Antonio Flores’ Blog

The weakness of the pound is already affecting thousands of property owners with an Euro mortgage, and according to many it would not seem that the English currency will revive in the short run. As we worry about the adverse effect of the exchange rate, some banks are already making predictions in respect of where the pound will be in June 2009, and you would be surprised that they are mostly well away from the terrifying “parity” word.


The chart below has been taken directly from the Sunday Times (Money supplement):

Even if the worst forecaster got it right, the Euribor applied by the banks (higher than the Euro current interest rate) is now at 3.025%, and there is almost unanimity in that they should be in the region of 2% by mid next year, which would mean that mortgages would cost up to 34% less than at the highest Euribor mark (5.5%), at the beginning of October 2008, comfortably making up for the depreciation of the British currency.

Expats and pensioners living on a fixed income paid out in sterling may have lost in real terms approximately 30% of their purchasing power in the eurozone. This is certainly a problem for many thousands of people but is already being tackled successfully by many by either buying in Gibraltar, a good option for Costa del Sol residents, or buying by internet in the UK, for certain products.

And for many who have decided to sell, the benefits are clear: if they managed to buy at a time when the sterling was trading at 1.5 times to the euro and can sell when a euro buys you 1.08 pounds, they are getting a good deal. In this respect many private purchase contract holders who have pulled out of their contracts due to contractual default by the developer are getting, in some instances, 40% more pounds than those they invested.

Finally, anyone deciding to buy one of many bargains which can now be found will necessarily need to take out a Euro mortgage to cover as much as possible of the purchase price so that the immediate exposure to currency risk is limited to the deposit (for example, a typical 70% mortgage). Of course, the euro mortgage repayments will still have to be funded from sterling sources, but at least the exposure to the unfavourable exchange rate is minimal and staggered over a considerable time. And when the pound/euro exchange rate returns to normal values, your mortgage capital in euros will still be the same, but in pounds it will have shrunk to 70-80% of the original amount.

If you live in the UK and have a property in Spain, and you are struggling to pay the mortgage, I would advise that you rent the property out, even if it’s below market rental value. You will be receiving the rent in euros which will cover a large amount of the monthly mortgage repayment. If you are worried about non-paying tenants, you must note that the goverment is enacting new laws which will allow evictions to be performed in a very short period of time.

When reading the pompously titled Royal Decree 1975/2008 (Spanish PDF) - Urgent Measures to be Implement in Respect of Economic, Fiscal, Labour and Access to Property Measures -, one thinks that we are opening a bag full of tax discounts and exemptions, job creation proposals and even formulas on how to bring in more business.

The reality is disappointing for when we look into these proposals only one really stands out of the crowd: the temporary and partial mortgage moratorium, limited to a maximum of 50% of the mortgage repayment (or €500) on a €170,000 mortgage, for unemployed at least since 3 months prior to applying for this help, whether salaried or self-employed and also, for the latter group, if they are earning less than approximately €1,500  in the last 3 months (or less than 3 times the minimum approved salary).

But if we then read carefully article 3 of the decree it states that “in any case the application of the measures herein contained will be subject to a prior agreement between the lender and the borrower”, which means that the above will be applied only if the bank wants to! And in anyone’s experience, how many times have we been offered help by a bank?

In summary, the Socialist Government is engaged in a superhuman effort to publish useless bits of legislation which are either always very difficult to benefit from because of the bureaucracy involved, are subject to third party agreement or simply are just not envisaged to save money (like this mortgage moratorium).

Zapatero has not realized yet that Spain was built on bricks and mortar and that he just cannot change the origin of the wealth and prosperity this country has enjoyed in the last 10 years. If he does want the economy to kick start again he better be thinking how to reduce the horrific taxes and costs associated with buying property (which in the worst case scenario go up to 11% of the purchase price) and then gradually try to base growth on a different economic model.

At last the Government has pre-approved a law proposal (PDF-Spanish) to encourage property owners to rent out their properties. Even though property sales have slowed down substantially, the property rental market is not increasing, and a staggering 2.8 million properties in Spain remain empty. 

