If you take out a loan to buy an apartment, you’ll inevitably come across this term: a real estate lien. This is how the lender secures the loan. Later, the real estate lien is also entered in the land registry. Here, we’ll explain everything you need to know about it.
What is a land charge?
To fulfill their dream of owning a condominium, many people need to take out a loan. In return, however, the lending bank requires collateral—in the case of real estate financing, this is usually a land charge. Other forms of this so-called real property lien include a mortgage and a rent charge. The lender uses this to secure its real estate loan. A land charge grants the bank the right to seize the property and, if necessary, the land itself, should the monthly loan payments not be made. Below, we explain what this means for you as a potential buyer and what first-time buyers, in particular, should keep in mind.
The Legal Situation
Before you sign the loan agreement with your bank, you should be familiar with the legal framework. If you take out a land charge, the creditor can, under certain conditions, foreclose on the property. Specifically, this means that in the worst-case scenario, your bank, as the creditor, can initiate a forced sale of your property if you fail to make your payments. The mortgage effectively makes the lender the owner of the apartment. This gives the lender the right to foreclose. However, for it to come to that, you generally must have missed at least three consecutive loan payments. In most cases, a first-priority mortgage amounts to 60 to 80 percent of a property’s market value.
If another bank is already listed in the land register, the registered bank will generally assign the land charge to the new bank. However, the amount of the registered land charge does not indicate how much the previous owner still owes. The land charge usually remains in the land registry in full until the loan is paid off completely. The bank and the customer agree in the loan agreement which land charge will be registered for the new bank and what other collateral the bank requires. The purchase agreement specifies which land charges are already listed in the land registry and whether these are to be deleted or assumed. If this process seems overwhelming just reading about it, don’t worry: A notary is always involved throughout the entire sales process, drafts the purchase agreement, and notarizes it. It is also the notary’s responsibility to clarify all important issues with the bank. At the notarization appointment, the notary reads the agreement aloud once more, allowing for any final questions to be addressed and requests for changes to be made.
Keep in mind: Interest is also charged on the land charge. This land charge interest is recorded in the land registry and is usually significantly higher than the loan interest rate, amounting to about 15 percent. The interest rate is set so high because the bank wants to protect itself against future costs. While the land charge interest increases the amount of the land charge, you do not actually have to pay it: In most cases, the amount exists only on paper. But what is its purpose, then? In the event of a foreclosure auction, the bank can demand an amount from the auction proceeds that exceeds the amount of the land charge. Interest on the land charge is subject to a three-year statute of limitations, so it cannot rise indefinitely.
Entry in the Land Register
The order of entries in the land register is important: In the event of foreclosure, the rights of the bank listed higher in the order of entries always take precedence. This means that, in the event of foreclosure, that bank is more likely to recover its money. A bank therefore carefully checks whether any land charges are already registered before granting a real estate loan. Banks also generally insist on disbursing the construction loan only after the land charge has been registered. If there is insufficient time between the purchase agreement and payment, the notary can alternatively confirm that the land charge can be registered at the intended priority level.
How Buyers Can Protect Themselves
Although you must grant the bank certain security interests through the land charge, you can also protect yourself. For example, you can draft a so-called security agreement. This declaration of purpose is intended to ensure that the bank, as the creditor, does not assert more rights in the form of the land charge than it is actually permitted to. In the security agreement, you can stipulate that the bank or other creditors may use the land charge exclusively for the intended security purpose—the real estate loan that was granted. Don’t forget the most important part of the security agreement: that the bank may no longer assert its rights if the secured claim no longer exists.
You can request that the land charge be removed from the land registry as soon as you have repaid your construction loan. However, you must submit a request to your bank for this. If you take no action, the land charge will remain in the land registry for the time being. The lender may not charge any bank fees for the deletion—this is considered an ancillary obligation on its part. However, you can also choose to keep the land charge in place and take out a follow-up loan from the bank. Alternatively, you can refinance: If you take out a new mortgage with another financial institution, the lien in favor of the old bank is removed and a new one is registered in favor of the new bank. If you decide to have the lien removed and your bank agrees, it will send you a release authorization. You can then apply to the land registry office through a notary to have the mortgage lien removed.
Other Forms of Real Property Liens
In addition to the land charge, there are two other types of real estate liens: the mortgage and the annuity lien. A mortgage differs from a land charge in that it is considered “accessory security.” This means that the mortgage remains in effect only until the corresponding loan—that is, the secured amount—is repaid. The annuity lien can be viewed as a type of subcategory of the land charge. When an annuity lien is registered, a specific person receives periodic payments of capital from the land or property—in other words, a type of annuity is paid out.
If you’re interested, please feel free to contact us—as a reliable and experienced partner, we at ACCENTRO are here to support you throughout the entire purchasing process and help you find the property that best suits your needs.
