A piece of land naturally exists as a spatially defined part of the earth´s surface (RGZ 68, 24, 25). In the judicial sense neither the BGB nor the Grundbuchordnung provide a definition. But according to the registration rules saleable or chargeable land only exists when it is measured and a ”Grundbuch” (Land Register) has been created for the land which is concerned. Land may therefore be defined as a measured parcel of land registered within the Land Register (Schöner/Stöber, Grundbuchrecht, Rn. 561). However, some land is not recorded, such as public roads and rivers used as transport ways (see § 3 ph. 2 GBO). Such land can only be conveyanced after rededication from the former purposes and recording in the Land Register.  

II. Types of Charges 

Land can be encumbered with easements, usufructs and mortgages (limited rights in rem). Besides some legal limitations of ownership exist which are not registered in the Land Register. Thus the owner of land may be obliged to tolerate a superstructure made by a neighbour (§ 912 BGB). Subsequent to § 917 BGB a land owner may be obliged to grant a right of way in favour of a neighbour whose plot has no access to public streets. Such a right is qualified as an obligation to tolerate and does not exist as a legal interest but in fact the right will encumber the land and is enforceable by law. The owner whose land is charged by such a right of way may claim an indemnity due as a rent fixed by the court (§ 917 ph. 2 BGB). 

III. Types of payment securities 

The BGB provides three security rights in rem against land which are very different from the English law relating to mortgages and charges. Foreign lawyers especially those from common law countries should dismiss all notions acquired from the English law relating to mortgages. Interestingly, the official translation of the Code Civil du Québec has solved the problem by creating a new English word: “hypothec”. The German security rights in rem include mortgages (Hypotheken, §§ 1113 et subs. BGB), annuity charges (Rentenschulden, §§ §§ 1199 et subs. BGB) and land charges (Grundschulden, §§ 1191 et subs. BGB). All three of them allow the creditor to demand payment of money as a result of the land so charged, and ultimately the creditor can enforce the debt by causing the sale of the land (§ 1147 BGB). The owner of the charge does not become the owner of the plot and he is never entitled to take possession of the plot. Nor can he appoint a receiver. In addition to that the creditor may benefit from guarantees and other security instruments which may arise from either a contract agreement or by operation of the law. 

The features of mortgages and land charges can briefly be summarised as follows: Both of them are interests in land created by written instrument providing some kind of a right to foreclose. A mortgage always relates to a certain claim, i.e. a loan. Land charges, on the other hand, do not relate to a certain claim but may also be used to secure a number of other obligations vis-à-vis the same creditor, or, if a loan has been settled, vis-à-vis another creditor. Due to their flexibility, land charges are therefore widely used in Germany. Deeds on mortgages/land charges are usually notarised and must be entered in the Land Register. 

Short characteristics 

(1) Two limited rights in rem securing loans are provided by German Law: mortgage (Hypothek) and land charge (Grundschuld). A mortgage/land charge is an interest in land created by a written instrument providing that payment may be asked from the owner of the land

(2) Mortgages and land charges normally serve as security for the performance of a debt.

(3) The mortgage or land charge is generally recorded

(4) The mortgagor creates the mortgage or land charge. The mortgagee is the creditor and the holder of the mortgage or land charge

(5) The mortgage or land charge is a legal title in land without any right to possession of the land

(6) The mortgage or land charge only entitles the mortgagee to search for payment by compulsory sale of the land

(7) A mortgagor may generally convey his land encumbered by the mortgage or land charge or subject it to further mortgages or land charges. In a sale of land subject to a mortgage or land charge the purchaser is not personally liable for the debt which the mortgage or land charge secures but the creditor may still ask for compulsory sale of the land.

(8) A mortgagor is not automatically or necessarily personally liable for the debt which the mortgage secures. If the debtor fails to pay the debt the creditor may proceed for the compulsory sale of land. However the creditor cannot get a deficiency judgment against the mortgagor in the event of a compulsory sale in which the property does not bring enough to satisfy the debt, unless the mortgagor has assumed his personal liability.

(9) Mortgages or land charges are assignable. But there is one great difference between them. The mortgage can only be transferred together with the debt, thus the mortgage (the security) and the debt should be transferred to the same person. The general rule is that the mortgage follows the debt. A land charge however can be transferred without the debt for which the mortgagor has granted the land charge.

(10) Foreclosure by sale is only possible under judicial supervision. 