The proposed changes will mainly target the excessive length of proceedings (which in some instances can take up to 12 months) to enforce an eviction process. Below is a summary of the main law changes to be approved in due course:

• Notice of payment prior to going to Court is reduced from 2 months to 1.
• The Court proceedings are now conducted via an equivalent to a small claims court procedure and are therefore a ruling can be reached in a couple of months (depending on the specific Court).
• The Court ruling will now be enough to evict a tenant and will be enforced within 30 days, without having to execute the ruling (whereas before the ruling was not automatically enforceable as the landlord had to instigate this action). If the tenant cannot be found the ruling will be notified in the notice board which each Court has and will proceed to send the bailiffs.
• Landlords will be able to demand return of the property if they need it not only for their own use but for that of parents and children. This clause will have to be inserted into the contract in order to be enforceable.

It will be interesting to see how these measures, in addition to others, bring dynamism to an otherwise stagnant market and, more importantly, if the court system will be able to cope with the expectations these changes will introduce.

We have been recently approached by a client asking whether sticking ones name on a list of debtors for Community fees is a legal thing to be done by the President or the administrators office.

In the particular case the President considered that these debtors have to be named and shamed as if we were in the time of the Spanish Inquisition as in his opinion this was the only way to make owners pay.

In a case identical to the one above, the Data Protection Agency contended that the information of debtors published on a notice board allowed the public (neighbours but also outsiders) to know information on the personal financial situation of the claimant which should have been kept secret by the administration office so that only the co-owners of the complex could access such information. The Community of Owners was consequently fined with 601 Euros and will presumably demand this money from the President.

In our case we have urged our client to send a clear warning to the “President” advising him that he is in breach of the Data Protection Act and that a similar illegality was fined with € 601 by the Data Protection Agency although the fine could be stretched to a maximum of €60,101, which is what the Act stipulates.

Spanish tax law is slow to keep up with the new times and so when buying (and selling) at discounted prices, a common occurrence these days, it may well happen that in 6 months from completion we receive a letter from the tax office asking us to pay more tax.

This is exactly what happened to a client who approached us after purchasing a property in Benahavis for €250,000, when he was sent the letter asking him to pay an extra €3,850, on account of Transfer Tax (7%) on €305,000 which is the value property should have, according to the tax office.

Why does this happen? Well, the regional Tax Offices in charge of transfer taxes uses a calculator which tells us what the minimum value each property should be sold at and therefore, if any property is sold under this value they will recalculate our tax declaration and will request that we pay the balance, using the property which has been bought as a guarantee of payment (a charge is immediately placed in the land registry).

Possible scenarios and options:

• What can be done before you buy? If you are buying a property at a discounted price we suggest that the minimum value is known prior to entering into negotiations with a seller and if there is a likelihood that the tax will be more then use when negotiating a price, to your advantage. So if you want to know what is the assessed value for tax purposes of a property in Andalusia, according to the Tax Office, you can do so by using this calculator (note that although an accurate calculation it is not legally binding).
• And if you have already bought and receive the letter…? If it was already known and made part of the deal then it gets paid, but if we receive the letter “out of the blue” (because we never suspected it could happen) then it can either be paid or appealed, a process likely to run into a 2 year period (but nowadays they can be won as judges consider that a calculator is no substitute to a proper valuation to be carried out in situ).
• And what if we are selling? This is a more complex case as the tax office in charge of capital gains tax (CGT) is the national AEAT, which does not use the above calculator but does actually send over property valuers. If this is the case, of which our firm has had very few in the last seven years, we will analyze the facts and merits of the case and advise on what the best course of action is. In one case we had our client had sold cheap (€350,000) because he had personal financial matters to resolve and soon after selling he left the country with the proceeds (very small, incidentally), so we have not heard more from the AEAT Tax Office who reported the real value to be of €450,000. Again, an appeal here is also an option.

If you want to avoid surprises it is possible to apply for a legally binding value report, whether you are buying or selling, which your lawyer can apply and obtain for you.

