учебный год 2023 / Cox, Trinder, Moeser, Lettau, Security over real estate. Germany compared to England and Wales

Obtaining first ranking valid and enforceable security over real estate is essential to any real estate financing transaction. As London-based banks are lending more and more money to borrowers acquiring investment property in Germany, it has become imperative that they are familiar with the procedure of taking effective security over real estate there. Further, a significant amount of property loans arranged by London-based banks secured over property in Germany will be securitised, that is Commercial Mortgage Backed Securities (CMBS). It is therefore also crucial that the bank takes into account the rating agencies' views on issues arising in Germany.

Against this background, this chapter highlights some of the issues relating to security over real estate faced by banks lending money to investors in Germany, and compares those issues to the position in England and Wales. While not presenting an exhaustive list of all the issues, in particular, it examines:

■Obtaining security.

■Registration issues.

■Title to immediate enforcement.

■Securing increases to an existing loan facility.

■The German equivalent of a debenture.

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■Due diligence documentation (legal, environmental, structural and valuation reports).

■Hedging documentation (if applicable).

The majority of this documentation will be familiar to a bank that lends money to borrowers in England and Wales. However, the land registration system in Germany, which is heavily reliant on the notarial system, is very different to that in England and Wales. There are a number of idiosyncrasies, with potentially significant timing and cost implications, which a potential lender in the German real estate market should be aware of.

In England and Wales, a legal mortgage is the best form of security for a bank over real estate and will be granted by the borrower (or a third party) over the property to be secured. If the property is registered or if the mortgage triggers first registration, the mortgage must be registered at the Land Registry to take effect as a legal mortgage and therefore obtain priority against a subsequent mortgage. If the borrower is a company or limited liability partnership (LLP) the mortgage must be registered at Companies House within 21 days of the date of the mortgage. If the mortgage is not registered at Companies House within the required time frame it is void against a liquidator or administrator of the company or LLP and any creditor of the company (other than the mortgagee).

■Certified and non-certified land charges.

■Land charges and refinancing an existing facility.

■Encumbrances and land charges.

■Enforcement and insolvency issues.

OBTAINING SECURITY OVER PROPERTY IN GERMANY

German real estate financing transactions tend to be governed by the following documents:

■Either an English law or German law credit facility agreement (containing similar provisions to that used in an English real estate financing) together with a suite of security documents (generally governed by German law).

■Execution and enforceability opinions.

■Property duty of care agreements with managing agents.

If the mortgage is not registered at the Land Registry, it takes effect as an equitable mortgage which is capable of being overridden by a subsequent registered legal mortgage. To protect the bank's priority, a priority search is carried out immediately before completion of the mortgage which will give the bank 30 days within which to register its mortgage. During this period it will take priority over any other application in relation to the relevant title.

In Germany, security for the property financing will either be in the form of a mortgage (Hypothek) or a land charge (Grundschuld). A mortgage secures a personal claim against the owner of the property (or a third party) and is dependent on the existence of the secured debt. This means the mortgage cannot be created, assigned or attached in the absence of the claim. A land charge however is a "stand alone" security, independent of the existence of a claim to be secured. The flexibility of the land charge means it is almost always used to take security over German property and is preferable for CMBS.

The land charge comes into existence on its entry in the land registry. Until a land charge is registered, the beneficiary has no security over the property. Unlike in England and Wales, the

application for registration of the land charge is made by a notary. The notary must have power of attorney from the registered owner of the property, or he cannot register the land charge.

REGISTERING A LAND CHARGE OR LEGAL MORTGAGE

The process of discharge and grant of a new mortgage in England and Wales is relatively easy, quick and cost-effective. The discharge of the existing legal mortgage (in the form of a Land Registry form DSI) is usually completed simultaneously with the completion of the new mortgage. Both documents are then submitted to the Land Registry for registration within the priority period afforded by the new mortgagee's priority search. This prevents registration of any other disposition until the new mortgage is registered (provided the application is made within the priority period).

