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Property (financing)
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The aim of this article is to explain the contents of the land register and the connection between loans and collateral in an understandable way. We will deal with the defense of enforcement against real estate in a separate article.

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Land register when buying a property

There are two public books in Germany whose contents are considered true by law: the commercial register and the land register. While those affected can obtain clarity fairly easily about the content of an extract from the commercial register, the regulatory content of the land register itself is largely unknown to notaries. Real advice and instruction are almost never provided when purchasing property and establishing mortgages. Above all, brokers know their fee entitlement and how to secure this with the notary. Notaries can often read aloud faster than someone can listen, let alone understand something. This is illustrated by a ritual that repeats thousands of times every day:

A completely normal case:

A younger couple appears at the notary accompanied by the real estate agent and the seller of a condominium. Beforehand, they were at the bank, signed a loan agreement and received the mortgage deed. Because you can only get the money for the apartment if you register a mortgage in the land register. It is clear to everyone what should happen: the two of them have decided to buy the apartment, whether for their own use or for renting is an open question. In any case, they have come together to achieve a common purpose.

Grundstücks GbR versus co-ownership shares

According to Section 705 of the German Civil Code (BGB), they form a partnership under civil law (GbR). A written contract is not required. However, the two would have the opportunity to determine the legal consequences regulated in the law for the GbR differently through a contract. For example, you could regulate who runs the business if someone is no longer able to do so. You could agree on regulations as to what should happen if someone goes bankrupt or becomes in need of care. They could regulate how the company would be ended and disbanded if necessary. You could also determine that the GbR, as the owner of the property, grants both of them a personal right of residence for their lifetime and much more. They would also conclude such a contract.

death

Because it would be important to them that, as long as they are still childless, even in the event of the death of one of them, their relatives do not inherit the share of the property, but rather it remains with their partner. It would be important to them that if there are children and one partner dies, the other partner can also represent the minor children in front of the bank and not that the parent in charge is assigned a court-appointed official guardian for each child separately until they come of age and he must submit a report to the court every year. It would be important to them that if one were to become insolvent due to accident, illness, unemployment or just bad luck, the property would be foreclosed on without the other being able to defend itself. They would also regulate what happens in the event of a divorce so that they don't end up in a war of the roses, but rather find an amicable settlement. 

They would have discussed this with the broker, a lawyer or their tax advisor and also with the notary in advance of the notary appointment. The notary would inform you at the appointment that you can either buy together as a GbR, or you can each acquire a joint ownership share on your own with the unchangeable, opposite consequences of what you could have regulated in your GbR contract. That wouldn't have cost a cent more. In the case of co-ownership shares, such regulations cannot generally be made apart from a will. But it happens as almost always. The two are not asked and leave the notary's room not as a property partnership, but as a joint ownership community.

Land register extract

You could read the result a few days later when the land register extract is sent to you. But who understands a land register extract? Even on the Internet, pages and pages only explain how to get one, but not what it says or how to read and understand it. An excerpt like this only has three departments, but they are quite something. The three departments have a ranking, what is in Department I has a higher rank than what is in Department II, these entries in turn have priority over the charges in Department III. Within Divisions II and III, rankings also apply, which have an effect on financing, but also on sales and foreclosure.

Real estate financing, subject matter of the contract

A contract is concluded through two agreeing declarations of intent. This also applies when concluding loan agreements. When interpreting a declaration of will, the real will must be explored and not attached to the literal meaning of the expression. This results from Civil Code § 133. Only the will of the declarant, in this case the borrower, is decisive. Anyone who purchases a building or restructures their debt is interested in the financing as a whole and not just its individual components. However, structured financing is very often offered, which consists of development loans from KfW, building savings loans combined with the conclusion of building savings contracts, annuity or repayment loans and policy loans in combination with the conclusion of life insurance. The question then arises as to whether each contract should be viewed individually and individual contracts can therefore be terminated, or whether the original declaration of intent when concluding the contracts should be interpreted in such a way that the subject of the business relationship is the financing as a whole.

Liability association

In any case, this can be assumed if the security of the loans in the land register and in the declaration of security purpose is formulated in such a way that there is a liability network across several or even all loans. If a dispute arises because, for example, the bank terminates a loan but other contracts continue to exist, the court must decide, taking into account the entire content of the negotiations and the result of any evidence taken, whether an actual claim is true or not is not to be considered true. The court would therefore have to focus on the uniformity of the contract. Therefore, as explained at the beginning, it is important to document all the discussions that took place before the contracts and the story.

If the borrower defaults on payments under a contract, this alone cannot lead to the termination of the contract. Special requirements apply to real estate loans under German law. The lender must carry out advice before the contract is concluded and record it. The bank can terminate the loan agreement if the borrower is in arrears with two installment payments and the arrears amount to at least 10 percent of the nominal amount of the loan for a contract term of up to three years or at least 5 percent for a contract term of more than three years. Termination must be preceded by a written reminder. But the question is whether the two installments or the percentage arrears relate to individual contracts or to the overall financing.

Consumer or entrepreneur?

Consumers are particularly protected in the legal system. Unfortunately, the German government has only partially implemented the EU's mandatory requirements from its binding Directive 2011/83/EU on consumer rights. As a consumer living in Germany, you can rely not only on the BGB, but also on the directive and, above all, on the case law of the European Court of Justice (ECJ). At this point, the ECJ protects consumers much better than the German legal system does. 

You should therefore know that the assessment varies depending on whether you are considered a consumer or an entrepreneur when it comes to real estate financing. Even if you have a property where you are registered as the owner alone or together with others and you use the property for your business, you are generally a consumer when it comes to real estate financing. This applies even if you have fully or partially accounted for the property in your tax balance sheet.

Jürgen Bächle
Jurgen Bachle

has been working as an independent tax consultant and expert in international tax law since 1989 and has been a member of the board of the German Association of Tax Consultants Baden-Württemberg, DSTVBW, for over 20 years.

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