What is Dación en Pago?
The legal process in Spain known as dación en pago has earned something of a reputation among those home owners in Spain that have suffered economic difficulties over the last few years, and have been unable to continue to meet repayments on a Spanish mortgage. Adding up “Dacion en pago divorce” conforms a usual cause for unability to repay mortgage.
In effect, the process involves the bank that conferred the mortgage accepting the property in lieu of the balance of the mortgage that remains to be repaid. This has been notoriously tricky of late since, with property values taking a tumble as a result of the great recession, banks have been reluctant to accept an asset that they cannot sell instead of loan repayments.
Normally, for the bank to accept the return of the property, and it is only possible if the bank accepts it, the resale value of the property must be greater than the amount remaining to be paid on the mortgage. In addition there would be legal and other fees to be taken into account, that must be covered by the resale value of the property.
An Exception to the Rule
Assuming that the bank will accept the transfer of the property in lieu of mortgage repayments, normally the transfer could only proceed when each owner of the property is in agreement to do so. However, an exception can exist, under Article 1377 of the Spanish Civil Code, if a couple own a property within the matrimonial system known as ‘gananciales’ (similar, but not exactly the same as exists by default in the UK, whereupon the assets accumulated by matrimonial couple during marriage are shared equally).
Such an exception may arise within the context of family law proceedings, whereby one spouse may seek a court order affecting the rights and obligations related to to a property, such as occurs with the transfer to a bank of a property under the dación en pago process, even without the agreement of the other spouse. In such cases, a valid dación en pago may take place where only one spouse signs the agreement.
While the law normally insists that, when dealing with assets that have multiple owners, that each owner should be in agreement before transferring the asset to a third party, it permits the transfer with the agreement of only one of the owners where to do otherwise would cause a serious loss to the assets accumulated up to that point within the marriage or which would impact gravely on the future inheritance of any children.
Article 1377 of the Spanish Civil Code: the performance of acts of disposal for valuable consideration over common property shall require the consent of both spouses.
Of one of them should refuse or should be unable to give it, the Judge, after summary information proceedings, may authorise one or several acts of disposal when he should consider it to be in the interest of the family. Exceptionally, he shall provide any limitations or precautions deemed convenient. (As seen in this scholarly PDF)
Dacion en pago divorce: a practical example
A practical example of this rule would be where a couple own a property jointly and are jointly and severally liable under a mortgage on the property, where the mother of one the spouses acts as guarantor. Upon a divorce, one of the spouses fails to agree to the terms of the divorce and they fall behind in the mortgage payments, thereby arising the option of dación en pago. However, the spouse whose mother is not acting as guarantor refuses to sign the dación en pago in order to cause hardship to the other spouse.
In such circumstances the only option to avoid financial hardship being the process of dación en pago, the Court may, on studying the matter in depth, agree to a request by the spouse whose mother acts as guarantor, to grant an order allowing for the dación en pago to take place, without the consent of the other spouse, who is also owner of the property.