The most common forms of security over real estate are:
A mortgage entitles the mortgagee to sell the property in a public auction with priority over unsecured creditors.
A shareholder in a corporate borrower can also create a pledge of its shares. This also entitles the creditor to sell the shares in a public auction with priority over unsecured creditors.
It is also common for security to be granted over the rent and other possible income from a property. This usually takes the form of a pledge whereby the tenants or the insurance company, in the event of breach of the loan agreement, are directed to make payments to the lender. This assignment is normally created by a separate security document.
Last modified 13 Mar 2025
Real estate includes the land, buildings constructed on it and fixtures which form part of those buildings. It is also possible to take security over the bare ownership as distinct from the use, the right to build on the site or a concessionary right to use public land.
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No, the concept of a trust or a split between legal ownership and beneficial ownership is not generally recognized under Spanish law.
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Secured debt can be traded and is in fact increasingly traded between lenders. There are several ways of transferring debt, being:
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Last modified 13 Mar 2025
Mortgages are only effectively created when they are registered at the relevant Land Registry. In order to be registered, mortgages must be executed by means of a public deed (escritura pública). This is a formal document entered into between the parties which is witnessed in front of a Spanish notary public.
Registrars and notaries charge fees, which are set by the government and are based on a sliding scale, although notary's fees can be negotiated down. In practice, the costs of both notaries and registrars together should not exceed 1% of the value of a particular transaction.
With regard to the taxation of mortgages, the actual loan is exempt from Transfer Tax (Impuesto sobre Transmisiones Patrimoniales – ITP) but the execution of the mortgage deed is subject to Stamp Duty (Actos Jurídicos Documentados) at rates which depend on the region where the property is located (0.5% to 2%). The rate of Stamp Duty is calculated over the amount stated in the notarial deed as maximum mortgage liability (ie the total amount secured by the mortgage).
Pledges of shares are not subject to stamp duty, but the grant of a pledge involves payment of notary fees, as a public document is required.
A pledge of credit rights and moveable assets must also be created pursuant to a public document (escritura pública or póliza mercantil) to benefit from priority over other creditors, so notary’s fees are involved. A pledge of moveable assets must be registered at the Moveable Assets Registry (Registro de Hipoteca Mobiliaria y Prenda sin Desplazamiento), and registry fees and (if granted as escritura pública) stamp duty must be paid.
Pledges over credit rights may be registered at the Moveable Assets Registry if they are granted as pledges without dispossession of the pledged assets, in which case registry fees and (if granted as escritura pública) stamp duty are payable.
If the mortgagee acquires ownership of the property through enforcement proceedings, it will have to pay Transfer Tax or VAT, depending on whether it is a first or subsequent transfer of the real estate. The second and subsequent transfers of real estate are exempt from VAT. This exemption can be waived by the acquirer if it acts in the exercise of its business or professional activities and is fully or partially entitled to deduct the VAT levied on the relevant transaction.
The rate of Transfer Tax depends on the place where the property to be mortgaged/acquired is located (generally, a rate of 6 to 11% applies) and the rate of VAT is 21% (or 10% in the case of residential property).
If the pledgee acquires ownership of the shares in a company through enforcement proceedings, the transfer is generally exempt from VAT and Transfer Tax. Nevertheless, Transfer Tax/VAT can be incurred on the transfer of shares in companies, when the transfer of the shares is made with the purpose of avoiding the payment of the tax that would have been paid in case of transfer of the real estate. The law considers there are tax avoidance reasons where 50% or more of the assets consist, directly or indirectly, of real estate located in Spain and are not used for business activities, and, as a result of the transfer, the buyer acquires control over the company (ie more than a 50% stake in its share capital) or increases its stake once it has obtained control.
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Yes, there are both financial assistance rules and corporate benefit rules which must be complied with.
