The German Federal Supreme Court (Bundesgerichtshof, BGH) has now published its judgment dated March 30, 2010 (Case Ref. No.: XI ZR 200/09, cf. Client Alert dated April 8, 2010). As was already mentioned in the BGH’s summary press release general terms and conditions submitting borrowers to immediate enforcement proceedings in the context of the creation of a land charge are valid. Such general terms and conditions do not unfairly discriminate debtors within the meaning of Section 307 Subsection 1 Clause 1 of the German Civil Code (Bürgerliches Gesetzbuch, BGB).

Pursuant to the Court’s ruling the admissibility of such clauses is not affected by fact that the underlying claims are freely assignable and that, therefore, every future creditor may also rely on the immediate enforcement of his claims. However, the clause submitting the borrower to immediate enforcement proceedings had to be interpreted narrowly in such a manner that the clause only extended to claims covered by a fiduciary bound land charge. This means that a purchaser of the land charge only has become the legal successor regarding the legally enforceable claim within the meaning of Section 727 Subsection 1 of the German Rules of Civil Procedure (Zivilprozessordnung, ZPO) if he/she has entered into the security agreement between the debtor and the original holder of the land charge. This requirement must be verified on the notary public’s own motion. The borrower who deems the transfer of title from the original creditor to the purchaser of the land charge to be invalid can make use of the legal remedies provided for in Sections 732, 768 ZPO.

Unfortunately, the decision does not make any statement regarding the form in which entering into the obligations from the security agreement must be proven. Sections 795, 727 ZPO require that the notary public is provided with proof of the legal succession by official or officially authenticated deeds. That would mean that entering into the security agreement must be executed by certification of the signature before the Notary.

Furthermore, the decision does not explain how the purchaser can enter into the security agreement if the debtor does not agree. In this instance common use is to execute a contract between the original and new creditor for the benefit of the debtor in which the new creditor is obligated vis-à-vis the debtor to oblige by the security agreement’s provisions.

Additionally, the BGH conflicts with the Risk Limitation Act and the transitional regulations set forth in Art. 229 Section 18 Subsection 2 of the Introductory Act to the German Civil Code (Einführungsgesetz zum Bürgerlichen Gesetzbuch, EGBGB). According to Sections 1192 Subsection 1a German Civil Code (Bürgerliches Gesetzbuch, BGB) in connection with Art. 229 Section 18 Subsection 2 EGBGB the collateralized property‘s owner can rely on objections based on the security agreement vis-à-vis the new creditor. This is also applicable if the new creditor has not entered into the security agreement. A bona fide, objection-free acquisition of the land charge is not possible. However, this provision only applies to land charges assigned after August 19, 2008. In contrast, the narrow interpretation of the BGH is applicable to all security land charges, regardless of the date of assignment. Furthermore, the BGH strips Section 1192 Subsection 1a BGB of every practical use, as - according to the BGH - the new creditor must enter into the security agreement if he wants to enforce the assigned claim. Then the borrower can also bring forth the objections based on the security agreement vis-à-vis the new creditor. The provision of Section 1192 Subsection 1a BGB is not necessary. Thereby, the BGH is in conflict with the legislator without even discussing this in its judgment.

Therefore, purchasers of land charges should examine whether they entered into the security agreement and can prove this by way of an officially authenticated form. Should this not be the case the defect can be cured by way of a subsequent agreement with the original creditor in favor of the debtor.

If you would like more information about the foregoing, please contact the authors of this Legal Update, Dr. Jörg Wulfken at +49 69 79 41 2951, Dr. Jan Kraayvanger at +49 79 41 2271 and Elmar Günther at +49 69 79 41 1141.