A mortgage lien is a primary security that strengthens a creditor's position and a right that endures in bankruptcy. It is established by a notary. The process of enforcement is customized where a specialized lawyer adds value.
Are you a business owner that provides financing? If so, establishing a mortgage lien provides you with great security of repayment.
Are you business owner being asked for a mortgage lien by your lender or have you already issued a mortgage? If so, it is important that you know what the mortgage right covers and that you have an understanding of what to look out for in the foreclosure process to avoid unnecessary damages.
In this article, Heleen Wessel-Krijger discusses what a mortgage lien is, what property can be mortgaged, what a mortgagor should look for, what the benefits of a mortgage lien are and how to proceed in the foreclosure process to get the maximum result.
What is a mortgage lien?
A mortgage lien is one of the security rights regulated by law (along with, for example, a lien or a surety bond). Is the debtor unwilling or unable to repay? Then the mortgage right gives the creditor security of satisfaction of his claim.
With a mortgage right properly established, the creditor has priority in the distribution of the debtor's assets. Specifically, the net proceeds of the assets on which the mortgage right is established. This puts the creditor in a much better position than other creditors. It increases his chances of recovering his entire claim plus interest and costs.
What can be mortgaged?
Register property
A mortgage lien can only be established on registered property. Registry property is real estate, such as:
- business properties;
- houses and apartment rights;
- and registered vessels and aircraft.
Registered property is property that must be registered in the Land Registry. This is a public register maintained by the government.
Pledge?
A mortgage does automatically (by operation of law) entail a lien on all claims for compensation that take the place of the registered property. Think of insurance payments or compensation for expropriation.
Movable property (machinery, inventory), shares, intellectual property rights and accounts receivable cannot be mortgaged but must be pledged. Read more about this in this article by Reinier Pijls.
Receivables
A right of mortgage can be granted for existing claims of the lender, as well as for future claims, such as an extension of financing. Future receivables require that they be sufficiently determinable.
Third Party
A third party can also grant a mortgage on its property as security for claims of another debtor. Examples include group companies, which mortgage their real estate for group financing or for another group company.
How is a mortgage lien established?
To validly establish (create) a lien, there are a number of requirements. These apply to any type of lien (movable property, property right). For example:
- the mortgagor have power of disposition;
- there is a valid title; and
- an act of establishment be performed.
1. Power of disposition of mortgagor
The mortgagor (the debtor) (or the third party) can establish a mortgage only if he/she is the rightful owner of the property. He/she must - very briefly - generally be the owner of the property he is mortgaging.
2. Valid title
In addition to the mortgagor's power of disposition, there must be a valid (legal) title. In practice, this is often an agreement in which the mortgagor undertakes to provide security to the financing institution. You can think of loan agreements, overdrafts, bank guarantees, etc.
3. Establishment act
Finally, a formal act of establishment must be performed that actually creates the mortgage right. This involves a notarized deed between mortgagor/debtor and mortgagee/creditor. That deed must be registered in the Land Registry.
What requirements must a mortgage deed meet?
Formal requirements
The mortgage deed must contain a number of details, otherwise, in principle, the mortgage right will not be established. These include:
- naming the parties (mortgagor, debtor and mortgagee) and parties representing them;
- indication of the notary and the time of suffering the mortgage deed;
- title of establishment (see above under ad. 2);
- indication of the claim or facts by which the claim can be determined, for which the mortgage right is secured (financing deeds);
- amount for which the mortgage right is granted or if that is not fixed the maximum amount recoverable from the property under the mortgage;
- the domicile chosen by the mortgagee in the Netherlands; and
- The nature, local designation and cadastral designation on which the mortgage is established.
Practical requirements
In addition to these formal requirements, mortgage deeds (and applicable general terms and conditions) often contain "standard" clauses such as a lease clause, management and eviction clause, lien on movable property belonging to the attached real estate and prohibition on alteration of fixtures.
Advantages mortgage law
Right of ready execution
The mortgagee is authorized to sell the registered property subject to the mortgage. If sold, he or she can recover the claim on a priority basis from the proceeds. The mortgagee can do so as soon as the debtor is late or stops paying his debt.
One of the great advantages of a mortgage lien is that the mortgagee can proceed directly to foreclosure . He does not have to first obtain a judgment from the court, which can be a long and costly process. This is called the "right of ready execution.
Method of auction (execution).
We have already written about the run-up to the auction (the financing termination process) in this article. During this foreclosure process it is advisable to clarify the possibilities as well as the pitfalls so that the maximum result can be achieved.
Separatist in bankruptcy
Another important advantage of a mortgage lien is that the mortgagee/financier retains his rights in case of bankruptcy of the mortgagor. He can act as if there is no bankruptcy. He does not have to worry about the trustee. This is a great advantage over the situation of a garnishee or other creditor. This is different, for example, in the case of a (foreclosure) attachment. That merges into the general bankruptcy attachment and expires.
Conclusion
A mortgage lien significantly strengthens a creditor 's position . When establishing a mortgage right , it may be wise to have a review of whether too much collateral is required and whether the terms of the mortgage are appropriate.
When it comes to the termination and possible foreclosure of the mortgage right , the help of a lawyer or another expert can be of added value to secure your rights. If you would like advice in this regard, please feel free to contact one of our attorneys.
