What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?
As far as the financing of real estate investments is concerned, both private individuals and legal entities may invest in Belgian real estate, whether outright or via the means of a company. These entities may obtain loans for this purpose, from both Belgian or foreign banks or other lenders, in principle without any restriction or limitation.
The most common forms of security in relation to real estate finance are:
A mortgage can be defined as the grant of a charge by the mortgagor (who may or may not also be the debtor) over real property (owned by that mortgagor/debtor) in favour of the creditor (mortgagee), security for the debt owned by the mortgagor/debtor. A mortgage must be created by means of a deed drawn up by a notary public and must be registered with the Office of Legal Certainty (bureau de Sécurité Juridique/Kantoor Rechtszekerheid)in order to be enforceable against third parties.
For the creditor, the benefit of a mortgage is that it gives him a preferential right over his debtor’s mortgaged assets, as against most secured and against all unsecured creditors. In the event that several mortgages are granted over the same property, the ranking of the mortgages will depend upon the time of their registration (the mortgage first registered/entered will rank first). The registration of a mortgage is valid for 30 years as from registration and is renewable.
Another benefit of a mortgage is that it remains attached to the property over which it is granted, and therefore it remains unaffected by subsequent changes in ownership.The mortgage can only be released after repayment of the debt to the mortgagee in accordance with the terms of the mortgage deed or with the agreement of the creditor. A mortgage does not only have to relate to the right of ownership, but can also have as its object the right to usufruct, a bare ownership right, a long lease right or a building lease right on a property.
The total secured amount must be specified in the mortgage deed and will be the basis for the calculation of the applicable taxes and fees.
In order to reduce the substantial registration duties and fees related to the granting of a mortgage, it is a common practice in Belgium to split the mortgage into (i) an effective mortgage and (ii) a mortgage mandate. With this technique, the chargor only grants effective security for a fraction of the agreed secured amount, and a mandate for the balance.
The mortgage mandate is an agreement between the chargor and representatives of the lender pursuant to which those representatives (acting in their own name and not in the name of the lender) are granted the power to establish a mortgage.
Note, however, that the mandate itself does not create an actual security interest in the asset, but only a mandate to grant such security interest at a later point in time. Only at that point, namely upon the conversion of the mandate and the registration of the mortgage in the Office of Legal Certainty, the security interest will obtain its ranking and the registration fees will be due. As a result, any mortgage established before the conversion of the mandate, will be prior in ranking. Furthermore, any conversion of the mandate within a suspect period (which can be fixed by the commercial court as up to six months prior to bankruptcy) can be voided by the bankruptcy court.
Despite this mortgage mandate technique, it remains customary in Belgium for lenders to take an effective mortgage for at least a portion of the secured obligations, in order to secure ranking for a portion of the secured amount and to raise awareness towards potential other creditors as to the existence of outstanding secured financing.
A pledge over receivables can be entered into by private agreement. Under Belgian law, a pledge over receivables is valid between parties, and enforceable against third parties (other than the debtor of the pledged receivables) as from the date of its conclusion, provided that the pledgee is entitled to notify the debtor of the pledged receivables of the pledge. However, in order to be enforceable against the debtors of the receivables, the debtors must be notified of the pledge or the pledge must be acknowledged by the debtor, by lack whereof a payment by the debtor to the pledgor is valid and the debtor cannot be held liable to make a second payment to the pledgee.
A security interest over bank accounts is created through a pledge over claims, rights and receivables in connection with monies credited to a bank account and any similar claims, rights or receivables for restitution of monies.
A pledge over bank accounts is enforceable between the parties as from the date of the pledge agreement and against third parties (other than the account bank) upon the entry into the (private) pledge agreement provided that the bank accounts are sufficiently determined or determinable on the basis of the pledge agreement.
A pledge over bank accounts will be enforceable towards the account bank upon notification to, or acknowledgement by, the account bank.
An acknowledgement by the bank holding the pledged accounts is required in order to protect the pledgee against risks arising out of rights afforded to the bank pursuant to its general conditions or otherwise (a bank usually benefits from a right of pledge over the accounts held by its clients, which must be waived in favour of the pledgee).
Where the purchaser or borrower intends to buy shares in a real estate company rather than the property directly, the lender will usually be offered a pledge over the shares to be purchased, as security.
Where the borrower is a shareholder of substance (being a shareholder with a large and/or important share portfolio), the lender may take a pledge on the borrower’s shares portfolio. This particular type of pledge may also be of interest where a holding company wishes to grant a security for a loan taken by one of its subsidiaries.
For the lender, the benefits of such a pledge rests in his effective control over the borrower’s shareholding as the borrower cannot dispose of the shares without notice to and the agreement of the pledgee.
In principle, the rights inherent to the shares (such as voting rights, participation in dividends or new issues or other similar rights) will be retained by and can be exercised by the pledgor as long as he is the owner of the shares. The pledge agreement, however, will usually contain certain restrictions on the pledgor and provide that the pledgee is to exercise such rights for instance in the case of an event of default under the financing.
A pledge over the shares in a Belgian company is entered into by private agreement.
A pledge over shares should be recorded in the share register of the borrower in order to be valid against third parties.
Movable assets can be pledged by way of a private agreement and can be perfected by means of registration in the Belgian National Pledge Register or by way of dispossession. All moveable assets, tangible and intangible, in whole or in part, which are capable of being transferred can be pledged.
This security will be valid between the parties to it from the date it is concluded but, in order to be enforceable against third parties, the pledge must be registered in the Belgian National Pledge Register or be perfected by means of dispossession. The registration in the Belgian National Pledge Register will be valid for a renewable period of 10 years.
This type of security is less relevant in the case of a pure real estate property financing.
Finally, a lender can request personal or corporate guarantees, which is often relied upon by a lender as an additional ‘top-up’ security and is favoured by holding companies in respect of loans granted to their subsidiaries. Guarantees can be for the total amount borrowed or can be limited to interests payable or the short-fall in value (‘deficiency’) or to any particular amount.
Guarantees should be within the limits of the guarantor’s corporate interest, and as such, particular attention must be given to this when structuring and documenting such arrangements. Therefore, for companies, guarantees are usually made subject to limitations.
The personal guarantee does not give the lender security over the borrower’s assets. As such, it cannot give the lender priority over either secured or other unsecured creditors of the guarantor (unless security is granted to secure the guarantee obligations of the guarantor). The only benefit of a guarantee is that the lender is able to claim against two companies instead of one and in this way may ‘spread’ his risk.
