REDAL Mortgage: Economic-legal dispute

A mortgage contract requires two financial covenants: one on interest (how much I pay for the borrowed money) and another on installments (how I pay back the borrowed money). There are contracts where the agreement on the amount of the installments is not established. This does not prevent the loan from being repaid, but it has some particularities on how to repay it. It is, in short, a situation that has many solutions, not a single way, that is why it is called “indeterminate”.

Thus, the financial consequences of REDAL contracts are twofold:

A) Indeterminacy of the quotas

“Indeterminacy of installments” is the mathematical way of saying that no specific amount has been agreed for the installments.

This poses a problem that we will illustrate with an example: Suppose that a friend lends us 1,000 euros, to be paid back in one year. We agree to pay him back something every month, but we do not say how much. In this situation, the friend who lends the money must be aware that any amount he demands on a monthly basis is unfounded. That is to say, he cannot tell us “this month it is your turn to pay me back 150 euros” because, precisely, we have agreed that I am going to pay him back as I can, provided that after one year I have paid it all back.

If we now look at the contract with the bank, the bank has a problem, especially in the case of non-payment. The bank has to present a debt based on unpaid instalments of specific and agreed amounts, so how can it present a settlement (i.e. a breakdown of defaults and total debt) if it has no amounts to settle?

Far from asking these questions, in REDAL contracts the banks take the fast track and go to court with a foreclosure. Will the civil judge easily understand a complicated financial issue that is usually the “bone of contention” for those who study economics or business administration? Will the foreclosed party and his lawyer realise that the numbers that appear in the settlement of the balance are not based on what was agreed in the deed? This question is of particular relevance, and could be a cause for a qualified objection, as the financial institution has not clearly and precisely stated the net amount due, a requirement imposed by law. This would lead to a more than likely rejection of the execution.

B) Performance of the contract with free instalments by the borrower.

The second important consequence is that, since the amount of the instalments has not been agreed but simply that they are mixed, the borrower can fulfil the contract by paying just that: a mixed instalment, i.e. the borrower has the right to amortise more or less each month, as he wishes.

In other words, the borrower has the right to amortise more or less each month, as he wishes. Why does he have this right? Because it is agreed in the contract.

Many banking lawyers present this situation as what lawyers call a “unilateral termination”. We understand that they are saying that the borrower has executed the agreement in his own way instead of following what the contract says. However, it is not possible to accuse of unilateral termination a person who is exercising a right granted by the contract.

Imagine that you rent a flat and the contract establishes the monthly payment between the 1st and 5th of each month. Is it a unilateral termination to pay some months on the 1st and others on the 5th? No, it is an indetermination in the date of payment that allows the tenant to exercise a right.

On the other hand, and this is important, the bank cannot impose a monthly instalment amount. In this case it would be a unilateral termination. In other words, the contract does not allow the bank to charge whatever amount it wants each month, because the contract says that the borrower must pay a quota, and that as long as it is mixed, the bank does not default. The contract does not say that the bank can charge whatever mixed fee it wants.

Source: FINANCIAL REPORT ON THE REDITO AD LIBITUM SYSTEM IN MORTGAGE CONTRACTS. Prepared by Mr. Guillem Bou Bauzá, Mr. Josep González Calvet and Mr. Joaquín Turmo Garuz.

Government of the Balearic Islands
Department of Health and Consumer Affairs
Directorate General for Consumer Affairs

Palma de Mallorca, 20 April 2023.