In Germany, the process of registration can take a considerable period of time, depending on the workload at the relevant local land registry. If the timing for drawdown of the loan is very tight, the bank will often agree to drawdown the loan against a notarial confirmation from a notary (carrying sufficient professional liability insurance) that the land charge will be registered with the agreed priority. This is the nearest equivalent to a priority search in England and Wales. The notarial confirmation will also confirm that any existing mortgages or land charges will be discharged and that the bank's land charge will obtain priority. If the loan is being securitised and the land charge is still not registered at the date of securitisation, the parties can agree to rely on the notarial confirmation.

In Germany, the land registry is legally obliged to register entries in the land register strictly on the basis of the sequence of filed applications (that is, on a first come, first served basis). The order of the applications for entries in the land register controls the order of ranking of such entries in the land register. Therefore, if the notary has inspected the land register and if he can confirm that there is no pending unregistered application and can also confirm that an application to register the relevant land charge has been made, the intended ranking of the land charge is usually sufficiently protected for closing purposes.

THE TITLE TO IMMEDIATE ENFORCEMENT

In England and Wales, provided a mortgage is in writing, by way of a deed and is signed by the mortgagor, the mortgage is automatically enforceable without the need for a court order (although, if the mortgagee is exercising the power of sale, in practice a court order will be obtained in most cases).

In Germany, on the grant of a land charge, the bank should make a request to the notary that it is immediately enforceable. To this end, the notary issues an "immediately enforceable copy" (Ausfertigung) of the land charge in the name of the bank to enable the bank to claim "title" to enforcement of the land charge. The title to immediate enforcement will enable the bank to enforce the land charge immediately (for example by applying to the court for the compulsory sale of the property) without having to first initiate separate legal proceedings against the owner of the property to obtain a legal title for enforcement purposes, which it would otherwise have to do.

Without the title to immediate enforcement, the bank will have to go to court to have the land charge declared enforceable; it cannot just rely on the security created by the land charge. The fact that the bank has the benefit of a land charge only serves to provide it with priority in any borrower insolvency scenario.

The notarial expenses for such enforceable land charges are higher than those for a land charge which is not directly enforceable. However, the enforceable land charge will save the beneficiary time and costs associated with the potential pursuit of a title before the courts. The immediate enforcement can be granted with respect to 100% of the notional land charge amount, or (to reduce notarial fees) a lower amount.

SECURING INCREASES IN AN EXISTING LOAN FACILITY

The land charge will specify an amount. This amount is the maximum amount payable to the lien holder (beneficiary of the land charge) in enforcement proceedings. Therefore, if the bank wishes to lend the borrower more money, provided the increase is within the amount secured it will not generally be necessary for the bank to obtain a new land charge to cover the additional debt. However, if the additional borrowings add up to a higher amount than the amount originally registered, then the land charge must be increased and the increase must be registered to be effective. Alternatively, a second ranking land charge registered in favour of the bank for the increased amount can be registered.

The increase of a land charge amount requires the consent of the beneficiaries of all subordinated registered rights. This is because these rights can be negatively affected by the increase of the land charge amount.

In England and Wales, registered legal mortgages rank in priority according to the order shown in the register and not the date they are created. The order of priority can be changed by agreement between the relevant mortgagees (section 48, Land Registration Act 2002 and rule 102, Land Registration Rules 2003). The proprietor of a registered mortgage can make a further advance on the security of the mortgage ranking in priority to a subsequent mortgage, if it has not received notice of the subsequent mortgage from the subsequent mortgagee. However, even if the original mortgagee has received notice of a subsequent mortgage, there are circumstances when further advances made by the first mortgagee can rank in priority to a subsequent mortgage, for example if they are made by the proprietor of the charge according to an obligation noted on the register. Further, if the parties to a registered mortgage have agreed that it will secure a maximum amount and that agreement is noted on the register, then the mortgage will secure a further advance in priority to a subsequent charge. This is the case even if the further advance is made after the subsequent charge, provided the total amount secured by the prior charge does not exceed the agreed and noted amount.

