Real estate finance

Types of security

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

Angola

Angola

The most common form of security over real estate is the mortgage. Due to the existing restrictions to foreign ownership of real estate, foreign investors are granted surface rights over real estate. Security over these rights can be created but it requires the prior authorization of the grantor. The creation of security over immovable assets, related rights or movable assets subject to registration is created through mortgage.  The mortgage must be executed by notarial deed and is subject to registration.

The most common form of security over receivables is a pledge of credits, which is created by a written agreement.  The pledge of receivables is subject to the notification of the respective debtor. Thus, it is also possible for security to be granted over the rental income from a property. This usually takes the form of an assignment whereby the tenants are directed to pay the rental income to the lender so that the rental income does not pass through the hands of the borrower.

Australia

Australia

Typically, a borrower acquiring or developing real estate will provide a mortgage over land in favour of the lender. A mortgage entitles the lender to take possession of the asset and dispose of it, with priority over unsecured creditors.

A corporate borrower may also provide a security interest in all (or some) of its current and future assets by way of a general security agreement. A general security agreement will include a security interest in circulating assets. Circulating assets form a class of assets which in the course of the borrower’s business changes from time to time and which may be disposed of without consent of the lender.

Guarantees and indemnities from third parties are also often provided to lenders and these may be supported by a mortgage or a general security agreement in favour of the lender.

Security can also be granted over assets such as a lease.

Belgium

Belgium

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
  • A mortgage mandate
  • A pledge over receivables (including rent due to the borrower)
  • A pledge over bank accounts
  • A pledge over shares
  • In some cases, a pledge over movable assets
  • Personal or corporate guarantees

Mortgage

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), as a guarantee 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 registration office and entered on the mortgage register in order to be valid 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/entry on the register (the mortgage first registered/entered will rank first). A mortgage is valid for 30 years as from registration and is renewable.

One of the other benefits 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 only possibility to remove the mortgage is after repayment of the debt to the mortgagee in accordance with the terms of the mortgage deed or with the agreement of the creditor. Therefore, the mortgagor must be the actual owner of the real estate in order to be able to obtain a mortgage.

The total secured amount must be specified in the mortgage deed.

Mortgage mandate

Parties can agree, in order to reduce the registration duties and fees entailed by a mortgage, to have a mortgage mandate, which is not an in rem security directly over the assets but only a means to acquire a mortgage.

This is an agreement between a borrower and representatives of the lender whereby those representatives are granted the power to secure the lender’s claim at a future date by establishing a mortgage against the property of the borrower, for the amount agreed in the mandate.

The mortgage mandate is executed in front of a notary public.

However, as this does not constitute a security over the assets, if the debtor grants a mortgage on the same property to another creditor before the conversion of the mandate, the mortgage first registered will rank first.

Also, it must be noted that any conversion of the mandate within the ‘suspect’ period (which can be fixed by the commercial court up to six months prior to bankruptcy) can be voided by the bankruptcy court.

In Belgium, it is customary for lenders to take a mortgage for a portion of the secured obligations, and a mortgage mandate for the remainder, in order to (i) secure ranking for such portion of the debt and raise awareness of other potential creditors as to the existence of outstanding secured financing but (ii) to reduce the costs that would be entailed by registering a mortgage for the full amount of the secured obligations.

Pledge over receivables

A pledge over receivables is effected 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 receivables) as from the date of its conclusion. However, in order to be valid against the debtors of the receivables the debtors must be notified of the pledge, by lack whereof a payment to the pledger is valid and the debtor cannot be held liable to make a second payment to the pledgee.

Pledge over bank accounts

As a pledge over a bank account is viewed by a majority of legal scholars as a pledge over a receivable (a claim on the bank for the funds standing to the credit of the account), it can be included in the pledge over receivables or drafted separately. The same principles as set out above apply. 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).

Pledge over shares

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. The pledge agreement will not in itself transfer title to the shares to the lender but will assign certain shareholders’ interest in them on such terms that the lender (assignee) is able to dispose of them and apply the proceeds towards the debt owed.

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 pledger as long whilst he is the owner of the shares. The pledge agreement, however, will usually contain certain restrictions on the pledger 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. The company can provide share certificates reflecting the record in the share register and mentioning that the shares are pledged.

Pledge over movable assets (register pledge)

The law of 11 July 2013, that came into force on 1 January 2018, created a new type of security, ie a pledge over movable assets by registration in an electronic pledge register. This register pledge means that, all moveable assets, tangible and intangible, in whole or in part, can be pledged by private agreement. 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 on the newly established National Pledge Register. This registration will be valid for a renewable period of 10 years. A pledge over tangible moveable assets will also be valid against third parties simply by the pledgee taking possession of the relevant assets (as was previously possible).

This type of security is less relevant in the case of a pure real estate property financing.

Guarantees

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.

Bosnia-Herzegovina

Bosnia-Herzegovina

The most common forms of security granted are a mortgage and/or a pledge. The Rights in Rem Act (“Official Gazette of F BiH” no. 66/13, and 100/13) (“Rights in Rem Act”) which was passed on 5 September 2013 and has been in force since 9 March 2014 provides for a land debt as a type of security. A land debt is a limited property right burdening the real estate with the effect that a certain amount of money should be paid to the holder of the right from the value of the real estate and the owner of the real estate from time to time is obliged to tolerate it. However, this type of security is not yet common in practice.

Canada

Canada

In all common law provinces, a borrower acquiring or developing real estate will provide a mortgage over land in favour of the lender. A mortgage entitles the lender to take possession of the asset and dispose of it, with priority over unsecured creditors.

