Payments in Kind

If you are looking for what dación en pago means, we can explain that it is an agreement by which a good is delivered in exchange for extinguishing a debt that the person transferring the good had with the person receiving it.

Daciones en pago can occur in individuals and companies. For example, in the case of the latter, it could happen that in cases of corporate insolvency, real estate or financial assets should be delivered to eradicate a debt.

However, swaps within the real estate sector are more well-known and frequent. The most common within this field is that daciones en pago are agreed with the bank. These involve the delivery of a mortgaged property or home in exchange for eradicating the payment of the mortgage loan that we had with the banking entity. It is also common to deliver a second home as payment for the mortgage loan of the main residence. We explain dación en pago in homes below.

Many times one can hear dation in payment or dation for payment, even as synonyms, but they are actually two concepts that, although similar, are different. Therefore, before entering into the study of dation in payment, we want to clarify both concepts.

• Dation in payment (datio pro soluto) is a figure that consists, as we have indicated above, of an agreement between creditor and debtor by which, by virtue of this pact, the debtor transfers ownership of a good or goods to the creditor, who accepts them in payment to fully extinguish an obligation.
• Dation or assignment for payment (datio pro solvendo) is regulated in article 1,175 of the Common Law Civil Code. In this case, the debtor delivers certain goods to the creditor so that the latter administers and disposes of them in order to realise the outstanding credit. The amount obtained from the disposal will be allocated to the payment and extinction of the debt, but only up to the amount obtained. If the sale amount is less than the debt, it will be reduced but not extinguished.

The fundamental difference between these two figures lies in their extinguishing effects. While dation in payment produces an immediate and total extinction of the debt by the delivery of the good, the assignment or dation for payment does not imply cancellation, but only the reduction of the debt, to the extent that the amount obtained from the disposal reaches.

Furthermore, in dation in payment, the good is intended to extinguish the entire debt, and if the good has a value higher than the debt, the debtor does not receive the surplus or its estimated value, but the creditor acquires the entire good. In the assignment or dation for payment, the creditor will dispose of the good and apply the price obtained to collect the outstanding debt. If the amount is insufficient to cover the entire debt, the debtor will continue to owe the remainder; whereas, if it is higher than the amount owed, the creditor must return the surplus to the debtor from the amount obtained.

When someone cannot pay for their home, they usually go through different phases of negotiation with the bank. The first phase is known as amicable negotiation, while in the second a legal claim is made by the financial institution, which can lead to consequences such as eviction. If we place ourselves in the first part, we could choose between different alternatives to resolve the arrears with our bank. For this, options are offered such as refinancing the mortgage, reducing the mortgage payment or even the so-called grace period, which involves postponing the payment of the property, the interest it entails, or both.

When it is not possible to reach an agreement regarding the payment of the mortgage instalments and it is agreed that the mortgage debt is extinguished in exchange for the bank receiving the ownership of the property that was mortgaged and in execution, the dation in payment of the mortgaged property occurs. This involves the delivery of the home to the bank, eradicating the mortgage, in exchange for the bank becoming the owner of the home.

Those who have lost ownership of their home may access social housing, provided there is a regulation allowing it in the Autonomous Community where the deed in lieu of foreclosure takes place. This involves the rental of homes belonging to banking entities. These residences are part of the Social Housing Fund and may be occupied by the aforementioned individuals who are in a vulnerable situation. In fact, these people can live in their own home for two years after a deed in lieu of foreclosure, provided they pay a rent determined by the bank. However, this is a matter that must be studied on a case-by-case basis, taking into account the regional regulations, the deed in lieu of foreclosure agreement, and the circumstances of each specific case.

Likewise, you should know that a deed in lieu of foreclosure can also be requested during judicial demand processes as long as your property (home) has not been auctioned.

We therefore determine the main advantage of the deed in lieu of foreclosure to be the elimination of the mortgage debt. The main disadvantage is the loss of the home or property subject to the deed in lieu of foreclosure.

Dation in payment can be:

• Total: this results in the full payment of the outstanding debt.
• Partial: in this case, payment is made in exchange for the cancellation of part of the debt, but leaving a balance that can be refinanced again through a payment schedule.
  This case should not be confused with dation or assignment for payment. In partial dation in payment, an asset is delivered to pay part of the debt, whereas in dation for payment, an asset is delivered to be sold and extinguish the debt up to the amount obtained.