THE GERMAN EQUIVALENT OF A DEBENTURE

When lending money secured over property in England, the bank will have the benefit of a debenture. There is no such equivalent in Germany. A debenture is usually a global security document that includes charges, both fixed and floating, over the assets of

the company. Unlike in England and Wales, in Germany it is not possible to grant a floating charge over the generic present and future assets of a borrower. However, despite this, it is usually possible to secure those assets by using a number of security documents. In addition to the land charge, a typical security package will contain:

■A security purpose agreement (specifying the main purpose of the land charge and providing details of when and how the land charge will become enforceable).

■A global assignment agreement (assigning rights such as those under construction documents and purchase agreements).

■Bank account pledges.

■An assignment of rents.

■Share pledges.

■Insurance assignments.

An English law debenture will contain, in addition to charging provisions, representations and undertakings of the borrower, primarily relating to the property. As these representations/ covenants will not necessarily appear in the German law security documents, these should be drafted into the credit facility agreement. Absence of these representations or covenants may affect the rating of the notes on any subsequent securitisation of the loan.

CERTIFIED AND NON-CERTIFIED LAND CHARGES IN GERMANY

In Germany, unlike England and Wales, it is possible to have a certified or a non-certified land charge. In terms of validity or enforceability, there is no difference between certified and noncertified land charges. The main reason to opt for a certified land charge is the easy and cost-efficient way of transferring it. This is why certified land charges are often, although not exclusively, used in relation to loans that are intended to be securitised. The costs (notarial fees and land registry fees) for granting a certified land charge are slightly higher (about 10%) than those for a noncertificated land charge (see below, Assignment of certified and non-certified land charges).

LAND CHARGES AND REFINANCING AN EXISTING FACILITY

In England and Wales, on a refinancing the new bank discharges the existing charge and registers its own charge. This is a relatively simple, quick and cost-effective process. Although it is possible to transfer mortgages from one bank to another, most banks will usually insist on having their own form of mortgage.

However, in Germany the bank may take an assignment of an existing certified land charge instead of taking a new one. This is because notarial fees and registration of new land charges is costly, whereas assignment of existing land charges is relatively inexpensive. As the borrower would be liable to pay these costs, it is far more preferable to the borrower.

Assignment and title to immediate enforcement

On assignment of the land charge, title to immediate enforcement is not automatically assigned. The bank should therefore ensure that this is also assigned. The new beneficiary of the land charge can obtain its own title by submitting to the notary the original title from the original beneficiary and the assignment agreement. The notary will issue a new title to the new beneficiary, usually within a few days.

To avoid any delays on enforcement, the new beneficiary should request the issue of the new title to immediate enforcement at the time of assignment of the land charge, rather than waiting until the bank needs to enforce the land charge. The costs for reissuing the title are the same, whether granted on assignment of the land charge or only when needed in an enforcement scenario.

Assignment of certified and non-certified land charges

If the land charge is a certified land charge, in addition to the assignment of the land charge, the benefit of the certificate should also be assigned. As the land charge is certified (and the certificate is being assigned also) it is not necessary to register the assignment to validate the land charge in favour of the assignee bank. Therefore, land registry fees (which can be very costly) can be avoided. This is why certified land charges, which trigger higher fees when first created, lead to lower overall costs once they are assigned.

If the land charge is non-certified the assignment needs to be registered in the local land register. Registration of the assignment is, unlike the certified land charge, mandatory for an effective assignment of the beneficial interest in the land charge.

Assignment − some potential issues

Assignment of an existing certified land charge as opposed to the creation of a new land charge can lead to significant cost savings but this method may raise a few potential issues for the bank, including:

■In relation to certified land charges, as the assignment does not need to be registered, if the land charge certificate is lost, the bank will be unable to enforce its security. The bank would need to go to the land register to obtain a new title to immediate enforcement. This will have timing implications which may be critical in an insolvency scenario. Therefore, the bank may insist that when the certified land charge is assigned, it is also registered.

■The bank will need to ensure, through proper due diligence and, if possible, an opinion being provided by its lawyers, that the existing charge was validly executed, is enforceable and remains good security.

■The existing land charge will be subject to a security purpose agreement relating to the original loan facility. A new security purpose agreement will need to be entered into in relation to the new loan facility.