Quebec is a civil law jurisdiction which also contemplates taking security by way of a hypothec over real (or immovable) and personal (or movable) property.

A corporate borrower may also provide a security interest in all (or some) of its current and future assets by way of a general security agreement or hypothec.

Guarantees and indemnities from third parties are also often provided to lenders and these may be supported by a mortgage, general security agreement or hypothec in favour of the lender.

China

China

Real estate developments are generally secured by mortgages over land and buildings (or just land where there are no buildings). The mortgaged property remains in the mortgagor's possession. The mortgagee enjoys priority over the proceeds from the mortgaged property in the event of the mortgagor's insolvency, but ownership of the mortgaged property will not be transferred to the mortgagee.

Mortgages over land and/or buildings are effective upon registration of the mortgage; other mortgages are effective when the mortgage agreements come into force, but subject to perfection by registration. Registration is regulated by a range of government bodies.

The contractor is entitled to a lien against a building under construction.

Croatia

Croatia

The most common form of security over real estate is a mortgage. A 'fiduciary transfer' of ownership may also be granted as security over real estate.

Czech Republic

Czech Republic

The most common securities created in order to secure real estate financing are the following:

  • A mortgage over the real estate that is the subject of the financing
  • A pledge or assignment of receivables arising out of the relevant project agreements (such as lease agreements, agreements with contractors, designers)
  • A pledge or assignment of receivables arising out of insurance policies
  • A pledge of the relevant SPV´s shares/ownership interest
  • Bank guarantees

In addition, it is common to enter into agreements in the form of notarial deeds consenting to the direct enforceability of the relevant borrower's payment obligations.

Denmark

Denmark

The types of security typically entered into by an investor are mortgages and owner’s mortgages. These securities can be combined and the security package often also include a personal guarantee.

France

France

The most common forms of security over real estate are:

  • Contractual mortgage (hypothèque conventionnelle)
  • Lender's lien (privilège de prêteur de deniers PPD)

Mortgage

Under French law, pursuant to article 2416 of the French Civil Code, a mortgage must be notarized (using a notarial deed) that is executed in front of a French public notary. The debtor’s consent to the mortgage needs to be given in the notarial deed either directly by the debtor or by their lawyer, pursuant to a power of attorney granted in such deed. The beneficiary’s (ie the lender’s) consent to the mortgage may be expressed by an agent of the lender, under a power of lawyer expressly granted by the lender to their signatory. The mortgage deed must state the obligation secured and the amount of the secured debt.

In order to be completed, a mortgage requires:

  • A mortgage extract relating to the relevant asset (état hypothécaire)
  • A mortgage deed (hypothèque) drafted and executed in front of a public notary
  • The registration of the mortgage with the mortgage office (Service de la publicité foncière). 

Obtaining the mortgage extract for the relevant asset (état hypothécaire) usually takes three weeks (sometimes more, depending on the location of the property).

A mortgage will guarantee the repayment of the principal amount secured, payment of the interest at the contractual rate and additional expenses, usually valued at up to a maximum 20% of the amount secured.

A mortgage must be registered with the mortgage office (Service de la publicité foncière). There is no time limit for registering a mortgage, but in the absence of registration the mortgage will not be enforceable against third parties. In addition, if the borrower is subject to bankruptcy proceedings prior to registration, it will then be impossible to implement the required formalities with full effect in the proceedings. Mortgages rank according to their date and time of registration. As a result, a mortgage created in February but registered in May will rank behind a mortgage created in March but registered in April.

Lender's lien

A lender's lien can only secure liabilities incurred in connection with the financing of the acquisition of a property. This means that, if a loan agreement is entered into to finance the purchase of land and the carrying out of construction works, only the financing relating to the purchase of the land may be secured by the lender's lien. In such a case (purchase of property and construction works), a lender's lien will be granted for the amount of the loan corresponding to the purchase price and a mortgage will be granted for that part of the loan relating to construction works.

A lender's lien, like a mortgage, must be made effective by a notarial deed, together with the loan agreement. The deed of sale, also made effective by a notarial instrument, will provide that payment of the price of the property was effected in whole or in part with the funds lent.

This security, the enforcement procedure for which is similar to the enforcement of a mortgage, must be registered with the mortgage office within two months from the sale. Registration will take effect as from the date of the sale, notwithstanding the fact that the formalities are carried out afterwards.

Such registration is less costly than a mortgage registration, since this security is exempt from the land publicity tax, which can represent a significant cost saving when the amount secured is significant.

Germany

Germany

The typical security package in a German real estate financing includes the following:

  • A land charge (Grundschuld) over land and buildings (mortgage (Hypothek) is only very rarely used in practice)
  • A security assignment (Sicherungsabtretung) of the lease receivables, claims under the property acquisition documents, claims under property management agreements and insurance policies
  • A pledge over bank accounts (Kontenverpfändung) used in connection with the operation of the property
  • A pledge over the shares (Geschäftsanteilsverpfändung) in the property owning company
  • A duty of care agreement (Sorgfaltspflichtvereinbarung) with the property and/or asset manager
Hong Kong

Hong Kong

The most common forms of security over real estate are:

  • Legal mortgage
  • Equitable mortgage, and
  • Floating charge.

A legal mortgage and an equitable mortgage are fixed charges and both create a similar type of security. The mortgagor is allowed to remain in possession of the asset though the ownership right passes to the mortgagee. In addition, the mortgagor retains an 'equity of redemption' which is a right to have the asset transferred back to it upon repayment. If there is a default in making mortgage payments, both legal and equitable mortgages entitle the mortgagee to take possession of the asset and dispose of it with priority over unsecured creditors.