A Spanish joint-stock company (sociedad anónima) may not advance funds, grant loans or guarantees, or provide any kind of financial assistance for the acquisition of its shares or the shares of its parent company by a third party. Likewise, a Spanish private company (sociedad limitada) may not advance funds, grant loans or guarantees, nor provide any kind of financial assistance for the acquisition of its shares or the shares of any company in its group of companies.
Breach of financial assistance regulations may result in fines for the directors of the company granting the assistance, but may also result in the security or even the relevant transaction being deemed void. In any event, any objection to the financial assistance must be invoked by:
The directors of a company must exercise their powers for the commercial benefit of the company and its members. Basically, Spanish company legislation provides that directors have a duty of care towards the company (ie they must act diligently when running the company), must act faithfully and loyally with regard to the company (ie they must comply with legal obligations and company by-laws, etc in good faith and cannot use the good name of the company for their own personal transactions).
The board, a CEO, a lawyer or any other person with sole signing authority to bind and represent a company may grant security over its real estate assets by means of a public deed. Security over real estate assets must be executed by means of a public deed under Spanish law.
Prior shareholder approval is required for significant transactions, such as the acquisition, disposal or contribution to another company of assets whose value exceeds 25 percent of the company's balance sheet.
Security granted by a company prior to insolvency may be revoked or terminated by clawback action if it is created less than two years prior to insolvency or bankruptcy and is viewed as harmful to the rest of the creditors. Also, certain special rules (especially tax rules and transfer pricing) govern intragroup and related party transactions.
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A borrower may be required to deduct withholding tax in respect of interest which is payable to a foreign lender.
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A creditor can agree to subordinate its security interest to that of another creditor by a priority agreement, being a deed of postponement (subject to regional stamp duty over the amount of the postponed security if the eventual postponement was not foreseen in the original postponed security document) or an inter-creditor deed. This agreement will regulate the subordination of the debt as well as the security and will cover matters such as rights of enforcement.
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In relation to securities over both real estate and moveable assets, the jurisdiction of the place where the asset is located is mandatory.
In relation to the assignment or pledge of credit rights, the law applicable is the law governing the contract from which the credit right arises.
Application of foreign law by a local court will require evidence of the applicable rules in accordance with such foreign law.
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If a security interest has not validly been perfected, the relevant creditor will rank pari passu with the rest of the ordinary creditors (or the subordinated creditors, if applicable).
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A holder of security over land is not liable for environmental damage provided it does not take possession of the land and does not itself cause, or knowingly permit, damage to the environment.
Great care must be taken if the security is enforced because owners of land can be liable for environmental damage on that land or arising from it, even if they did not cause the damage. A mortgagee should not go into possession of land without careful consideration of the implications of potential environmental liability.
Last modified 13 Mar 2025
In relation to defaults, Spanish courts are reluctant to accept the enforcement of the security for reasons apart from non-payment of the loan or any amounts which are required to avoid damaging the security or the asset (eg common expenses, insurance or taxes on the real estate asset).
A lender is only entitled to declare the early termination of the loan on the grounds of non-payment of money due in the event that this has been provided for in the loan agreement. In the absence of an early termination clause duly recorded at the Land Registry, the lender is only entitled to claim the principal and interest overdue but not the whole amount of the loan. If the mortgaged property is transferred before the payment of any overdue instalment and there are other instalments not yet due, the property will be transferred subject to the mortgage corresponding to that part of the loan pending payment.
Early termination of the loan cannot be declared (and therefore security may not be enforced) unless the default in payment extends to three monthly instalments (or the equivalent amount, if payments are not made on a monthly basis or if the default corresponds to payment obligations other than debt service).
Before initiating judicial or extrajudicial foreclosure proceedings the lender must notify the borrower formally (through a notary in Spain, a certified letter, fax or any means which may state on record that the notification has been given and include the contents of the notification). The notification must state both:
A general principle of Spanish law prohibits what is known as 'pacto comisorio' (ie any agreement whereby the creditor would have an automatic right to keep property given as security or collateral if the debtor fails to pay), except in certain specific cases (eg when the collateral is cash). Consequently, foreclosure must take place through a public sale of the secured property normally through a formal auction procedure, which must be supervised by a judge or notary public. In practice, it is advisable that mortgage deeds provide for the possibility of using either process at the creditor's option.
