A Supreme Court ruling handed down on 21 October 2024 has put an end to the numerous contradictory jurisprudence that existed until now between the different Spanish provincial courts on the effects on lease contracts when there is a dation in payment in the context of bankruptcy proceedings.
The Supreme Court has decided that the dation in payment, in the context of an insolvency proceeding, can be equated to a forced disposal. Always bearing in mind that it is a transfer subject to supervision and authorisation by the insolvency judge following approval of a liquidation plan.
The interpretation of the Law on Urban Leases is extended
In this case a number of properties had been awarded by way of dation in payment in the bankruptcy proceedings of the landlady. The Supreme Court has confirmed that there are two cases in which the existing lease contract with the previous owner (subsequently bankrupt) must be extinguished:
- When these contracts are not registered in the corresponding land register.
- When, in addition, the new owner after the dation in payment of these properties is unaware of the pre-existence of tenants. He therefore becomes a bona fide third party.
Legal certainty is therefore guaranteed in these cases.
The Supreme Court indicates that article 13.1 of Law 29/1994, of 24 November, on Urban Leases is applicable in this type of case. Even though dation in lieu of payment is not included in the list of this regulation. And it does so because, although this is not one of the cases contemplated in the Law, it can be assimilated to a forced disposal derived from a mortgage foreclosure or a court ruling.
The judgement makes it clear that, in a dation in payment in the context of insolvency proceedings, the debtor’s voluntariness does not play any part whatsoever. We are therefore dealing with a compulsory alienation. This ruling guarantees legal stability in these cases, where until now, clients were forced to recognise leases that were not registered in the Land Registry. All for the simple fact of having acquired the property in an insolvency proceeding and not in a judicial auction.
Conclusion on dation in lieu of payment in bankruptcy proceedings
In its decision, the Supreme Court starts from the interpretations of the precept already made in previous case law. Such as STS 577/2020 of 4 November, 109/2021 of 1 March and 379/2021 of 1 June. In them, it has already declared that, when there is a forced alienation of a property whose lease is not registered, the loss is produced by extinction of the title that legitimised the possession of the occupants. Therefore, the lessor’s right is terminated whenever there is a loss of the right over the property that allowed the owner to lease it.
The Supreme Court therefore concludes that the dation in payment can be equated to the forced disposal derived from a foreclosure. Especially because it takes place within the framework of a universal process in which an alienation of assets is carried out. The same requirements implicit in the aforementioned article 13.1 of the Urban Leasing Act are therefore met. This is because a transfer of the right to the property that allowed the owner to lease it is assumed by means of the corresponding judicial authorisation. Thus, leases that have not been entered into the Land Registry beforehand will be automatically extinguished.