Most borrowing is secured by a legal mortgage. The difference between a legal mortgage and an equitable mortgage lies largely in the extent to which the mortgage is perfected by registration at the Land Registry, and legal and equitable mortgages are treated differently in terms of the rules of priority as against other creditors. A legal mortgage created subsequent to an equitable mortgage has priority if it is acquired without notice of the pre-existing security.

It is also common for security to be granted over the rental income from a property. This usually takes the form of an assignment whereby the tenants are directed to pay the rental income to the lender (usually via a managing agent) so that the rental income does not pass through the hands of the borrower. This assignment can be created by a separate security document but it is more usually contained within the mortgage (or a debenture if one is granted).

A corporate borrower can also create a floating charge. This is a charge over a class of assets which in the course of the borrower's business changes from time to time and which may be disposed of without consent of the lender. This type of charge is sometimes taken with very large and complicated property portfolios where the borrower requires maximum flexibility and the lender is not too concerned over control. While a floating charge allows greater flexibility, it has lower priority than a fixed charge because in the event of insolvency where assets are insufficient to satisfy all claims, the claim of a floating charge holder will be postponed to that of the preferential creditors (eg employees). However, it is more normal for a lender to take both a floating charge and a legal or equitable mortgage.

A fixed charge over property can be granted by anyone, including companies, limited liability partnerships, traditional partnerships and individuals. A floating charge cannot be granted by an individual.

Hungary

Hungary

Typical types of security over, or in relation to, real estate include:

  • mortgage over real estate
  • pledge of quota (business interest) in Hungarian limited liability companies (korlátolt felelősségű társaság) / security deposit of shares held in Hungarian companies limited by shares (részvénytársaság)
  • pledge over receivables (for instance rental income, insurance policies)
  • pledge (without blocking or control) and/or security deposit (with blocking) over bank accounts
  • pledge over all present and future circumscribed rights, receivables and moveable assets
  • call option over real estate for security purpose, and
  • corporate guarantees/sureties.
Ireland

Ireland

An investor who is borrowing to acquire or develop real estate in Ireland will usually be required by the lender to enter into a first ranking fixed security over the real estate asset in question. The form which the security takes is typically a charge.

The beneficiary of the charge, normally a first fixed charge, will obtain the right to enforce its security by taking possession of the real estate and/or appointing a receiver over it and/or managing it and/or disposing of it. The beneficiary of the first fixed charge will, in most instances, have priority over preferential creditors (such as the Revenue Commissioners (the tax authority) and employee claims), floating charge holders and unsecured creditors. A first fixed charge holder will also have priority over second ranking or subsequent fixed charges. Where capital gains tax arises on the disposal of an asset by way of enforcement of security the capital gains tax liability arising on the sale of the property must be discharged in advance of payment to the creditor.

The terms 'mortgage' and 'charge' are often used interchangeably in relation to security over real estate. In general, references to mortgages and charges are to fixed security over the real estate asset in question. The differing terminology arises from the fact that, historically, there have been two different land registration systems in Ireland, the Registry of Deeds and the Land Registry. Security was created over real estate registered in the Registry of Deeds by way of a mortgage and over real estate registered in the Land Registry by way of a charge.

New legislation, introduced on 1 December 2009, means that all security over real estate is created by means of a charge. This legislation facilitated a wide-ranging update to, and reform of, Irish land law generally and it also covered the creation of, and enforcement of, security. Mortgages and/or charges which were created before 1 December 2009 are still subject to the pre-1 December 2009 rules, The Land and Conveyancing Law Reform Act 2013, introduced in July 2013, clarified an error in the 2009 legislation by providing that lenders under pre-1 December 2009 mortgages would have similar (statutory) enforcement powers to lenders under post-1 December 2009 mortgages.

Depending on the nature of the real estate asset in question, the security required by the lender may need to extend beyond a straight charge over the asset in question. It is common for security to be granted over the rental income where the asset in question generates rents. This usually takes the form of a charge and security assignment whereby the tenants are directed to pay the rental income directly to the lender (often via a management agent) so that the rental income does not pass into the hands of the borrower.

A corporate borrower can also create a floating charge. This is a general charge over a class of assets which is not (in the normal course) affixed to a specified asset. A floating charge is usually used where, in the course of the borrower's business, the borrower needs the flexibility to deal with the secured assets from time to time, as it usually allows the borrower to dispose of the assets the subject of the floating charge without the consent of the lender. In relation to real estate, this floating charge is sometimes used with regard to large and complicated property portfolios where the borrower requires maximum flexibility and the lender is willing to allow the borrower to manage the portfolio without the need for a specific consent each time an asset is to be disposed of, however, it is more typical for a lender to take a fixed charge where real estate is concerned.

A fixed charge over real estate can be granted by anyone, including a corporate entity, a limited liability partnership, a traditional partnership or an individual. A floating charge cannot be granted by an individual.

Italy

Italy

The most common form of security over real estate is a mortgage (ipoteca).

A mortgage must be executed by a written deed before a Notary Public and it must be deposited and registered with the competent Land Registry (Conservatoria dei Registri Immobiliari) to be validly created. 

It is also common for the shareholder(s) in a borrower company to grant a pledge over the shares in the property owning company, and for borrowers to grant

  • a pledge over, inter alia, each bank account held by the borrower itself in relation to the relevant transaction, and
  • an assignment by way of security of all rights and receivables under any insurance contracts, any occupational lease and/or any construction contracts (in the case of real estate development).

Pursuant to the above mentioned pledge, the account bank(s) continue to receive instructions relating the operation of the bank accounts from the borrower, until an event of default occurs.

