If you buy a house or condominium and finance the purchase price, your bank or savings bank (as well as a financing insurer) will usually require a land charge to be registered against the property. The creation of a mortgage has become rare; the following information on land charges applies accordingly. You can also secure loans (e.g. for a renovation) independently of the purchase of a property by creating a land charge on your property in favor of the lender. The land charge ensures that the lender has priority to be satisfied from the proceeds in the event of foreclosure on the house or apartment. This means that the lender can access the proceeds before all other creditors, who are either not entered in the land register at all or are only entered in the land register after the lender.
Subjection to enforcement in rem: immediate possibility of enforcement against the property
When you create a land charge, you are often subject to immediate enforcement in rem. This means that the creditor can directly enforce your property on the basis of the land charge without the need for court proceedings. Before the creditor can proceed from the land charge, he must terminate the land charge with a notice period of six months.
Limitation through declaration of collateral purpose
The creditor's direct enforcement option is limited by the so-called “declaration of security purpose”, also known as the “security agreement” or “security contract”. This specifies when the creditor may proceed from the land charge, i.e. enforce it. The main grounds for enforcement are: default by the debtor on loan installments of a certain amount, insolvency or the opening of insolvency proceedings against the debtor's assets. If the creditor proceeds from the land charge although he is not (yet) allowed to do so on the basis of the security agreement, he may be liable for damages. As a rule, you sign the security agreement together with the loan agreement with your bank/savings bank or insurer.
Limited declaration of collateral purpose for purchase price financing
If the land charge is created - as is often the case - to finance a purchase price, the land charge is usually registered before the buyer has become the owner. This is because the lender (bank/savings bank/insurer) is only prepared to pay out the loan if the land charge is registered. Only then can the buyer use the loan funds to pay the purchase price, whereby the lender usually pays the seller directly.
To this end, the seller allows the land charge to be registered in the purchase contract before the transfer of ownership to the buyer. To protect the seller, there is usually a restriction in the declaration of security purpose: the lender (bank/savings bank/insurer) is only secured to the extent that it pays the purchase price to the seller. Otherwise, it would not be safe for the seller to have the land charge registered in advance. The limited declaration of security purpose ensures that the seller first receives the entire purchase price, before the buyer also secures loans for other purposes (e.g. renovation, further purchases) with the land charge. The notary ensures that the lender observes this agreement.
Limited declaration of security purpose in the case of land charges created by third parties (especially by family members)
It is not uncommon for people to create a land charge against their house or apartment in order to secure someone else's loan. In particular, parents often create a land charge to secure a loan for their children. In these cases, to protect the owner, the declaration of security purpose should stipulate that the land charge only secures the liabilities arising from the specific loan taken out. Only to this extent is it generally permissible to create land charges for third parties. On the other hand, the land charge should not secure any further debts of the borrower that he may incur in the future. To this end, the party ordering the land charge should make the appropriate agreements with the lender (bank/savings bank/insurer).
Personal submission to compulsory enforcement: immediate possibility of enforcement against the remaining assets
When you create a land charge, you are often also subject to personal execution. This means that the creditor can enforce not only against the encumbered property, but also against your other assets (salary, accounts, other receivables, movable property such as cars). This is because such enforcement is often easier for the creditor than the more costly auction or forced administration of property. The declaration of security purpose also applies to this form of enforcement, i.e. the creditor may only initiate enforcement if one of the cases specified in the security agreement applies (e.g. the debtor is in default by a certain amount, insolvency or the opening of insolvency proceedings against the debtor's assets).
Interest rate of the land charge
The forms used by banks, savings banks and insurers often stipulate a high interest rate of 12, 15, 18, 19 or 20 % for land charges. This does not mean that you will have to pay interest in this amount at any time! The percentage rate only indicates the maximum amount of interest that the creditor can enforce on the basis of the land charge or the personal declaration of submission. The interest therefore acts as additional security alongside the basic amount of the land charge. The same applies to a one-off additional payment (e.g. amounting to five or ten percent of the land charge amount), which some creditors also wish to have entered.
The creditor thus secures the enforcement of interest in an amount that will generally never be necessary. The amount is also due to the fact that loan interest rates were much higher several decades ago than they are today.
However, how much the creditor is actually entitled to, i.e. how much he is allowed to keep from the proceeds of enforcement, depends solely on your loan agreement. The interest rate stipulated in the agreement is therefore decisive. In the event of default, the interest rate increases to five (consumer loans) or nine (business loans) percentage points above the prime rate. The creditor may also be entitled to compensation for prosecution and enforcement costs as well as other damages. The creditor can also enforce these claims for compensation
Land charge by book or letter
A land charge can be created as a registered land charge or a registered land charge. The registered land charge is only entered in the land register. In the case of a land charge by letter, a letter is created for the land charge in addition to the entry in the land register. With the help of the letter, it is possible to transfer the land charge without the need for an entry in the land register. In the case of a land charge by letter, it is therefore easier to transfer it to several creditors in succession as security. All that is required is an agreement on the assignment of the land charge and the handover of the letter. In the case of a registered land charge, on the other hand, a land register entry is required for the transfer. On the other hand, land charge letters are sometimes lost. In this case, a - sometimes protracted - procedure is required if the land charge is to be deleted again. In practice, the registered land charge is more common. Some forms from banks, savings banks or insurers stipulate as a precaution that a letter can be created later if required. The land charge by letter incurs slightly higher costs at the land registry than the land charge by book.
Cancellation or reuse of the land charge
Once you have paid off the loan in full, you can have the land charge deleted from the land register. This requires a notarized deletion permit, which the creditor issues to you. Furthermore, your consent as the owner is required, which must also be notarized. In the case of debts owed by letter, the letter must also be presented for the deletion. Deletion is therefore not automatic when the loan is repaid!
As an alternative to deletion, you can also leave the land charge in place if you intend to take out another loan in the future and secure it against the same property. In this case, you will save the costs of having a new land charge created and registered. However, as deletion documents and land charge letters are sometimes lost or the deletion is forgotten, it often makes sense to have the rights deleted immediately after the loan has been paid off in full.
If you want to sell the property in the near future, you can wait until the sale before deleting it. The notary will then take care of the deletion as part of the purchase process.
Preparation of the creation of a land charge
For the creation of a land charge in favor of a bank or savings bank, please arrange for the land charge creation documents intended for the notary to be sent to us or send us these documents if the bank or savings bank has already handed them over to you.
If you wish the land charge to be created in favor of another creditor (private individual, company, other), please provide us with the following information or send us the following documents:
- Your name, date of birth, address
- Name, date of birth and address of your creditor
- Property to be encumbered (local court, land register district, sheet number
- Amount of the land charge
- Amount of interest in percent (note: the amount of the land charge interest may, but does not have to, differ from the interest agreed in the contract)
- Amount of the fringe benefit in percent
- Date of the loan agreement or other agreement from which the claim to be collateralized results
- Amount of the total debt, if applicable, amount of the remaining debt (if installments already paid)
- Amount of interest agreed in the contract (note: the amount of land charge interest may, but need not, differ from this)
Preparation of the deletion of a land charge
To cancel a land charge, please provide us with the following information in advance:
- Encumbered property (local court, land register district, sheet number)
- Right to be deleted (for example: “Land charge section III no. 2 for Sparkasse *** for € 100,000 plus 18% annual interest”)
Please also send us the deletion documents or a copy for checking in advance. In the case of a letter right, it is also necessary to submit the land charge letter.
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