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foreclosure
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ECJ strengthens consumer rights

We will first begin the topic of “foreclosure on real estate” with a judgment.

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Foreclosure: ECJ judgment 4.03.2013, C 415/11

A Spaniard had fallen behind on his payments for a real estate loan and had not responded to numerous letters from his financing bank. That only changed when the foreclosure auction took place. He was of the opinion that the bank should not have called in the debt and certainly should not have auctioned the property. The bank is also not entitled to enforce the mortgage deed into his property. The ruling is binding for the German courts, but has never found favor there. Most recently, the Federal Court of Justice ruled against the owner and in favor of the bank in a similar case. However, the BGH's ruling precedes that of the ECJ and is therefore no longer tenable. Proceedings are currently underway before the Stuttgart Higher Regional Court, which will take this legal question to the Federal Court of Justice and, in relation to German legal practice, to the European Court of Justice if necessary.

Tenor of the ECJ

  1. Directive 93/13/EEC and thus also 2011/83/EU on unfair terms in consumer contracts must be interpreted in such a way that, before enforcement, it must be clarified in court whether the termination of the loan and the mortgage is legal. Executing on the basis of a document alone is not permitted.

 

2nd Art 3  the directive must be interpreted as follows:

  • the concept of “significant and unjustified disproportion” to the detriment of the consumer must be assessed through an examination. It is also important here that the legal situation of the consumer is examined in the light of the means available to him under national law to put an end to the use of unfair terms;
  • When it comes to the question of whether the disproportion is caused “contrary to the requirement of good faith”, it must be examined whether the bank, acting loyally towards the consumer, could reasonably expect that, after individual negotiations, the relevant, usually pre-formulated clause in the contracts.

Contract clauses

The ECJ depends on whether the consumer actually had influence on the contractual clauses or whether they were not presented to him pre-written for his signature. The contracts must be written in clear and understandable language. The consumer must actually have the opportunity to take note of all contractual clauses. In cases of doubt, the interpretation most favorable to the consumer must be applied. 

In any case, this disproportion of contractual rights and obligations is significant and unfair if the bank can advance without having to prove that it has a claim at all, but the consumer can only avert the realization if it takes an unreasonably long and expensive process Procedure must prove that the claim or its due date does not exist. German legal practice requires the consumer to bring such a lawsuit to defend against enforcement. The ECJ considers this to be unreasonable and the clause is therefore void.

Land charge deed

It is highly likely that all consumers in Germany understand the agreements in the land charge deeds in such a way that in the event of a justified termination of the loan, the security given in the form of the land charge will be returned against repayment of the amount actually owed and can therefore represent other financing. In individual negotiations, consumers would only fulfill and secure legitimate claims from the bank.

In point 74 of the reasons for the judgment, the ECJ states that, among other things, the amount of the default interest rate set must be compared with the legal interest rate in order to check whether the default interest is suitable for achieving the purposes pursued by it and not beyond that Required goes beyond.

German law does not provide for such an examination. A significant and unjustified imbalance in the contractual rights and obligations of the contractual partners results from the interest rate agreed in the mortgage, which is often 10 to 15 or even more percent. Therefore, this clause is likely to be invalid.

Favoring the bank

There is a blatant disproportion if the bank is given an advantage without any legal justification in such a way that its security increases year after year by the interest rate of 15%, for example, agreed in the mortgage, even if the loan is properly serviced, and this increased security does not increase either is reduced by repayments made. Simply by taking advantage of this abusive regulation, the bank is able to make the return of the security dependent on the fact that, in addition to the possibly illegally terminated loan amount, it also receives the full repayments and, on top of that, an illegal prepayment penalty of up to 60% of the nominal mortgage amount. This makes it simply impossible for the consumer to obtain a loan from the other financing partner in exchange for transferring the mortgage. 

It also does not help the consumer to pursue legal proceedings afterwards by obtaining compensation because the damage in the form of the loss of the family home and livelihood is irreversible and irreparable. 

According to Article 5 of Directive 93/13 EEC, all clauses must be set out in writing and must always be clear and understandable. If there is any doubt about the meaning of a clause, the interpretation most favorable to the consumer applies. As a consumer, you assume that in the event of a court-ordered enforcement, the court will check the admissibility of the termination, the amount of the claim and the admissibility of the compulsory enforcement in advance and not just the distribution of the auction proceeds after the compulsory enforcement has been carried out. The notaries do not provide any other instructions in connection with the creation of a mortgage.

Protection of consumer interests

Regarding the 2nd DIRECTIVE 2009/22 / EC of April 23, 2009

on injunctions to protect consumer interests

In Germany, the enforceability of loan claims for real estate financing usually takes place from land charge deeds that have been notarized and declared enforceable. The real enforcement through compulsory auction and compulsory administration takes place from the land charge itself, the other compulsory enforcement against the borrower personally against the remaining assets takes place from a “personal liability” with subjection to enforcement, which is regularly specified in the land charge deed. In both cases, no judgment procedure takes place before enforcement begins. The legal situation is comparable to Spanish law and mortgage enforcement there.

Foreclosure - Enforcement Order

In Germany, the enforceable document is legally legitimized as an enforcement title in Section 794 Paragraph 1 No. 5 ZPO. The provisions on and against the enforcement of judgments apply accordingly to these enforcement titles via a reference. The judgment debtor is therefore only able to defend himself against the enforcement of a document with the help of the court. Theoretically, the consumer can have the entire title and the claim to be enforced checked and raise objections for the first time that speak against enforcement.