Under the above mentioned assignment by way of security, the assigned debtor(s) of the borrower continue to pay to the borrower the amounts due to it (until an event of default occurs), but usually such amounts are credited to a bank account pledged in favour of the lender.

The security mentioned above can be created by separate security documents or within the loan agreement itself.

Japan

Japan

The most common form of security over real estate is mortgage (teitoken), including without limitation, revolving mortgage (ne-teitoken).  Mortgage in general is a fixed charge and it entitles the mortgagee to take possession of the asset and dispose of it with priority as against other unsecured creditors.  Mortgage is perfected by registration in the land or building registries.

It is sometimes the case that security is granted over the rental income from a property by way of an assignment whereby the tenants are directed to pay the rental income to the lender.  Or, a lender (bank) sometimes requires the borrower to open its bank account with the lender and to have the tenants pay the rental income to such bank account so that the lender may set off its credits against the borrower, if necessary.

A corporate borrower can also create and perfect with registration, security by way of transfer (jyoto-tampo) over assets other than real estate.  This security could be floating security over a class of assets which in the course of the borrower's business changes from time to time and which may be disposed of without consent of the lender.  Pledge over the same assets is possible, however, registration system is not available for perfection thereof.   It is sometimes the case that a lender takes both mortgage over real estate and security by way of transfer or pledge over other assets in or around the real estate.

Netherlands

Netherlands

The most common form of security over real estate is a right of mortgage (hypotheekrecht). A right of mortgage can only be established by a notarial deed, which must be registered at the Land Registry. This is a public register, which provides notice and information to third parties of the registered deed.

Mortgage rights can be divided into three categories:

  • Fixed mortgages (vaste hypotheek)
  • Credit mortgages (krediethypotheek)
  • Bank mortgages (bankhypotheek)

All three types of mortgages offer similar security to the mortgagee. All three types of mortgage give the mortgagee the right to carry out a summary foreclosure in respect of the real estate if the debtor fails to comply with his obligations under the finance agreement. All three give the mortgagee a priority right of recovery over other creditors, and all three rights may be enforced by the mortgagee irrespective of bankruptcy proceedings in relation to the mortgagor.

The difference between the three types of mortgage relates to the loan in relation to which the security is granted. A fixed mortgage offers security for a specific amount. A credit mortgage offers security for a specific loan that has already been contracted for, or that is contracted for when the mortgage is created. A bank mortgage normally offers security for all amounts owing by the borrower to the lender (bank) and can therefore cover various loans granted (or to be granted) by the same lender or even claims of the lender towards the borrower arising from other grounds. In order to ensure the deed of mortgage can be used as enforceable title for the residual debt upon foreclosure of the mortgage right, it is advisable to describe a bank mortgage in a gradual way, that is by reference to both a specific loan and all other debts arising on any account whatsoever.

Commonly, borrowers also create a right of pledge over the rental income arising from and the insurance policies entered into in relation to the real estate. This usually takes the form of a disclosed right of pledge (openbaar pandrecht), whereby the tenants or insurers, as applicable, are informed of the right of pledge and are usually informed they may pay the rental income or insurance receivables, as applicable, to the borrower until the lender has notified them to the contrary. Such latter notification usually takes place in case of an event of default under the finance agreement so that the rental income or insurance receivables, as applicable, do not pass through the hands of the borrower (which is beneficial for the pledgee because any bankruptcy of the pledgor will not then interfere with the rights of the pledgee). A right of pledge can be created by means of a separate deed of pledge, but as regards the right of pledge over the rental income it is more commonly contained in the deed of mortgage. In order to establish a disclosed right of pledge, the right of pledge should be notified to the tenants.

Nigeria

Nigeria

The typical forms of security created over real property in Nigeria are:

  • Legal mortgage
  • Equitable mortgage, and
  • Equitable charge

A legal mortgage is the form of security which involves an actual transfer of legal interest from a mortgagee to a mortgagor subject only to reversionary rights in the asset where payment obligations are settled. The equitable mortgage on the other hand may take the form of an agreement to create a legal mortgage in future or a deposit of title deeds without an actual transfer of legal interest to the mortgagee for the period for which repayment obligations remain outstanding. An equitable charge connotes an appropriation of interest in real property giving the chargee the rights to enforce the security without an actual transfer of legal interest in such an asset.

It is important to note that the creation of security and the nature of interest created over real property is subject to the governor’s consent and due registration with the appropriate land registry under the relevant provisions of the Land Use Act and registration of the security provided for the borrowing at the Corporate Affairs Commission.

Norway

Norway

The most common forms of security over real estate are:

  • A pledge of shares in the property-owning company and/or the holding company (if relevant)
  • A mortgage over the real estate being acquired or developed (such mortgage also includes a right for the mortgagee as co-assured in relation to the insurance taken out over the property, in accordance with Section 7-1 of the Insurance Agreement Act of 16 September 1989)
  • A pledge over the accounts into which rental payments are made
  • An assignment of rental claims
  • A floating charge over receivables from lease or other sources
  • A pledge over intra-group loans
  • Guarantees from all involved companies

In addition, sometimes assignments will be made of claims arising under hedging arrangements (eg interest exposure), as well as assignments of claims against the seller in a share sale and purchase agreement (including assignments of claims arising under any lease guarantees provided by the seller).

All of the above-mentioned forms of security entitle the mortgagee to take possession of the asset in question and dispose of it with priority over unsecured creditors.

To be perfected, a mortgage over real estate or lease contracts must be registered in the Norwegian Land Registry. Pledges over receivables must be registered in the Moveable Property Registry and/or by notice to the debtor.

A fixed charge over property can be granted by any party who is registered as owner of the property in the Land Registry, including companies, limited liability partnerships, traditional partnerships and individuals.

