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06 April 2021 / news

Reform of property law – Mortgage in case of split ownership

In our second webinar dedicated to the reform of the property law (new Book 3 in the Civil Code), we discussed the question whether a mortgage can be granted to a financing provider in case the ownership is split between different parties. Below the main take-aways.

reform-of-property-law–mortgage-in-case-of-split-ownership

Can the holder of a property right establish a mortgage on his right?

Short recap to start: the property rights concerned are the long-term lease right (erfpachtrecht / droit d’emphytéose), the building right (opstalrecht / droit de superficie), the usufruct right (vruchtgebruikrecht / droit d’usufruit) and the easements (erfdienstbaarheden / servitudes). The definitions given to these property rights by the law are mandatory, and the parties cannot create other property rights.

From a legal point of view, mortgaging a property right is an act of disposal since the mortgaging includes a potential sale. The new Book 3 explicitly confirms that each holder of a property right can dispose of his right. Consequently, each holder of a property right can in principle mortgage that right.

There are two exceptions to this principle:

  1. If the nature of the asset prevents this
    Some assets cannot be disposed of due to their nature. For example, the inherent components of a property (e.g. the roof of a building), the share in the common parts (including the land) attached to an apartment in an apartment building, accessory building rights (accessoire opstalrecht / superficie-conséquence), etc. These assets cannot be disposed of without simultaneously disposing of the main asset. So, if you want to sell the common parts in a co-ownership, you must sell the private parts as well.
    The same applies to security rights within the meaning of Book 3 (e.g. mortgages): these rights cannot be transferred separately from the secured claim.
  2. The holder of the property right cannot act beyond the limits of his powers.
    The holder of a property right may only grant rights in so far as he does not exceed the limits of his rights. Consequently, he may not allow rights which exceed the duration of his own right. For example, a long-term lessee who benefits from a 30-year right cannot grant a building right for more than 30 years.

In addition, the capacity of the holder of the property right may also be subject to certain restrictions agreed in the underlying title. For example, parties to a usufruct agreement can agree that the usufructuary may not transfer or mortgage his usufruct right without the prior written consent of the bare owner. Therefore, it is very important to verify the provisions in the title and to verify whether and under what conditions a transfer or mortgage is possible. The “second step” must also carefully be verified, i.e. under which conditions a mortgaged asset can be sold in case of enforcement.

What is encumbered by the mortgage?

The principles are straight-forward and logical:

  • The usufructuary may transfer or mortgage his usufruct right. With regard to the constructions built by the usufructuary and of which he is the temporary owner based on the accessory building right embodied in his usufruct right, the usufructuary can transfer or mortgage these constructions together with the usufruct right. The reason for this is logical: the temporary ownership of the usufructuary derives from the accessory building right, which in turn is accessory to the usufruct right. Consequently, the usufructuary cannot transfer or mortgage the constructions without simultaneously transferring or mortgaging the usufruct right.
  • The same applies to a long-term lease right and a building right. These rights can be transferred and mortgaged. With regard to the constructions built, either by the long-term lessee by virtue of the accessory building right embodied in his long-term lease right or by the holder of a building right, these constructions can be transferred or mortgaged simultaneously with the underlying property right.

Note that it is not possible to encumber easements, nor the constructions built in execution of easements. This is because easements are accessory rights (as opposed to a usufruct right, long-term lease right and building right which are ‘independent’ rights). Indeed, easements are accessory to the dominant estate (heersend erf / fonds dominant). Consequently, they cannot be transferred or mortgaged without the dominant estate.

The question whether constructions built on the basis of a concession right can be transferred or mortgaged is a difficult one. On the one hand, the Mortgage Law provides that only (i) real estate in trade (in de handel / dans le commerce) and (ii) property rights over this real estate can be mortgaged. On the other hand, the new Book 3 provides that ancillary rights cannot be independently disposed of because of their nature and must be disposed of (or mortgaged) together with the main asset.

