Only ‘fair’ mortgage contract terms can be enforced – EU ruling

Debtors facing mortgage foreclosure proceedings may have a powerful defence weapon in the Unfair Contract Terms Directive 1993, in light of a recent EU ruling. This comes at a time when pressure mounts on EU member states to restructure and expunge bad debts from their banking systems.

On March 14th, the Court of Justice of the European Union handed down a judgment in a case taken by a Spanish mortgage holder, Mr Aziz, against the bank which granted him a 33-year mortgage in 2007 and began foreclosure proceedings against him in 2009.

The court held that Spanish mortgage enforcement legislation contravened EU law, since the grounds on which a debtor could object to mortgage foreclosure proceedings did not include a claim that terms of the relevant mortgage contract were unfair and unlawful under the 1993 directive, or that the proceedings should be staying pending resolution of a separate court action based on the 1993 directive.

The judgment is noteworthy not only because of the topical nature of its subject matter in Spain, as well as Ireland and Europe as a whole, but also because of new legal guidance provided by the court on the definition of an “unfair term”.

In assessing whether a term in a consumer contract is “unfair”, the 1993 directive states that two important factors are whether there is a “significant imbalance” between the positions of the contracting parties or a clear absence of “good faith”.

The court provided new guidance on the meaning of each of these terms. It held that an assessment of the significance of any imbalance should consider the counterfactual situation for the debtor (ie, the situation which would apply under normal national law rules) and the nature of the protections that remain available to the debtor where the mortgage term applies.

In relation to the meaning of “good faith”, the court found that an appropriate test would be whether the debtor would have accepted the relevant mortgage term in hypothetical circumstances where the contract had been negotiated individually between the debtor and the bank.

The Spanish authorities responded to this decision by announcing that the required changes form part of a wide-reaching reform of Spanish mortgage enforcement legislation that is already underway. It remains to be seen if and when any follow-on impact will be felt in Irish litigation or policy-making on this issue. The upcoming merger of the Competition Authority and the National

Consumer Agency can be expected to lead to greater national focus on how the 1993 directive interacts with the statutory rights of defaulting mortgage holders, as well as consumer law.

*Kate Leahy is a member of the Irish Society for European Law

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