In some circumstances, a lender may consider reducing the security package in order to mitigate any adverse tax consequences for the borrower due to limitations on the tax deductibility of interest on loans secured or guaranteed by a shareholder or its affiliates.

Poland

Poland

There are two types of security created by a borrower who acquires or develops real estate:

  • Personal securities 
  • Material securities

Personal securities

Personal securities include amongst others bills of exchange and guarantees.

Material securities

However, in the process of borrowing, financial institutions are more likely to demand material security. The most common ones are:

  • A mortgage 
  • A collateral transfer of ownership

Mortgage

A mortgage is a security of a monetary debt over real estate which entitles a creditor to enforce its debt against the real estate asset, regardless of who the owner of the real estate is and with priority over other creditors. A mortgage usually arises out of an agreement made between the lender and a debtor (owner of real estate). The owner’s declaration of will must take the form of a notary deed. Registering a mortgage into the Land and Mortgage Register of the said property is mandatory.

Prior to February 2011, under Polish law, the following mortgages were able to be created:

  • The hipoteka zwykła, which secured liability for a specific amount 
  • The hipoteka kaucyjna, which secured all pecuniary claims, both existing and past (including conditional claims) of a specified or unspecified value.

In February 2011 the distinction between such mortgages ceased to have effect and only mortgages based on the hipoteka kaucyjna modelcan now be created.

Collateral transfer of ownership

A collateral transfer of ownership is another tool for securing a monetary debt. Upon the agreement between the creditor and debtor (owner of the property), the debtor’s property is transferred to the creditor to secure its debt. At the same time the creditor incurs an obligation to transfer the property back upon payment of the debt.

Portugal

Portugal

When structuring a financing operation for the acquisition or development of real estate investors are required to create security in favour of borrowers to assure performance of the principal obligations.

There are different types of security, tailored in accordance with the specific risks of each project, including without limitation:

  • Real security over immovable assets such as mortgages or other liens or encumbrances
  • Personal security such as guarantees or deposits as collateral
  • Indirect security or controlling rights such as pledges over shares of special purpose companies, subordination agreements and voting agreements
Romania

Romania

The most common forms of security created or entered into by an investor who is borrowing to acquire or develop real estate are:

  • a mortgage over the real estate 
  • legal mortgage rights over the real estate 
  • a mortgage over movable assets.

Mortgage over real estate

A mortgage over real estate is created through a mortgage agreement, which must be executed in front of a notary public in order to be valid under Romanian law, and also specify the mortgaged asset, the parties and the basis for the guaranteed obligation. It must also contain reasonably sufficient detail to determine the secured amount. Furthermore, in order to be enforceable against third parties and to rank in priority, mortgages must be registered in the Land Book. If more than one mortgage affects the same asset, their respective priority depends on when the application for registration was made.

Under the Romanian Civil Code, the assets affected by a mortgage agreement over an immovable asset consist not only of the immovable asset itself, but also:

  • any products or rents arising from the real estate, but only after the registration of the commencement of insolvency or enforcement proceedings 
  • improvements (meaning anything done or added to the real property that increases its value, even those made subsequent to the mortgage registration) and any movable assets naturally linked to the relevant immovable asset.

The mortgage extends to the above mentioned assets without any registration formalities. However, if an ancillary movable asset was previously affected by a movable mortgage registered with the Electronic Archive of Security Interests, the creditor holding that mortgage has priority. On the other hand, if a movable mortgage is registered on the same day as an immovable mortgage over the same asset, the immovable mortgage has priority.

Legal mortgage rights

A legal mortgage right over real property is created in favour of the lender of the money used to acquire the relevant property, with the aim of securing the repayment of the loan. 

A legal mortgage is registered with the Land Book on the basis of the deed that mentions the receivable for which the creditor is granted the legal mortgage.

Movable mortgages

In order to acquire a movable mortgage over the borrower's movable assets (eg all of its movable assets, receivables, insurance, etc), a lender needs to enter into a movable mortgage agreement with the relevant borrower.

Unlike an immovable mortgage, a movable mortgage agreement does not need to be notarized in order to be valid, a private deed being sufficient. The mortgage may be granted over any type of movable asset belonging to the debtor in question, including future assets, but the security will only become effective after the debtor has acquired rights over the assets in question and the secured obligation is created. In order to be effective against third parties, a movable mortgage agreement must be registered in the Electronic Archive of Security Interests.

Movable mortgages over business assets may be taken over movable assets, either tangible or intangible, used by an entity to carry out its business. This covers the lease of the premises from where the business is conducted, fixed assets (such as machinery, equipment and tools), intellectual property rights, and, although not expressly mentioned by the law, it is also generally believed to cover goodwill and the business name. In order to be enforceable against third parties, movable mortgages over business assets must be registered both with the Electronic Archive of Security Interests and with the Commercial Registry.

Russia

Russia

Typically, a lender, lending to an investor who is borrowing to acquire or develop real estate, will insist on the full package of security instruments available under Russian law, including pledges of shares, suretyships and parent guarantees, bank guarantees, pledges of assets and rights, mortgages of real estate including land, etc.

A mortgage is one of the most effective forms of security instrument under Russian law.

Mortgages are regulated by special legislation, mainly contained in the Law on Mortgages but otherwise in the Russian Civil Code. A mortgage allows the mortgagee to receive compensation for the debtor's default under a principle secured obligation, with priority over unsecured creditors. A mortgage is an encumbrance on the property and limits the mortgagor's right to the free use and disposal of such property. For example, the mortgagor may only dispose of the mortgaged property with the consent of the mortgagee (unless the mortgage agreement provides otherwise). As a general rule, if the property changes hands and the mortgage has not been discharged, the mortgage will remain in place over that property.

