011 upon default of the secured obligation. Should
dated July 1st (“RD 8/2011”) amending certain the secured obligation not be satisfied, the
features of the judicial enforcement have made secured creditor will have to proceed with a
this an actual and interesting topic. foreclosure proceeding. There are two different
public auction proceedings: (i) the judicial
This note intends to provide a general overview proceedings, to be followed before the Spanish
on the foreclosure mechanisms for real estate Courts and (ii) the extrajudicial proceedings
assets located within Spain and subject to to be followed before a Notary Public. The
Spanish security. This note describes two different extrajudicial proceedings may only be used if
foreclosure proceedings for real estate assets agreed by the parties, generally in the security
and it includes the amendments resulting from documents and in practice is rarely used due to
RD 8/2011 (for the purposes of identification we certain technicalities1.
1
It must be noted that there has been a long discussion on the legality of the extrajudicial proceedings that, up to date, has not been
definitively settled. This uncertainty refrains creditors usually from choosing this proceeding, trying to avoid the risk of a judicial
pronouncement addressed to stop its development.
Analysis GA&P | July 2011 12.1. Judicial Proceedings (d) Auction
The process will generally be as follows: Once the above has been complied
with, and at the request of the
(a) Essential breach by the borrower claimant, the borrower or the third
party owner, the property or asset
After an essential breach the creditor mortgaged shall be auctioned. Auction
will most likely declare the early will generally be made through a
termination or acceleration of the closed-envelope process but could
secured obligation. Ordinarily after also be made through live-verbal bids
such termination/acceleration the before the Court on the date fixed for
borrower will have a short term to the holding of the public auction. In
repay the total outstanding amount, order to attend the auction, bidders
this is, principal plus interests accrued. must deposit 20% of the auction price
Should the borrower not repay the (it was 30% before the 8/2011 RD).
requested amounts, the secured The enforcing party may only bid
creditor may initiate the corresponding when there are other bidders and will
enforcement proceedings. not be required to make a deposit.
These are the possible scenarios in
(b) Enforcement claim the auction:
The enforcement claim must be made (i) Bid equal to or higher than 70%
against the borrower, and if applicable, of the price for which the asset
against the non-debtor mortgagor and is auctioned (which shall have
the third party owning the mortgaged to be determined in the public
assets. The secured creditor shall deed of mortgage and shall
have to attach to the writ of claim remain without prejudice to
certain specific documents expressly the actual value of the asset at
designated in the Spanish legislation the time of enforcement, the
and, among others, an enforceable “JP Appraisal Value”): the Court
copy of the public deed of mortgage Clerk shall, by order issued on
–that is, in principle, a first copy of the same or the following day,
such public deed–, a certificate of the award the foreclosed asset to
outstanding debt issued by a Notary the highest bidder. Within a
Public in accordance with the terms time limit of twenty (20) days,
of the agreement, a copy of the the highest bidder shall pay
notarial request of payment made to to the consignments account the
the borrower, granting it, at least, a difference between the amount
ten (10) working-days term for the initially deposited and the total
repayment and finally, a certificate price of the final bid. If the bidder
issued by the Land Registry regarding is the enforcing creditor, it will
the property and its encumbrances. only pay the difference, if any,
between its bid price and the
(c) Grounds for opposition outstanding amount owed to it for
principal, interest and court fees
In practice, the borrower has very little (thus credit bidding is allowed).
grounds to challenge foreclosure in
case the enforcement claim has been (ii) Bid higher than 70% of the
correctly filed. In any event, once the JP Appraisal Value with deferred
challenge has been filed, the Court payment: if only bids in excess
Clerk shall stay the enforcement and of 70% of the JP Appraisal Value
shall summon the parties to a hearing are made, but offering to pay
before the Court. in instalments with sufficient
Analysis GA&P | July 2011 2bank or mortgage guarantees (v) Bid lower than 50% of the
of the deferred price, such bids JP Appraisal Value: if the best
shall be notified to the enforcing bid does not meet the above
creditor who, within the next requirements, the parties may
twenty (20) days, may request allege whether or not the award
the adjudication of the property is admissible and the Court Clerk
at 70% of the JP Appraisal Value. will resolve on the basis of a series
If the enforcing creditor does of circumstances, mainly the
not make use of this right, the attitude of the foreclosed debtor
foreclosed asset shall be awarded regarding its obligations under the
to the most favourable of said agreement. If the Court rejects
bids. the award, the rule to be applied
is that the secured creditor may
(iii) Bid lower than 70% of the request the adjudication of
JP Appraisal Value: if the best the asset for an amount equal
bid placed at the auction is lower or greater than 50% of the
than 70% of the JP Appraisal JP Appraisal Value or for the
Value, the foreclosed debtor may, amount owed to him (principal,
within a time limit of ten (10) days, interest and court fees) but just
present a third party improving in case such price is equivalent
the bid by offering an amount in to or higher than the 50% of the
excess of 70% of the JP Appraisal JP Appraisal Value.
