It should be noted that the land charge certificates are based on forms that are not drafted by a notary. Rather, each bank, savings bank, or insurance company (hereinafter referred to simply as "bank") provides its own form.
In order to be able to examine the details of the mortgage registration, it is advisable to obtain the form from your credit institution in advance.
What is a land charge?
Real estate can rarely be financed with cash; usually, the buyer must take out a loan. Therefore, a land charge (Grundschuld) is typically registered as security for the loan following the purchase agreement. Since the land charge certificate is difficult for laypersons to understand, we would like to help you familiarize yourself with the most important aspects of land charges beforehand.
1. Those who incur debt…
…is always liable with their entire assets – this principle always applies, even if no special loan security is agreed upon between creditor and debtor. A land charge provides the financing bank with additional security by granting it easier access to the property in question and usually also to the debtor's other assets. By registering a land charge in the land register, the property becomes collateral. The land charge gives the bank the right to have the encumbered property auctioned and to withdraw from the proceeds an amount equal to the principal of the land charge plus interest and ancillary charges (see section 3).
2. Important for understanding:
Although a land charge (Grundschuld) is usually established in connection with a specific loan agreement, it operates independently of the loan and has its own legal status. The necessary link between the loan and the land charge is the so-called security agreement or purpose declaration: This defines precisely what the land charge secures. Generally, this includes not only the claims arising from the newly concluded loan agreement, but all claims the bank currently or subsequently has against the borrower. Such a comprehensive purpose declaration can lead to unexpected liability risks, especially if it involves liability for loans not taken out by the land charge holder. Examples: Both spouses jointly establish a land charge which, according to the purpose declaration, also secures loans taken out by one spouse alone; parents establish a land charge for loans taken out by their children. Since the purpose declaration is usually not included in the land charge certificate, it is advisable to inquire about it beforehand.
3. Against this background…
This explains the banks' desire to extend their security beyond the principal amount of the mortgage. They achieve this by agreeing on mortgage interest and other ancillary charges. This mortgage interest is unrelated to the loan interest; in particular, it is not payable in addition to the loan interest. Its sole purpose is to increase the maximum amount the lending institution can withdraw from the auction proceeds in the event of foreclosure (i.e., only if the debt is actually that high). Currently, mortgage interest rates range from approximately 10% to 20%, while other ancillary charges range from 5% to 10%.
4. The heart of the matter
The "heart" of a land charge is the so-called submission to immediate enforcement. This gives the bank the right to initiate the forced sale of the property without first obtaining a court judgment, which is normally a prerequisite for any enforcement action. Additionally, the land charge certificate includes a clause known as personal liability or abstract acknowledgment of debt with submission to immediate enforcement. This grants the bank the right to enforce its claim against all of the debtor's other assets without a court judgment. This is usually simpler than foreclosure; for example, the bank can seize a savings account. Of course, the owed sum can only be demanded once. The submission to immediate enforcement does not deprive the debtor of the protection of legal proceedings, as they can appeal the enforcement.
5. What should be considered in the purchase agreement?
In a purchase agreement, the buyer often needs to register a mortgage on the purchased property even before the transfer of ownership is recorded in the land register, because otherwise they would not be able to obtain a loan. This requires the cooperation of the seller, who remains the property owner as long as they are listed in the land register. This is known as a preliminary encumbrance. Without this procedure, the purchase price could, in most cases, only be paid much later. To minimize the seller's risk, the buyer's bank is only permitted to pay the seller or their bank directly. Furthermore, the seller is not liable with their other assets (see section 4).
6. In some cases, the mortgage can be…
…not immediately registered in the land register, for example, because the property in question first needs to be surveyed and separated from another. In this case, the buyer's claim to ownership of the property is pledged to the bank as provisional security. However, not every bank accepts this form of security.
7. What happens when all debts are repaid?
Initially, nothing changes, as the land charge is independent of the loan (see section 2). The land charge remains registered in the land register and can be used to secure a new loan from the same bank. However, the debtor has a right to have the land charge removed from the land register. It is important to note that the debtor must personally arrange for the land charge to be removed from the land register. This requires obtaining a so-called release authorization from the bank and having the property owner (usually the debtor themselves) provide notarized consent. The right to have a land charge removed expires ten years after all secured claims have been repaid, unless this period is extended to 30 years by agreement with the lending institution.
If multiple mortgages are registered against the same property, the bank with the earlier registered mortgage has a stronger position in a forced sale than a bank with a later registered mortgage. The bank with the lower priority therefore seeks to move up in the land register when the prior-ranking mortgage no longer secures loans. For this purpose, a section entitled "Assignment of Recourse Rights" is usually included in the mortgage agreement. This allows the bank with the lower priority to demand the cancellation of the prior-ranking mortgage if it is no longer needed to secure a loan.