Slovak Republic

Slovak Republic

The most common securities in Slovak real estate financing are the following:

  • A mortgage over the real estate being the subject of the financing
  • An assignment of receivables arising out of contracts
  • A bank guarantee, and
  • A pledge over receivables on the bank account or a pledge over receivables resulting from contracts
Spain

Spain

The most common forms of security over real estate are:

  • A mortgage over the relevant real estate asset
  • A pledge of the shares in the relevant company
  • Pledge of credit rights related to the relevant real estate asset

A mortgage entitles the mortgagee to sell the property in a public auction with priority over unsecured creditors.

A shareholder in a corporate borrower can also create a pledge of its shares. This also entitles the creditor to sell the shares in a public auction with priority over unsecured creditors.

It is also common for security to be granted over the rent and other possible income from a property. This usually takes the form of a pledge whereby the tenants or the insurance company, in the event of breach of the loan agreement, are directed to make payments to the lender. This assignment is normally created by a separate security document. 

Sweden

Sweden

For smaller transactions, the security granted would usually consist of mortgage security over the relevant property and a share pledge over the shares in the property owning company. In larger transactions, banks normally require security over all of the borrower's assets and thus, in addition, take pledges over inter alia:

  • Each bank account in which the borrower has an interest
  • All rights under insurance contracts
  • All rights in respect of rents under any occupational lease, and
  • All rights to payments under all investor loans and/or notes

Banks may also take a security assignment of rights under acquisition agreement(s) (if any).

Thailand

Thailand

The most typical security created or entered into by an investor borrowing to acquire or develop real estate in Thailand is the real estate mortgage. A mortgage agreement is defined as a contract whereby a person, called the mortgagor, mortgages an immovable property to another person, called the mortgagee, as security for the performance of an obligation, without delivering the property to the mortgagee. It is a kind of encumbrance over land or other real property registered as a security of a debt repayment on the condition that if the mortgagor does not repay the debt, the mortgagee shall be entitled to enforce the mortgage and collect the debt from consideration of a public auction of the land or the real property; provided that the mortgage will be redeemed should the terms of the mortgage have been satisfied or performed. Apart from the real estate mortgage, under the Business Security Act B.E. 2558, a person, as a security provider, who directly operates the real estate business can also assign an immovable property as security for securing his or others' transactions. A personal guarantee is, in addition, a less popular type of security. A number of schemes such as a pledge of shares and either a conditional or unconditional assignment of rights and liabilities belonging to an investor are also available.

United Arab Emirates - Abu Dhabi

United Arab Emirates - Abu Dhabi

The UAE is a civil law jurisdiction and as such, the law governing the taking of security is generally codified. It is important to note that unlike common law jurisdictions:

  • No concept of trust exists
  • The taking of security over future assets is not permitted
  • The concept of a 'floating charge' is not recognised

Some of the most common forms of security in the UAE are:

  • Mortgage over real (immoveable) property: a mortgage may only be created over real property or a right affecting real property. The property must be fully and accurately described in the mortgage document or risk the court setting the mortgage aside. The mortgage includes all rights and restrictions attached to the land. Only a bank licensed by the UAE Central Bank can have a real estate mortgage registered in its favour. Self-help is not permitted under UAE law and creditors may only enforce a mortgage via the courts and the procedure set out in the relevant laws.
  • Mortgage over movable property: security over moveable property is governed by the Commercial Transactions Law (though there are similar, and to some extent, overlapping rules set out in the Civil Code) which permits moveable property to be secured by a pledge. The pledge is not effective unless possession of the property is transferred to the pledgee (or placed in joint possession, for example, with a third party appointed by both parties). Specific rules apply to different types of moveable property (such as 'commercial debts' or receivables, cheques, promissory notes and fungible/non-fungible assets).
  • Commercial business mortgage: a regime by means of which banks may obtain security over the following business assets: goods, equipment, machines and tools, customer contacts, goodwill, trade names, rights to let, industrial, literary and artistic patents and licences.
  • Possessory pledge: a means of creating security for a commercial debt over identifiable movable property (eg movable plant and machinery).
  • Pledge of shares: a form of security which can be taken over both shares in limited liability companies, public joint-stock companies and private joint stock companies established in the UAE.
  • Pledge of bank accounts: whilst there are no statutory provisions which deal specifically with taking security over a bank account, as such, the view is taken that the general provisions relating to possessory pledges over movables would apply to bank accounts.
  • Assignment of rights: whilst the law recognises the concept, there are no express rules governing it. However, the court has held that in commercial matters and in the absence of express contractual provisions to the contrary a counterparty's consent to the assignment of a right is not necessary, although evidence will be required that the counterparty has been given notice of the assignment.

    Market practice is that all contractual rights are capable of assignment, unless expressly stated otherwise and licences are excluded as purely personal rights. Licences are considered to be 'personal grants' and therefore, under UAE law, may not be transferred by way of security. However, licences obtained from government agencies may, subject to a direct agreement with the relevant agency, be transferred to a lender stepping into the place of a 'defaulting' borrower. Assignments under UAE law are absolute. Generally, speaking, assignments by way of security are not recognised under UAE law (although some commentators would argue that the pledge of a commercial debt by a party in favour of its creditor, as recognized by the UAE commercial code, is akin to an assignment of receivables by way of security).
  • Suretyship/guarantee: under UAE law, the obligation of a guarantor is incidental to the obligations of the principal debtor and the obligations of the guarantor will only be valid to the extent of the continuing obligations of the principal debtor. Accordingly, a guarantor should explicitly consent to any amendment or modification of the obligations of the principal debtor. An arguable exception to this general rule in the case of precautionary guarantees issued in the context of bills of exchange and promissory notes, is that a precautionary guarantor is to be treated in the same manner as the party being guaranteed. In addition, the obligations of a precautionary guarantor are valid even if the obligation which it guarantees is void for any reason other than on account of a flaw in the form of the guarantee. As such, a precautionary guarantee is likely to be treated as a primary obligation by the UAE courts.