The Federal Court of Justice made it clear in the judgment of March 30.03.2010, 200, XI ZR 09/2013 and thus before the ECJ judgment from 93, that the debtor must not be forced into the role of the attacker. The reason for the decision was the possibility of enforcement from a land charge deed. At the same time, however, the BGH had rejected any control of the content of clauses and abuse of enforceable documents. According to the ECJ ruling, this is no longer tenable. Because the ECJ expressly requires control of the content of clauses and abuse. Directive 13/2009 EEC and Directive 22/XNUMX EC were created specifically for this purpose.

Security agreement

According to the BGH (in 2010), sufficient protection is binding the creditor to a security agreement. According to further case law of the BGH, the so-called proof of entry is generally not a condition of enforcement and according to consistent legal practice. Contrary to the ruling of the Federal Court of Justice, the debtor must still initiate legal proceedings himself and can only obtain service of a lawsuit if he first pays a full advance on court costs or is granted legal aid or a deferment of the advance on court costs is granted. The court costs advance is based on the generally very high nominal value of the land charges and is therefore usually in the four-digit range and even in the five-digit range for amounts in dispute of EUR 650.000 or more. If a credit institution wanted to obtain a title against the borrower, it would have to pay the legal costs advance in this amount and would usually only have an enforceable title after a legally binding decision. Above all, however, she would have to explain and prove the amount of her claim. She could only obtain an enforcement title at this amount.

Opportunity to comment

Now one could argue that the borrower could apply for legal aid. But this objection does not hold water. The decision on legal aid not only depends on the debtor's need, as is the case with the granting of social assistance, but also requires a positive assessment by a single judge about the prospects of success of the objections. The requirements for a temporary suspension of enforcement are similar. In each case, the creditor is given the opportunity to comment, which is essential in constitutional procedures, but also means that a decision on enforcement protection is made much later than is necessary. In addition, there is the fact, which is also important in the legal dispute presented by the ECJ, that enforcement has already begun or may have already ended before legal protection can be obtained.

Negative effects of foreclosure

In Germany, the negative effects of compulsory enforcement occur with the first entries in the land register and the confiscation. From this point on, the debtor loses legal and economic freedom of choice. The publication of a compulsory auction date means the loss of all economic freedom of movement. As in Spanish law, the loss of property due to a bid in the compulsory auction is irreversible.

The courts will only take note of the amount of the registered claim after the award has been made at the distribution date and will only decide there through an objection in a subsequent legal dispute - only after the debtor has paid an advance on costs. 

Personal enforcement takes place without restriction in the full amount of the mortgage amount plus interest in rem (15% pa for up to four years, i.e. mortgage + 60%).

Violation of the principle of equivalence

The formal enforcement law in Germany therefore offers numerous opportunities for abuse. The review of a legitimate claim by the credit institution is almost independent and independent thanks to pre-formulated enforcement options. It follows that, in both Spanish and German procedural law, the final award of an item encumbered by a mortgage or land charge in favor of a third party is always irreversible, even if the unfairness of the term challenged by the consumer in the declaratory procedure leads to the invalidity of the enforcement proceedings. The ECJ sees this as a blatant violation of the principle of equivalence - paragraph 57 ff. of the reasons for the judgment.

In points 45 and 46 of the reasons for the judgment, the ECJ states that, in view of the weaker position of the consumer, Article 6 Paragraph 1 of the Directive provides that unfair terms are not binding for the consumer. In this context, the Court has already ruled on several occasions that the national court must of its own motion examine the unfairness of a contractual term that falls within the scope of the Directive (contrary to BGH 2010) and thus remedy the imbalance between the consumer and the trader. According to the ECJ ruling, the banks' pre-formulated land charge deeds can therefore no longer be valid. This applies all the more in light of the other reasons for the judgment.

Reasons for judgment

60. As the Advocate General pointed out in point 50 of her Opinion, the compulsory enforcement could have been carried out before the promulgation of the decision of the Court of First Instance annulling the contractual term underlying the mortgage and thus the enforcement proceedings, that decision would only ensure downstream protection for the consumer, consisting solely of compensation, which would prove to be incomplete and inadequate and, contrary to Article 7(1) of Directive 93/13, would be neither an adequate nor an effective means of preventing the use of this term to put an end to it.

61. This is all the more true when, as in the main proceedings, the property encumbered by the mortgage security is the home of the injured consumer and his family, because that consumer protection regime, which is limited to the payment of compensation, is final and irreversible cannot prevent the loss of the said apartment.

62. Accordingly, if the conditions are met, banks could essentially deprive consumers of the protection intended by the Directive simply by pursuing such enforcement proceedings, which also proves to be incompatible with the case-law of the Court of Justice. 

70. In particular, as regards, first of all, the early repayment clause for non-fulfillment of the debt within a limited period in long-term contracts, the referring court must examine, inter alia, whether the possibility granted to the bank to call the entire loan due depends on: that the consumer has failed to fulfill an obligation that is essential to the contractual relationships in question, whether this possibility is provided for in situations in which such failure is sufficiently serious in relation to the term and the amount of the loan, whether the said possibility of the rules applicable in this area and whether national law provides for appropriate and effective means enabling the consumer to whom such a clause applies to eliminate the effects of the default of the loan. 

Therefore, after examination, nothing else can emerge than that all land charge orders and land charge documents commonly used in Germany are not sufficient to enforce against consumers.

Jürgen Bächle
Jurgen Bachle

has been working as an independent tax consultant and expert in international tax law since 1989 and has been a member of the board of the German Association of Tax Consultants Baden-Württemberg, DSTVBW, for over 20 years.

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