■The value of the existing land charge needs to be sufficiently high to cover the value of the new loan (see above, Securing increases in an existing loan facility).

ENCUMBRANCES AND LAND CHARGES

The German land register contains three sections. Section I contains details of the registered owner of the property (similar to the Proprietorship Register in England and Wales). Section II contains details of easements such as rights of way and rights of user. Section III contains details of financial charges (that is, land charges and mortgages).

The existing encumbrances in Section II will be binding on a buyer of the property and they will rank ahead of the bank's land charge unless the beneficiary of such a section II encumbrance agrees to subordination in rank in favour of the bank's land charge. It depends on the nature of the right which is entered in Section II as to whether it reduces the value of the collateral. Valuers typically clarify this.

One further thing to note is that some encumbrances on real estate in Germany, such as public easements, do not appear on the land register. Most of the federal states have public easement registers which can be searched as part of the bank's due diligence exercise, but others, such as Bavaria, do not have such a register. In these circumstances, it is advisable for the bank to ensure that the seller warrants in the sale and purchase agreement to the borrower that no such easements affect the property, and to obtain a covenant from the borrower to this effect in the credit facility agreement.

tration and maintenance, it continues to receive ongoing payments from the income generated by the property.

Although both options are available when the borrower is the subject of insolvency proceedings, special rules apply once proceedings commence. As in other jurisdictions, a general moratorium on enforcement proceedings against the debtor is imposed on secured and unsecured creditors on the opening of insolvency proceedings. However, the moratorium on enforcement of security does not typically apply to the enforcement of mortgages over property or land charges. This means that the bank can apply to the court for immediate enforcement by an order for compulsory administration and/or compulsory sale.

Generally, when a bank seeks a sale of the property by a courtordered public auction, it also seeks an administration order, because this increases the likelihood of maintaining the property value in the period before the auction occurs, and of recovering the property income during that period. However, enforcement could be delayed if the borrower's insolvency receiver successfully applies for a special moratorium to stall the enforcement of security over the property. The court may grant this order if:

■The receiver has not yet reported to the creditors on the status of the borrower's estate.

■The secured property is required to continue or sell the borrower's business.

■Enforcement of the security is likely to jeopardise an agreed insolvency plan.

ENFORCING SECURITY AND INSOLVENCY ISSUES

In England and Wales, the mortgagee can enforce the mortgage by:

■Appointing a receiver of the income of the property (section 101(1)(iii), Law of Property Act 1925).

■Taking possession.

■Enforcing the power of sale or foreclosure.

In Germany, land charges are enforced by compulsory sale (similar to the English power of sale) or compulsory administration (similar to the appointment of a receiver in England and Wales). Unlike in England and Wales, the court administers both procedures.

In a compulsory sale, unlike in England and Wales where the mortgagee or its appointed receiver (acting as the agent of the mortgagor) will sell the property, the German court will auction the property. The auction process must comply with complex procedural rules and can be a lengthy process. In a compulsory administration, the court appoints an administrator to administer the property on behalf of the creditor. The advantage for the secured party is that, after deduction of certain costs for adminis-

■Enforcement of the security will materially obstruct the realisation of the borrower's estate in any other way.

Even before insolvency proceedings begin, a preliminary receiver can request the suspension of the enforcement of the security over the property, by providing evidence that the suspension is required to avoid changes that could be disadvantageous to the financial condition of the debtor. If the court orders a special moratorium, the bank is entitled to certain interest payments during the period of the special moratorium (subject to a grace period of up to three months). If the insolvency receiver is unable to pay this interest, the special moratorium is lifted on the bank's application.

If the German borrower becomes insolvent, so long as the borrower is a limited-purpose vehicle, an insolvency plan providing for its rehabilitation is unlikely to be implemented. In addition, if the bank is the only substantial creditor and it has security over all the assets of the borrower, there would be little incentive for the court to award a special moratorium on enforcement of the legal charge over the property, because such an order would be unlikely to improve the position of other creditors. The rating agencies would most probably assume that if the borrower becomes insolvent it would be liquidated and a sale of the property would follow. The rating agencies consider that it would be reasonable to expect a sale within two years.