    In order to enforce a guarantee under UAE law, the underlying debt obligation for which the guarantee has been granted may need to be proved before the relevant UAE court.

    Claims for debts due under a guarantee should be brought within six months to avoid the claim being barred by limitation or lapse of time.

    In the event that a borrower becomes insolvent and a lender fails to make a claim against that borrower's estate, the relevant lender will not be able to claim against any guarantor to the extent that damages arise for failure to claim against the insolvent borrower's estate.
  • The UAE has issued the new Federal Law No. 20 of 2016 on Mortgaging Moveable Properties as Surety for Debts (new mortgage law), which was published on 15 December 2016 and was intended to come into effect 90 days from the date of publication (though it has not yet come into effect as the requisite infrastructure for its operation has not yet been put into place). The new law permits the granting of registered security over assets including current, future, tangible and intangible and is distinct from a pledge (for which possession of the underlying asset is a requirement) and other existing forms of registered mortgage. In addition, the new law also permits self-help remedies in certain circumstances.
United Arab Emirates - Dubai

United Arab Emirates - Dubai

The UAE is a civil law jurisdiction and, as such, the law governing the taking and granting of security is generally codified. It is important to note that, unlike common law jurisdictions:

  • No concept of trust exists
  • The taking of security over future assets is not permitted
  • The concept of a 'floating charge' is not recognized

Here are some of the most common forms of security in the UAE and those typically used in real estate transactions:

Mortgage over real (immoveable) property

A mortgage may only be created over real property or a right therein (eg absolute interest, usufruct or long lease (for between 10 and 99 years) or a musataha interest) and the property must be 'in existence' when the mortgage is made. Therefore, a bank taking a mortgage over a property being bought 'off plan' cannot obtain a legally valid mortgage until the property is completed. Until this time, the mortgage should be noted on the 'interim' register managed by the Real Estate Regulatory Agency in Dubai.

The property must be fully and accurately described in the mortgage document and the mortgage document must also contain details of:

  • The value of the property
  • The value of the debt
  • The mortgage term
  • Full details of the lender, the borrower and any guarantor

The mortgage covers all rights and restrictions attached to the secured land.

Upon registration at the Dubai Land Department (DLD), the DLD issues a mortgage deed either in writing or in electronic form and the mortgage becomes enforceable against third parties as a result. Following such registration, the borrower cannot sell or otherwise dispose of the property without the consent of the lender.

The holder of a musataha (the right to develop land and use the land for a period not exceeding 50 years) may grant a mortgage over the buildings constructed but does not have the right to mortgage the land on which the buildings are built (unless otherwise agreed with the granter of the musataha interest).

Land which has been 'granted' by the Ruler of Dubai to UAE nationals falls outside of the law relating to mortgages and is instead dealt with by directives and decisions of the Ruler.

The Central Bank of the United Arab Emirates (UAE Central Bank) have issued regulations on mortgage lending. These regulations define the eligibility of various categories of borrowers (UAE nationals and foreigners) based on a maximum loan-to-value ratio. These restrictions chiefly affect individuals as investors, and it is common for commercial investment in the UAE to be conducted in the name of a specified individual.

The regulations also provide that the maximum term of a mortgage loan is 25 years with the maximum age at the final repayment being 70 for UAE nationals and 65 for foreigners (or 70 if self-employed).

Furthermore, a borrower's ratio of debt burden to gross income cannot exceed 50 percent and interest only periods are limited to investment mortgage loans only with deferral of principal re-payment permissible for no longer than 5 years from the date of the first drawdown.

Pledge of shares

This is a form of security which can be taken over shares issued by companies registered in the UAE. Three types of company in the UAE may issue shares:

  • Public joint-stock companies
  • Private joint-stock companies
  • Partnerships limited by shares

Suretyship/guarantee

Under UAE law, the obligations of a guarantor are incidental to the obligations of the principal obligor and the obligations of the guarantor will be valid only to the extent of the continuing obligations of the principal obligor. Accordingly, a guarantor should explicitly consent to any amendment to, or modification of, the obligations of the principal obligor.

An arguable exception to this general rule, in the case of precautionary guarantees issued in the context of bills of exchange and promissory notes, is that a precautionary guarantor is to be treated in the same manner as the party being guaranteed. In addition, the obligations of a precautionary guarantor are valid even if the obligation which it guarantees is void for any reason other than on account of a flaw in the form of the guarantee. As such, a precautionary guarantee is likely to be treated as a primary obligation by the UAE courts.

In order to enforce a guarantee under UAE law, the underlying debt obligation for which such guarantee has been granted may need to be proved before the relevant UAE court.

Claims for debts due under a guarantee should be brought within six months to avoid the claim being barred by limitation or lapse of time.

If a borrower becomes insolvent and a lender fails to make a claim against that borrower's estate, the lender will not be able to claim against any guarantor to the extent that damages arise for failure to claim against the insolvent borrower's estate.

UK - England and Wales UK - England and Wales

UK - England and Wales

The most common forms of security over real estate are:

  • Legal mortgage
  • Equitable mortgage; and
  • Floating charge

A legal mortgage and an equitable mortgage are fixed charges and both create a similar type of security. Both entitle the mortgagee to take possession of the asset and dispose of it with priority over unsecured creditors.