Value or that, albeit lower than
such amount, is sufficient for (vi) No bidders: if there are no bidders
the complete satisfaction of the to the auction the secured creditor
amount owed to the enforcing may request the adjudication of the
creditor (principal, interest and asset for an amount equal or greater
court fees). If, upon expiry of than 60% of the JP Appraisal Value
said time limit the foreclosed (it was 50% before the 8/2011 RD).
debtor has failed to proceed as When the secured creditor fails to
set out in the above the enforcing use this power within a time limit
creditor may, within a time limit of twenty (20) days, the Court
of five (5) days, request the Clerk will order the lifting of the
awarding of the property for 70% attachment over the asset at the
of the JP Appraisal Value or for request of the foreclosed debtor.
the amounts owed to him
(principal, interest and court 2.2. Extrajudicial Proceedings
fees), provided that this
amount is higher than 60% The extrajudicial proceeding shall only
of the JP Appraisal Value and be followed if it has been agreed in the
the highest bid (it only had to mortgage deed and in case the debtor,
be higher than the highest bid in such public deed, has appointed a
before the 8/2011 RD). representative for the sale of the asset
and has also determined the value of the
(iv) Bid higher than 50% of the asset to be used in the public auction
Appraisal Value: in absence of (the “EP Appraisal Value”).
all of the above, the asset will
be awarded to the best bidder The main differences of this process are
at 50% of the JP Appraisal as follows:
Value or, if the best bid is lower
such 50%, if it at least covers the (a) Required Deposit
amount at which the foreclosure
has been ordered (principal, The secured creditor will be able to
interest and court fees). bid in the auctions without having
Analysis GA&P | July 2011 3to make any deposit. Other bidders the appropriation of the asset as
will have to deposit 30% of the price payment of the debt, accepting
for the first and second auctions the persistence of previous
and 20% (of the second auction price) charges and fully discharging the
for the third auction. secured debt.
(b) Auction (iii) Third Auction: if the secured
creditor does not make use of this
Once thirty (30) days have elapsed appropriation right a third auction
as from the payment request, the may take place. This auction will
process for the sale of the asset in not be subject to any minimum
public auction will start. Possible value, but if the best bid placed
scenarios are as follows: is lower than the value set for the
second auction the non enforcing
(i) First Auction: no bids under the creditor, the owner of the property
EP Appraisal Value may be accepted. or any third party authorized by
If no bid is accepted, the secured them may improve the bid within
creditor within the next five (5) days the time of five (5) days. In this
may request the appropriation of auction, in case no bidders attend
the asset as payment of the debt, it, the creditor is not entitled to
accepting the persistence of previous obtain the adjudication following
charges. The secured creditor will the same process set out for the
then discharge the total amount of judicial proceedings.
the secured claim.
(c) Payment and credit bidding
(ii) Second Auction: if the secured
creditor does not make use After the public auction the highest
of his right of appropriation a bidder shall pay the difference between
second auction may take place the amount initially deposited and the
where the value will be 75% of total price of the final bid. If the bidder
the EP Appraisal Value and no is the foreclosing party, it will only pay
bid under such price may be the difference, if any, between its bid
accepted. If no bid is accepted, price and the outstanding amount owed
the secured creditor within the to it for principal, interest and court
next five (5) days may request fees (thus credit biding is allowed).
Analysis GA&P | July 2011 4For any queries on the above please contact any of the following members of Gómez-Acebo & Pombo:
Miguel Lamo de Espinosa Abarca Javier Izquierdo Jiménez
Partner, London Lawyer, Madrid
Tel.: 44 (0) 20 7329 5407 Tel.: (34) 91 582 91 00
mlamo@gomezacebo-pombo.com jizquierdo@gomezacebo-pombo.com
Barcelona | Bilbao | Madrid | Málaga | Valencia | Vigo | Brussels | Lisbon | London | New York
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