Property renting can become a source of conflict between renter and landlord when either party has limited understanding of the law. As we don’t expect everyone to read the Property Rent Act here are a few things both landlords and tenants should know:

• A contract under 12 months is not necessarily of short term duration. Under Spanish law rental contract terms (for accommodation purposes) are to be freely agreed between the parties but if the tenant can prove that this property has become his habitual home (not a too difficult task) he will be entitled to extend the term up to 5 years.
• In the event of non-payment, it is illegal to attempt to kick the tenant out, change the locks, willingly interrupt utility supplies, send thugs, a night-time guitarist or any other person who with the use of unethical threat, coercion, intimidation or even harm attempts to evict the tenant. Whether we like it or not, only a judge can decide on an eviction.
• It is illegal to deduct anything from the monthly rent. Anything means costs incurred in by the tenant in repair works or self-assessed compensation packages for electricity cut offs, noisy neighbours, incorrect information supplied by the landlord or agent when renting etc. Any such claim has to be claimed directly from the landlord initially and further via the Courts, if not in agreement.

Haphazard screening and tenant selection too often results in problems (i.e. a tenant who pays the rent late or not at all, trashes your place or lets undesirable friends move in). It is advisable to check credit history, references and background prior to letting a property out.

 For further reading:

Revisited 20-11-2008

Being unable to keep up the mortgage repayments is indeed a difficult situation for many and the topic is now becoming an all too often familiar situation. Keeping up the repayments is the best way to avoid problems but since this is not always possible below are some recommendations I would use when dealing with your Spanish bank:

1. Be frank to the person in the bank you deal with and tell them about your problems, which are incidentally shared by thousands of persons. The branch manager (with whom almost invariably you will be now dealing with and from whom you should not expect much help), will either try to  a) make you feel guilty about the situation and say that the ball is in your court and that they cannot help you further and b) scare you out of all proportion by making you think that if they foreclose you will be chased around the world for this debt, now and in future, which is probably not true as they will keep the property and forget about you if there’s not a substantial nagative equity on the property. However, some banks use credit-search sites which they can link to other site within the EU, something which may have an adverse effect on your credit history back home.
2. Always answer the telephone if they are chasing you, even if it is to reassure them that you cannot pay (going silent is a bad sign and who knows, perhaps they have good news to communicate as we found out once). Branch managers are accountable to regional managers in respect of difficult cases and so they will show more willingness to help if they can contact us for updates.
3. Propose your lender an interest only payment for a minimum of 2 years. This will see your repayment greatly reduced.
4. Propose your lender that interest rates are revised every quarter as opposed to every 12 months. Bear in mind that rates in the EU zone are going down and it is very likely that by mid next year the Euribor should be in the 2% mark, according to many analysts (if they can still be trusted!). As an example, a €200,000 mortgage repayable in 25 years and it´s rate to be calculated in December could be reduced by €120 per month and up to €300 per month by mid next year.
5. Combine the above with a rental, even if it is below the market. On a property worth €200,000 you should be able to get a minimum of €6,000, around €500 per month.
6. It is now (time of writing) a great time to think of switching your mortgage to a multicurrency loan with the Yen as the main currency, given that the interest rates are very low (1%) and the Yen at one of the highest exchange rates in the last years in respect to most western currencies (EUR, GBP). This means that if it goes down you will end up paying a smaller installment and will owe much less. Not all banks offer this type of loans but it is worth considering as a  €1,000 loan would go down to around €500. However, be advised that this can be risky; if the Yen goes further up, you might end up having to pay more for your mortgage. You could also consider USD, Swiss Francs or even GB pounds sterling, which will see your exchange rate risk eliminated (although the rate is still not favourable to the pound).
7. Some banks will accept listening to a refinancing plan which is basically adding the unpaid balance to the principal of your loan and increasing your payments slightly to cover the extra amount.
8. If the bank is not willing to help, then coldly ask them when is it a good time to come to see them as you want to hand them over the keys to the property, the deeds and the utility bills. Of course this will not discharge you from the obligation of paying the debt but you will see a change of attitude in them immediately and will listen to proposals more attentively.
9. If realistically there is no possibility to continue paying and the lender is totally inflexible (which is bound to happen if you are behind by more than 3 payments) it is then crucial that an agreement is struck with the bank where they keep the property in payment of the debt. This is called ‘dacion en pago’ and it basically consists on formally handing over the deed to your home to your lender who agrees to release you from your mortgage. A lawyer may be required for this but it is certainly a good way to spend that last bit of money so that one’s name is not published on a debtors list in Spain (and in some cases like with the CAM bank, also published in other countries, including the UK).

