Handing back the keys in Germany is not as easy as it is in the UK, explains Kathrin Aigner, lawyer at law firm Lovells. If a mortgagor fails to make the repayments due under a mortgage, the most significant question for an investor is: what is the quickest, easiest and most successful way to get my money back? There are various remedies available to a mortgagee under German and English law.
The most popular remedy used by mortgagees in England is the power of sale, ie the right to sell the mortgaged property, which can be exercised without the need for a court order. On the contrary, mortgagees in Germany are more likely to need a foreclosure order to enforce their security effectively. Under English law, the power of sale is the right of the mortgagee to sell the mortgaged property, usually exercised by a “receiver” appointed by the mortgagee. The power of sale will normally arise when the redemption date has passed or there is an event of default under the mortgage deed. A sale by the mortgagee passes the whole of the mortgagor’s property to the purchaser, subject only to incumbrances ranking in priority to the mortgage (but discharging those over which the mortgagee has priority). If there are any remaining funds, they will be paid to the next ranking mortgagee and so on, with any residue after the mortgages have been discharged finally being paid to the mortgagor.
If for whatever reason the sale cannot be carried out without a court order, any mortgagee or other security holder can apply to the court to order a sale of the property. Any prior ranking mortgage debt together with interest and costs will normally be redeemed from the proceeds of sale first. Again, any remaining funds are paid to the other mortgagees in order of rank and any remainder paid to the mortgagor.
An order of foreclosure extinguishes the mortgagor’s title to the property and vests the title in the mortgagee: the mortgagee becomes the owner of the property, subject only to prior ranking interests. As a consequence, the mortgagor loses all of its equity in the property and also all lower-ranking mortgagees will lose their security. For this reason, foreclosure is very seldom allowed by the English courts.
Under German law the situation is quite different. Here, a mortgagee may either apply to the court for a forced sale of the property (foreclosure sale) or agree to a sale of the property by the owner (and mortgagor). This takes place rarely and is therefore a more theoretical alternative.
In the case of a private sale, the property is sold by the owner himself or the mortgagor. If the property is sold on this basis, the security of the mortgagee initiating the sale will usually be deleted if discharged from the proceeds. However, the securities of all prior and subsequent ranking mortgagees will remain secured against the property unless the mortgagees agree to a discharge of their security (which will normally only be given if the secured debt is paid).
Private sale not the usual remedy
Accordingly, unless all mortgagees consent, either the purchaser will not obtain a clean title or the purchase price of the property will be reduced as the purchaser will acquire a property which remains bound by security after the sale. Accordingly, a private sale is not the usual remedy unless there is only one mortgage encumbering the property and the mortgagor is co-operative.
The usual and therefore most important way of enforcing a mortgage under German law is to apply to the court for a foreclosure sale of the encumbered property. The foreclosure sale will be processed by the court. The judicial proceedings are usually quite long-winded. The judicial sale of a property can take as long as two years. As a result of the judicial sale, the property is officially awarded to the purchaser who becomes the new owner. He has additional rights to terminate all leases of the property. With respect to the mortgages encumbering the property, mortgages that rank ahead of the enforcing mortgagee’s mortgage remain secured against the property. All lower-ranked mortgages are discharged by operation of law.
As can be seen from the summary of the position given above, German and English laws on enforcing mortgages differ.
Professional advice should always be sought and due diligence undertaken about the individual methods of enforcement prior to dealing in real estate or real estate securities.
Mortgage default law in the UK and Germany