In case of a construction built on the basis of a concession right, the concessionaire is temporary owner of this construction because of the accessory building right. Such accessory building right cannot be independently transferred or mortgaged, meaning that a transfer or mortgage can only be envisaged together with the transfer or mortgage of the concession right. But on the basis of the Mortgage Law, a concession right is not a mortgageable asset. In our view, it follows that the concessionaire cannot mortgage the constructions he built and of which he is the temporary owner. Note however that there is much debate on this point. 

What are the consequences for the mortgagee if the property right terminates?

The new Book 3 makes a distinction between the "ordinary" and "abnormal" grounds for termination.

The "ordinary" grounds for termination are those on which third parties in good faith with a conflicting right can anticipate: they know or should know that the property right will terminate. The most straight-forward example is the contractually agreed term: the right terminates by law on its end date. At the moment the mortgage is granted, the bank knows or can know that the long-term lease right will end upon the agreed expiry date. At that moment, both the property right and the mortgage will end. This is logical since the holder of a property right cannot grant more rights than he has himself (nemo plus iuris). Since the bank knew or could have known on which date that property right would end, the bank bears the risk: it is not protected against the termination and his mortgage right will end.

The "abnormal" grounds for termination are those grounds for termination on which third parties in good faith with a conflicting right cannot anticipate: at the moment they acquire rights, they cannot know that the property right will prematurely terminate. Since they cannot anticipate on these grounds for termination, they are protected if the underlying property right prematurely terminates on such basis. This protection consists of the fact that the extinction of the underlying property right has only relative effect: the termination only has effect between the parties and cannot prejudice the interests of third parties. According to the new Book 3, the “abnormal” grounds for termination are: waiver (afstand - renonciation), revocation (herroeping - révocation), dissolution for non-performance (ontbinding wegens niet nakoming – resolution pour inexécution), termination by amicable agreement (opzegging in minnelijke overeenstemming – résiliation de commun accord), confusion (vermenging - confusion) and dilapidation (vervallenverklaring - déchéance)

In those circumstance, the mortgage still exists and benefits to the mortgagee. This can have far-reaching negative consequences for the owner. The mortgagee, if not repaid by its debtor, can enforce and proceed with the sale, meaning an impoverishment of the owner while he is not the debtor. The mortgagee and the owner will still have a recourse against the debtor, but it is fair to say that in insolvency situation this right does not bring any solution.

It is therefore strongly recommended to discuss and agree on principles in an agreement between the land owner, the property right holder and the financing provider.

What are the consequences for the mortgagee if the asset to which the property right relates, disappears?

In principle, a property right ends when the asset to which it relates is completely destroyed. It follows that if a mortgage is established on a property right and this right ends because of the total destruction of the asset, the mortgage right will also end. The Mortgage Law protects, to a certain extent, the mortgagee is such circumstances by providing that the insurance indemnity is applied to the repayment of the mortgage-backed receivable if not used for the reconstruction. Credit agreements usually provides for a mandatory repayment clause in such circumstances.

The new Book 3 however provides for an exception: in rem subrogation (zakelijke subrogatie / subrogation réelle). Generally speaking, in rem subrogation occurs when the property right, in case of total destruction of the asset to which it relates, continues to exist in respect of the asset which has replaced the original asset. The concept of subrogation refers to the continuation of a legal relationship despite the replacement of an essential element of it.

From the above it follows that in case the original asset is replaced by another asset and there is therefore in rem subrogation, both the property right and the mortgage right will continue to exist. One can however question whether the property right on an insurance indemnity (that will “replace” the asset destroyed) can still be relevant. In any case, it is still recommended to discuss and agree on obligations and/or rights in case of destruction.

Conclusion

The new Book 3 follows largely positions taken by the legal doctrine and clarifies many situations. However, the case of (abnormal) termination of a property right or destruction of the underlying asset still rise many questions, and the reliance on the legal provisions might be detrimental to the land owner and/or the mortgagee. It remains therefore recommended to deal with these specific cases in the contract.



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