Again, always remember that banks are not real estate agents nor wish to be and so foreclosing and repossessing is and should be the very last option for the bank.

It has been widely believed that British citizens who own property in Spain will invariably be subject to UK law, which determines freedom of disposition of assets, as opposed to the more restrictive Spanish inheritance law where children will get 2/3 of the estate and the spouse the life interest of one third (and who may not be the preferred choice of the testator/testatrix!).

The reason for this is that under Article 9.8 of the preliminary title to the Spanish Civil Code, succession to all property, whether movable or immovable and wherever situated is determined by the law of the deceased’s nationality, in our case, English law, which takes relevance but surprisingly, it conversely stipulates that for property located abroad it will be the laws where the property is located which are to be applied. And in Spain forcible inheritors will almost always challenge a will if they don’t receive what they are supposed to get according the Spanish Civil Code, unless of course there are more debts than assets!

The above legal quarrel between both legal systems is now resolved so that if a British testator dies in Spain and:

• has moveable assets and property only in Spain then Spanish law applies.
• has property in the UK and Spain then UK law applies.
• has movable assets in Spain only then Uk law applies.
• has property in Spain and assets in the UK (but not property), then Spanish law applies.

It normally happens that if no inheritor challenges the application of UK law, which is normally typed into the will as the governing law, it will apply regardless of the above.

More often than is desirable some of my colleagues tend to overindulge in optimism when providing a legal opinion on a soon-to-be litigation matter. You can often hear and read on online forums the words “You have a strong case!“. This sort of a ‘closer’ phrase when selling services can bring about nasty surprises, especially if the judge thinks otherwise.

So I tend not to use this language when dealing with my clients, and will, on the contrary, give them a more elaborate opinion which will invariably include playing the devil’s advocate and exclude encouraging clients to file a case. Let’s not forget that the opposing party will also be assisted by expert legal advice who knows the law, case law and how certain judges perceive different types of disputes.

In my opinion any lawyer needs to be very frank and open about the possibilities of obtaining a favourable ruling and should provide a per cent ratio of success, which even in the most blatantly clear case should not exceed 75% (so run away from the 95% success rate claims, and do it quickly!).

Litigation is a double-edged sword that can turn out to be very expensive for our clients, especially if a case is lost and therefore we (lawyers) should contemplate all -legally- available options prior to dragging our clients into courtroom, with their best interests as the main motivation and the legal fee bill as the last!

The tragic Barajas accident has brought about a singular controversy, never heard before in this part of Europe (or at least Spain). Spanish newspapers started it all off and the Spanish Law Society has now taken an interest in the matter. I am referring to the so called “ambulance chasers“, a funny and graphic term given to lawyers who hurry to disaster sites to solicit business from the injured or the relatives of those who have died.

The Spanish Law Society is now studying whether to take disciplinary actions against Spanish law firms who have hooked up with their American counterparts in a quest to attract as much of the personal injury legal compensation business as possible, almost right at the scene of the accident. Also, the Dean of the Las Palmas Law Society has affirmed that that some Spanish law firms are in clear breach of the Law Society Rules and Statutes in respect of legal business solicitation (articles 7. and 8.) and has equally recommended exemplary disciplinary action.

Aggressive solicitation of legal work  is not uncommon in Spain and temptations arise when those targeted are foreigners caught up in nightmarish legal wrangles, for example when buying property. I suppose it is not always possible to differentiate what is ethical from unscrupulous but the above case seems a clear example of someone wanting to profit from someone else’s misfortune. Too bad for those Spanish firms!