Fastener vs. buy-to-let financier

With today's low savings rates, a search for other investment opportunities has begun. Increasingly, private savers are seeing opportunities within real estate. Financiers are jumping on this by offering suitable financing. One example is the buy-to-let mortgage, which allows private investors to buy a property with the aim of renting it out. Financing rented property brings with it new risks. This prompted me to research the position of the buy-to-let financier.

Buy-to-let explained

The term "buy-to-let" stands for "buy to let. The buy-to-let mortgage is designed for private investors who primarily target existing owner-occupied homes with the intention of renting them out. Typically, investors with a housing stock between two and 50 homes are among the buy-to-let investors.

Buy-to-let mortgage

Buy-to-let mortgages allow private investors to meet their debt capital needs. Buy-to-let mortgageproviders finance up to 90% of the value of the property in rental condition. In exchange for granting credit, the buy-to-let lenderrequires a mortgage lien on the financed home (the collateral). With the mortgage right, the lender can proceed to sell the collateral in the event the borrower fails to meet his mortgage obligations. He can then recover - in repayment of the loan - from the proceeds of the collateral.

Pledge

The financier can obtain additional security by establishing a lien on the (current and future) rental receivables. The lien allows the financier to lay claim to the rental receivables in order to recover on them.

Seizure by creditors of the borrower

Problematic for the buy-to-let financiermay be a seizure of rental receivables. A garnishment of a debtor's property allows a creditor to recover on that property to repay the debt. Therefore, a garnishment of rental receivables may result in rent accruing to the garnishee. Creditors of the borrower can create an exceptional position for themselves vis-à-vis the buy-to-let lenderwith an attachment of the rental claims. This position of the garnishee is the result of the Van Berkel/Tribosa judgment(HR Jan. 25, 1991, ECLI:NL:HR:1991:ZC0122). In it, the Supreme Court ruled that a seizure of future rental claims upon a transfer of the leased property can also be enforced against the transferee of the leased property. This will prevent the new landlord from claiming the rental income. This obviously has a value depressing effect.

Example

An example for clarification. A purchases an investment home and is financed by bank B. In exchange for the financing, A grants for the benefit of the bank a right of mortgage on the investment home and a lien on the rental receivables arising from the investment home. If A defaults on his agreements against the bank, the bank can recover either the investment home or the rent owed by the tenant of the investment home to landlord A each month.

In addition to its debt to the bank, A also has a debt to C. C attaches the (current and future) lease receivables. However, if the bank wants to enforce its mortgage on the leased property, problems may arise. This is because when the investment home is sold, C's attachment remains on the rental receivables. Thus, if the bank sells the investment home to D, C can continue to recover on the rental receivables - despite D's ownership. With this knowledge, the purchase price of the investment home will be determined and there is a high probability that the mortgage debt cannot be repaid.

Solution?

The literature mentions several ideas by which attachment of rental claims can be avoided. I will mention three.

First, it talks about a broad interpretation of the lease clause. Among other things, the lease clause allows the lender to prohibit the borrower from assigning lease receivables. If the borrower subsequently does so anyway, by invoking the lease clause, the lender can also invoke the prohibition of assignment against the assignee of the lease claims. With a broad interpretation of that assignment, so that garnishment is also characterized as assignment, it could be assumed that the lease clause could also be invoked against the garnishee.

Second, it has been suggested that the right of usufruct be introduced into financing practice. This allows the financier to create his own right to the lease receivables, which offers more security than the lien.

Third, a bankruptcy of the borrower may possibly offer a solution. After all, attachments on property of the bankrupt expire because of the occurrence of bankruptcy. However, the question is whether the general bankruptcy attachment - which replaces the individual attachment - does not have the same effect as the individual attachment.

The above solutions could provide a solution for the funder, but there are objections to each solution. It is therefore up to the courts or the legislature. Until then, the funder will have to make do with other solutions.

Conclusion

The buy-to-let mortgageoffers a good option for financing investment properties. However, the lender should consider that sufficient collateral is built in in case the rental receivables are seized by a third party. The correct solution is still being debated in the literature. This will probably be crystallized in case law.

Should you be faced with this, or something similar, we would be happy to think with you.

This article was written by Nine Blom (legal assistant at Poelmann van den Broek attorneys) as first author and Mr. L.A. Witten (attorney at Poelmann van den Broek attorneys) as second author.