Dación en pago is regulated by Royal Decree 6/2012, of 9 March, on urgent measures for the protection of mortgage debtors without resources, which includes requirements for dación en pago such as vulnerability or the threshold of social exclusion, as well as personal requirements such as illnesses, disabilities or gender-based violence. Various articles of the Civil Code must also be taken into account for its regulation.

However, the most frequent cases of dación en pago are voluntary agreements between mortgage debtors who cannot meet the mortgage payments and the bank to which they cannot pay.

For the exercise of dation in payment, a series of requirements must be met, namely:

• The prior existence of an obligation. This is a fundamental requirement, since without a prior debt dation in payment cannot occur. If this obligation is monetary, as in the case of a loan, it is important to bear in mind that the debt must be proven. This does not pose problems in mortgage loans granted by credit institutions, but it can be a challenge in loans from individuals or in simple acknowledgements of debt, since the rules on justification of means of payment and prevention of money laundering must be applied.
• Animus solvendi. For dation in payment to be configured, the debtor must perform a different prestation from the one originally agreed with the intention and will to extinguish the obligation.
• Capacity. This can be understood in a double sense. Firstly, capacity understood as the faculty to understand and want to make the dation in payment. This required capacity will depend on the type of prestation. If ownership of a good is transferred, the normal capacity for acts of disposal will be needed. If payment is made with an obligation to do, the general capacity to contract will be required.
  Secondly, it can be understood as the faculty to dispose of the good or right being transferred, since one cannot transfer what does not belong to them.
• Acceptance of the creditor. It is essential that the creditor accepts the change of prestation proposed by the debtor, since it is a different prestation from the one initially established.
• Identity of the provider. It is irrelevant whether the prestation is performed by the debtor themselves or by a third party. The relationship between the debtor and the owner of the property allocated to pay the debt of a third party lies outside the debtor-creditor relationship, although it effectively exists.

On the other hand, in the case of dations in payment regulated by Royal Decree 6/2012, on urgent measures for the protection of mortgage debtors without resources, if the bank to which the mortgage cannot be paid has signed the Code of Good Practices for the viable restructuring of debts secured by a mortgage on the main residence, the debtor who cannot pay their mortgage can demand dation in payment from the bank as a last resort. In these cases, dations in payment are mandatory for banks adhering to this Code and it should be noted that almost all banking entities operating in Spain have adhered to this Code. The requirements that allow demanding these mandatory dations in payment can be seen in Royal Decree 6/2012 (BOE-A-2012-3394 Royal Decree-law 6/2012, of 9 March, on urgent measures for the protection of mortgage debtors without resources.)

In other cases, dations in payment can be agreed upon as long as the debtor and the person entitled to collect a debt agree, and the main requirement is the unanimous agreement between the parties.

To request payment in kind, you must meet the requirements mentioned above. Whenever you fail to make mortgage payments, speak with your bank, especially if it is a banking institution subscribed to the Codes of Good Banking Practices. Subsequently, your application will need to be reviewed for approval. In the case of payment in kind for homes, it is usually necessary to carry out a new valuation of the property.

The deed of dation in payment of properties must be formalised before a Notary, who will certify the settlement of the debt by the delivery of the asset and the cancellation of the mortgage which will be reflected in a public deed. On the day of signing, you must attend together with a representative of your bank.

Subsequently, a payment letter will be issued which will act as proof of debt settlement, allowing the debtor to have access to new credits, loans or mortgages in the future.

The Notary is a legal professional with extensive training and considerable experience. Among their functions is providing impartial and free advice and guidance.

Applying complete impartiality, the Notary's mission is to inform all parties involved equally, offering greater assistance to the party that needs it most. Whatever the notarial procedure or act being considered, it is advisable for the interested party, if any doubts arise, not to hesitate to make the necessary enquiries, both on the day of signing and in the days prior.

Do not forget that you may choose the Notary you wish and trust for the deed of dation in payment that you carry out.

On the day of signing the dation in payment, the following documentation must be presented:

• DNI, passport, NIE or residence card of the natural persons. In the case of a legal entity intervening in a dation in payment, the documents accrediting the personality and representation of the legal entities will be required.
• Title proving ownership of the property that is the object of the dation in payment.
• Identification of the debt to be extinguished.