Most borrowing is secured by a legal mortgage. The difference between a legal mortgage and an equitable mortgage lies largely in the extent to which the mortgage is perfected by registration at the Land Registry, and legal and equitable mortgages are treated differently in terms of the rules of priority as against other creditors.

It is also common for security to be granted over the rental income from a property. This usually takes the form of an assignment whereby the tenants are directed to pay the rental income to the lender (usually via a managing agent) so that the rental income does not pass through the hands of the borrower. This assignment can be created by a separate security document but it is more usually contained within the mortgage (or a debenture if one is granted).

A corporate borrower can also create a floating charge. This is a charge over a class of assets which in the course of the borrower's business changes from time to time and which may be disposed of without consent of the lender. This type of charge is sometimes taken with very large and complicated property portfolios where the borrower requires maximum flexibility and the lender is not too concerned over control. However, it is more normal for a lender to take both a floating charge and a legal or equitable mortgage.

A fixed charge over property can be granted by anyone, including companies, limited liability partnerships, English limited partnerships acting through their General Partners, traditional partnerships and individuals. A floating charge cannot be granted by an individual or a limited partnership.

In November 2016, the Loan Market Association (LMA), a trade body for the European syndicated loan market, introduced a suggested form of English law security agreement to sit alongside the LMA's Real Estate Finance Investment Facility Agreement. That suggested form of security agreement contains fixed and floating charges of the types described above and is likely to form the basis of transaction security in future UK Real Estate Finance Transactions.

UK - Scotland

UK - Scotland

The most common forms of security over real estate are:

  • Standard security
  • Assignation of rents
  • Floating charge

A standard security is a fixed charge over real estate assets owned by either an individual, a partnership, a trust or a company. In relation to residential properties, standard securities are commonly called mortgages, referring to the terminology of English law. In Scotland it is not possible to create any other form of fixed charge over land other than by way of a standard security. It ranks in preference to unsecured creditors and also to any floating charge. The standard security is a creature of statute; the Conveyancing and Feudal Reform (Scotland) Act 1970.

There are two forms of standard security and both forms (A and B) are laid down by the relevant statute in Scotland:

  • Form A is generally used by banks and building societies for standard securities which are governed by legislation relating to loans to consumers
  • Form B is generally used where the details of the loan agreement are complicated and need to be specified in some detail

A Form B security may cover a long-term facility which is governed by a complicated facility letter or indeed several facility letters which specify the rights and obligations of the parties. Similarly, Form B may also be used where the obligations secured are not entirely monetary, for example where the security covers obligations covered in a contract between two parties or an option agreement.

It is also common for security to be granted over the rental income from a property. This usually takes the form of an assignation whereby the tenants are directed to pay the rental income to the lender (usually via a managing agent) so that the rental income does not pass through the hands of the borrower.

A corporate borrower can also create a floating charge. This is a charge over both real estate and moveable assets and as the name implies floats over the secured assets without attaching to any until the charge is crystallized. The procedural requirements for a lender to invoke its power of sale under a standard security mean that a floating charge and the flexibility it offers over the real estate in question is an important part of the security package in Scotland. This type of charge is sometimes taken with very large and complicated property portfolios where the borrower requires maximum flexibility and the lender is not too concerned over control. The lender does not need to grant consent to the disposal of any assets secured just by a floating charge. It is, however, normal for a lender to take both a floating charge and a standard security.

As mentioned above, a standard security over real estate can be granted by anyone, including companies, limited liability partnerships, traditional partnerships and individuals. A floating charge cannot be granted by an individual.

A lender may also seek further comfort in addition to the above, for example:

  • An assignation of guarantees relating to the real estate
  • Collateral warranties (duty of care agreements) from building contractors and professional consultants if the real estate is recently constructed or a new development
  • Substitution agreements with the contractor and consultants in supplement of collateral warranties if lending is for construction or development
  • A comfort agreement with end-users if lending is for construction or development
  • Performance guarantees from contractors
Ukraine

Ukraine

Generally, Ukrainian law recognizes the following types of security: mortgage of immovable property, pledge of movable property, guarantee and sureties. The most common types of security for the real estate finance are mortgage of existing or future real estate object, pledge of shares of companies holding real estate as well as security over rental income from the property, bank guarantee and suretyships from parent companies. In most cases the security structure includes combination of several types of security.

United States

United States

The most common forms of security over real estate are:

  • Mortgage
  • Deed of trust

A mortgage is the most common means of effectuating real estate financing. It is a transfer of an interest in real estate to a lender as security for repayment of a loan or other obligation.

The deed of trust is a particular kind of mortgage pursuant to which a borrower transfers an interest in real property to a trustee designated to hold title to the property for the benefit of the lender pending repayment of a loan or other obligation. In a deed of trust scenario, if the borrower defaults on its obligation, the trustee may be compelled to sell the property and pay any outstanding obligations to the lender from the sale proceeds or foreclose and transfer title to the lender.

The mortgage or deed of trust is customarily recorded with the applicable county recorder where the property is located. The main difference between the mortgage and the deed of trust is the manner of enforcement following the borrower’s failure to repay its obligations.

Zimbabwe

Zimbabwe

The typical form of security over real estate is a mortgage bond, registered against the real estate or land that the investor is acquiring or borrowing. There is no differentiation between different types of mortgages in Zimbabwe. The other common type of security is a surety bond. This is an agreement among at least three parties where the bond is based on the surety of a third party.

Another less common form of security that can be entered is a cession of shares to be held in trust or the pledge of shares in a company as security.