IV. Constitution 

As a basic principle the conveyance of the ownership in a piece of land, the encumbrance of a piece of land with a right, as well as the transfer or encumbrance of such a right requires, to the extent that the law does not otherwise provide, the agreement of the person entitled and of the other party with regard to the occurrence of the change of title and the registration of the change of title in the Land Register (§ 873 ph. 1 BGB). Thus the rights in rem come into existence by agreement and registration, unless there is another cause such as an execution order granting a mortgage (§ 866 ZPO). The agreement contains nothing but the common will of the parties that a mortgage or land charge in favour of the creditor is to come into existence on the property of the owner. Unlike the agreement concerning the transfer of the property (Auflassung) the consent that a charge is to come into force requires no form. But the Land Register will enter the charge only on the basis of a formal application under the rules of the GBO (Eintragungsbewilligung). No evidence whatsoever as to the agreement is required. However the application for the entry of the charge must be notarised. On the other hand notwithstanding the formal registration of the charge does not exist, when charge was not validly concluded. Finally if a person has bound himself by legally enforceable agreement to grant a charge but fails to comply with it the creditor may replace the consent of the debtor by judgment (§ 894 ZPO).

V. Enforcement 

A mortgage or a land charge is a legally binding agreement and a limited right in rem as well. By consequence a charge may be enforced by law. Unlike the English concept German law does not provide that the owner of a charge becomes the owner of the plot nor does it provide a right to take possession of the land. In principle realisation of the debt secured is achieved by application of execution under § 1147 BGB after judgment against the debtor followed by a procedure of compulsory sale or appointment of a judicial administrator. Usually the mortgage or land charge agreement contains a special liability clause (Zwangsvollstreckungsunterwerfungsklausel) allowing immediate issue of a writ on default of the debtor. Pursuant to § 800 ZPO the owner may make himself liable to immediate execution in a document drawn up pursuant to § 794 ph. 1 n° 5 ZPO with respect to a mortgage , a land charge or an annuity charge in such manner that the execution be permissible against any person who is the owner at the time in question. Such subjection requires registration in the Land Register. Under the terms of § 794 ph. 1 n° 5 execution is levied on account of documents drafted by a German notary public within the scope of his competence, to the extent that the document is made with respect to a claim, the substance of which is the payment of an ascertained sum of money or an ascertained quantity of other fungibles or securities, and the debtor made himself liable to immediate execution in the document.

Unlike other forms of enforcement the enforcement with respect to immovable property is not exclusively governed by the rules of the Code of Civil Procedure (ZPO). A special law governs compulsory auctions and compulsory administration (§ 869 ZPO). Reference is made to the Act Governing Auctions and Sequestrations of Immovables (Zwangsversteigerungsgesetz-ZVG) of march 24, 1897 with numerous amendments. According to the rules of the ZVG the mortgagee (who has already obtained a title according to § 1147 BGB) is entitled to file for an order of compulsory sale (Zwangsversteigerungsbeschluss). Application for a sale by auction has to be made in writing to the local court ‑ the court with jurisdiction in enforcement matters. The application must be accompanied by the enforceable title which either may be a notarised document or an enforceable jugdment (§ 16 ZVG). A legal clerk will deal with the application. The order imposing the compulsory sale is served on the debtor. The opening order has to be recorded in the Land Register (§ 19 ZVG). Besides he can file for a sequestration or administration order (§ 146 ZVG). Sequestration allows a creditor to settle his debt from the current income from real property (§ 155 ZVG). An application for sequestration is made to the local County Court in whose jurisdiction the seized real property is situated. The court appoints a sequestrator who is obliged to draw up a distribution scheme.

VI. Example of a grant of a land charge under German Law

I. Granting of a Land Charge

 

The owner of the parcels of land recorded XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX in the official land register of Bremen under

 

Neustadt III,             book number,                    on page     ¹⁰²¹,

 

(the parcels of land recorded  \  XXXXXXXXXXXXXXXXXXXXXXXXX

 

parcels                         part parcels          ^{311, 312, 313}

 

encumbers the abovementioned real estate in favour of the

 

 „German Mortgage Bank AG“,

XYZ-Straße 20, ++++++ Frankfurt/Main - named "bank" hereinafter – with, a

REGISTERED LAND CHARGE

for the amount of

                            4,600,000.- DM,

in words: German Marks (DM) four million and six hundred thousand.