In the event of a declaration by the judge of the debtor's insolvency, if the asset affected by the security is necessary for the continuation of the debtor’s professional or business activity, the mortgagee cannot initiate proceedings to enforce the security until one of the following events occurs:
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As a general rule under Spanish law debtors are obliged to apply for a judicial declaration of insolvency within two months of the date on which they knew or should have known about the insolvency situation.
Notwithstanding this, the obligation does not apply to insolvent debtors who have started negotiations in order to obtain assent to a proposal for an agreement between the creditors, if these negotiations are communicated to the relevant judge within the two month period. If the debtor has not overcome the insolvency situation within three months from the communication to the judge, it must then apply for the declaration of insolvency within a month.
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The validity of security interests is not, as such, affected by the onset of a borrower's insolvency. However, insolvency rules establish that the secured creditor will not be recognized as privileged for the whole secured amount, but rather for a maximum of 90% of the market value of the encumbered asset minus the value of any prior charges registered over the asset. Any amounts that are not recognized as privileged will rank as ordinary debts in the list of creditors, which has implications for quorum and voting majorities regarding arrangements with creditors. This notwithstanding, if the security is eventually enforced, the creditor will be repaid with the proceeds of the auction up to the initially secured amount.
As regards enforceability, in the event of a declaration by the judge of the debtor's insolvency, if the asset affected by the security is necessary for the continuation of the debtor’s professional or business activity, the secured party cannot initiate proceedings to enforce the security until one of the following events occurs:
Any actions of the debtor during the two-year period preceding the declaration of insolvency which are deemed harmful may be annulled. Transfers made in favour of related parties and the creation of in rem guarantees to secure pre-existing obligations or new obligations acquired replacing those pre-existing liabilities (unless made following an agreement between the creditors holding at least three fifths of the liabilities) are deemed to be “harmful” unless proved otherwise. Gratuitous transactions and payments made before the due date are deemed “harmful” notwithstanding any evidence to the contrary.
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If an agreement with the creditors has been reached, payments will be governed by that agreement (but such agreements do not affect creditors with in rem security (such as mortgages or pledges) if they do not consent to it.
If there is no agreement with the creditors, the first creditors to be paid are those holding créditos contra la masa, basically the creditors owed wages in respect of the 30-day period leading up to the declaration of insolvency and those becoming payable during the insolvency proceedings as well as legal and judicial fees, the fees of the insolvency administrators, etc. The créditos contra la masa cannot be paid with assets over which in rem security has been taken.
The next creditors to be paid are creditors with a special privilege, in the order established by law and, if applicable, pro rata. Creditors with special privilege are basically creditors with security over specific assets. Creditors with a special privilege are paid out of the assets over which the security was taken. If there are multiple forms of security over the same asset, the priority between creditors depends on the date their security was created.
Once the créditos contra la masa have been paid and the assets subject to security in rem have been deducted from the assets of the company, creditors with a 'general' privilege are paid. These creditors are generally public authorities (in relation to unpaid taxes and employer’s contributions to national insurance) and creditors owed wages other than créditos contra la masa, subject to certain economic limits.
Subsequently, 'ordinary' creditors are paid and, if there is any surplus, creditors holding debt which is subordinated by the law are finally paid
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What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?
The most common forms of security over real estate are:
A mortgage entitles the mortgagee to sell the property in a public auction with priority over unsecured creditors.
A shareholder in a corporate borrower can also create a pledge of its shares. This also entitles the creditor to sell the shares in a public auction with priority over unsecured creditors.
It is also common for security to be granted over the rent and other possible income from a property. This usually takes the form of a pledge whereby the tenants or the insurance company, in the event of breach of the loan agreement, are directed to make payments to the lender. This assignment is normally created by a separate security document.
Last modified 13 Mar 2025