From this day on this land charge bears annual interest at 16%. Interest is due retroactively at the first working day of the following calendar year.

Besides a fee 4) of 8% of the land charge capital is to be paid once.

Land Charge capital and fees are due.

 

II. Priority Order

The land charge is to be registered at first priority - junior to the encumbrances registered under 

.\.

 

If registration at this priority is impossible then the aforementioned land charge is to be

registered at the next priority available.

III. Creation of the Land Charge in the Case of Multiple Lien-Objects

 

If simultaneous recordation of all encumbered properties listed under part l No 1 is not possible then this land charge is to come into existence at the moment one or a part of them
is registered regardless of the future enforcement of this deed.

IV. In Rem Enforcement

The owner surrenders himself and the lien object to immediate enforcement in respect to land charge capital, interest and other fees of this deed and he does so in a way that makes
enforcement of this deed admissible against any owner.

II-1118-1/90/02(IR)

V. Permissions and Motions                                                              

1.) Explicitly waiving any right of revocation the owner accepts and demands recordation of:

a) the land charge with the contents described in part  l No. 1 to 3. of this deed

b) the in rem enforcement clause according to part IV of this deed.

2.) Furthermore, the owner demands that a notarized copy of the recorder's office files shell be submitted to bank after recordation.

VI. Statement of Purpose

The land charge granted by this deed and the acceptance of personal  liability secure all current and future claims of  bank arising under a loan contract including claims based upon unjustified enrichment, damages and non-acceptance of the loan - as well as other –also future - business transactions between the bank and the persons present. 

If principal debtor and surety are not the same person then the land charge secures all claims and secondary claims of bank arising under the loan contract unless the purpose of the creation of the land charge or unless an explicit agreement between bank and surety do set forth a more extensive coverage of the land charge.

If an interim loan is granted by another lending institution then the aforementioned land charge also secures the claims of this institution, as long as and insofar as claims of bank do not arise. Claims of bank are secured by that part of the land charge that is registered with the highest priority.

The owner as surety hereby irrevocably accepts that Bank may assign the land charge in part or as a whole to an interim loan lending institution named to Bank, there is no need that the bank makes this other institution prove the existence of the claims.

VII. Return of the Land Charge Deed

All payments made to bank are accounted to the personal debt and not to the land charge. The claim to have the land charge returned is limited to a claim to give consent to deletion of the land charge from the recorder's office (consent to deletion). Therefore, claims to have the land charge deed returned or to have it cancelled are excluded. The claim to give consent to deletion of the land charge from the recorder's office can not be brought before all claims of bank have been satisfied. Bank may hand over the deed to any owner.

In the case of enforcement proceedings bank is not obliged to enforce the land charge in excess of the principal personal debt. Bank may however waive excessive sale proceeds in distribution proceedings.

VIII. Land Charges of a higher or the same Priority

Insofar as land charges are registered now or will be registered in the future with a higher or of the same priority as the land charge hereby granted to the favour of bank, owner hereby assigns all current and future rights against any creditor, who holds a land charge of a higher or the same priority, to bank. Without limitation the claims to have this deed being given back, to waive, to consent to deletion, to receive the proceeds of a forced sale, insofar as these proceeds exceed the personal debt underlying the land charge, are assigned.

If the rights to have the land charge deed being given back, have already been granted otherwise owner assigns all current and future claims to have these rights to bank. Owner promises not to modify the security agreement upon which the granting of this land charge is based without the consent of bank.

IX. Personal Liability and Enforcement Clause

Simultaneously we - the persons present as mentioned at the beginning -  

accept that we are personally liable for the payment of an amount equal to the land charge capital, interest and other fees granted by this deed. Several persons are liable jointly and severally. Each debtor surrenders himself and all of his assets to immediate enforcement of this deed. Bank can enforce personal liability regardless of recordation of the land charge and without seeking prior enforcement against the lien object.

X) Power to accept Service

Each of several owners/ debtors has authority to receive service for any other.

XI) Spouse's Consent

Each spouse consents as far as required to the declarations of the other spouse.

XII) Fees

All costs caused by execution and enforcement of this deed are paid by the person present.

XIII) Orders to the Notary

The persons present ask the notary to issue and submit:

an enforceable duplicate of this deed to bank,

a copy to the recorder's office in order to have the land charge recorded in the land registry a copy to the owner.

 

This transcript has been read out to the persons present, been approved by them and is subscribed in the handwriting of each person present:

(four signatures)