REALWorld Law

Real estate finance

Jurisdiction

Will a clause in a security document making a foreign law apply be recognized and applied by the local courts? Does local law always apply in certain circumstances?

Angola

Angola

As a general principle the physical location of the property determines the applicable law. However, for those matters not directly related to real estate, but rather with lenders or borrowers rights and obligations under finance agreements and security documents, a foreign law may be recognized and applied by Angolan courts, provided that certain conditions are met, including:

  • The choice of the relevant law not flowing from fraudulent intentions in order to avoid the application of mandatory provisions
  • The law chosen does not contradict the principles of public international legal order expressly recognized under Angola law, in which case the foreign law would apply, however it would be subjected to any relevant limitations.
Australia

Australia

If it is clear that the parties to the security document have made a bona fide choice of law by which the document will be governed, then generally that law will apply and the courts will apply that law in resolving a dispute. However, local courts will not give effect to a foreign law, even where it is clear from the circumstances that the foreign law is intended to apply, where applying that law would be contrary to public policy. For example, local courts will not apply a foreign law where the choice of that law has been made to engage in a sham, evade a law or where the choice of law is unconnected to the transaction (it will be sufficient, however, that there is a reasonable basis for the choice of law).

Similarly, mandatory rules applying in the local jurisdiction may nullify a choice of law clause or may override it in specific factual conditions. For example, it is mandatory in the Australian state of Queensland for 30 days' notice to be given before a mortgagee can exercise its power of sale. If a foreign law has been chosen to apply to a mortgage of land in Queensland, the mandatory 30 day notice period will not be overridden by the choice of a foreign law.

Although parties can determine the law to be applied to a security document, it would be prudent for the law of the place in which the security is located to apply to the security document. This will avoid problems of inconsistency where mandatory local rules are enforceable.

Belgium

Belgium

Except for a mortgage, if a choice of law is duly and correctly motivated (i.e. not chosen to deliberately avoid a national law or policy), the Belgian courts will give effect to it. Also, use of Belgian law security documents is usually recommended as this will avoid a number of problems in the event of enforcement and in the framework of a bankruptcy. For this reason, it is not usual in Belgium to provide for foreign law security documents in relation to assets located in Belgium. One must also consider the international private law rules when determining which law the security should be subjected to, as set out  below, in particular in relation to perfection requirements.

Indeed, where the asset that is the subject of the security is situated in another country, a security document governed by the law of that country will often be appropriate, and the choice of that law will be recognized by the local courts.

Bosnia-Herzegovina

Bosnia-Herzegovina

Yes, but only in relation to the enforcement of security over real property.

Canada

Canada

If it is clear that the parties to the security document have made a bona fide choice of law by which the document will be governed, then generally that law will apply and the courts will apply that law in resolving a dispute to the extent that that law can be proven to the satisfaction of the court. However, local courts will not give effect to a foreign law, even where it is clear from the circumstances that the foreign law is intended to apply, where applying that law would be contrary to public policy.

China

China

PRC courts will recognize clauses making foreign law apply where the agreement contains a foreign element. However, as the State Administration of Foreign Exchange (SAFE) will not process any foreign offshore currency loans for real estate foreign-invested entities (FIEs), it is anticipated that security documents will not often have a foreign element.

Croatia

Croatia

In order to be enforceable, security documents must be governed by Croatian law.

Czech Republic

Czech Republic

The Regulation Rome I (593/2008/EC) and the act governing private international law state the general rule that the parties to a contract have freedom of choice as to the applicable law.

Under Article 21 of Rome I, the application of a rule of the law of any country specified by the convention may be overruled only if that application is manifestly incompatible with the public policy (ordre public) of the forum.

If the subject of the mortgage is situated in another country, a security document governed by the law of that country will often be suitable. In addition, it is necessary to comply with provisions relating to the relevant public registers (eg the cadastral register).

Denmark

Denmark

If the lender and borrower agree to make foreign law applicable the local courts will recognise and apply this.

The enforcement of the claim must always be under Danish law.

The parties may agree that foreign law is applicable to loan and security agreements as between themselves, but the act of perfection in relation to real estate in Denmark must be compliant with Danish law. A mortgagee’s position in relation to any third party, eg in the event of the borrower's bankruptcy, will also be subject to Danish law. 

France

France

Security interests over real estate located in France must be governed by French law in order to be enforceable in France.

Germany

Germany

In general, if a choice of law is a sensible choice (ie not chosen to deliberately avoid a national law or policy) it will be recognised and upheld by the German courts and accordingly the foreign law will govern the validity, binding effect and enforceability of the documents against the parties to the contract.

However, the choice of a foreign law for creating security over assets located in Germany will not be recognised by the German courts. The lex rei sitae (law where the asset is situated) applies so that German law governs the creation of security over a German asset.

Hong Kong, SAR

Hong Kong, SAR

If a choice of law is a sensible choice (ie not chosen to deliberately avoid a national law or policy), the Hong Kong courts will give effect to it. It would probably not be sensible to choose a law other than Hong Kong law to govern a security document under which a Hong Kong company creates security over a Hong Kong asset.

Where the asset that is the subject of the mortgage or charge is situated in another jurisdiction, a security document governed by the law of that jurisdiction will often be appropriate, and the choice of that law will be recognized by the local courts.

Hungary

Hungary

The parties are free to choose the governing law of the security agreement subject to and in accordance with Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (the Rome I Regulation). However, the mortgage/pledge, as an in rem right, shall be governed also in such case by Hungarian law if the security asset is located in Hungary, therefore it is not customary to stipulate a foreign law to govern the security agreement. Furthermore, in relation to pledges over claims the Rome I Regulation provides the law governing the pledged claim shall determine whether it may be pledged, the relationship between the pledgee and the debtor, the conditions under which the pledge can be invoked against the debtor and whether the debtor's obligations have been discharged. Also certain Hungarian regulatory (administrative law) requirements will apply to the parties even if they stipulate a foreign law to govern their contract.

Ireland

Ireland

European Union Regulations in relation to choice of law apply in Ireland. In general, if a choice of law is a sensible choice (ie not chosen to deliberately avoid a national law or policy) the Irish courts will give effect to it.

As a general rule, enforcement is more likely to run smoothly if Irish law is chosen to govern a security document under which an Irish person creates security over an Irish asset.

Irish law should be chosen to govern a security document over an Irish real estate asset (whether the charging party is Irish or not). The security document will have to contain the necessary mandatory charging provisions in order to create enforceable security over the Irish real estate asset in question.

Where the assets that are the subject of security include assets situated in another country, a security document governed by the law of that other country will often be appropriate in relation to those assets.

 

Italy

Italy

Pursuant to section 51 of law no. 218 of 31 May 1995, which regulates Italian private international law and relevant conflicts of laws, security over Italian assets or real estate (which includes mortgages, privilegio speciale, pledges of shares or quotas, pledges of bank accounts and pledges of receivables or claims), and the creation, assignment and release of such security, must be governed by Italian law. Section 51 is a rule which cannot be varied by agreement between the parties.

An assignment of receivables is governed by section 12 of the Rome Convention of 1980 (ratified by Italy in 1984), and accordingly the parties are free to choose the applicable law. While technically remaining an assignment, the assignment of receivables by way of guarantee is normally treated as a security in Italy, and it is often seen as preferable for it to be governed by Italian law.

Japan

Japan

If a choice of law is a sensible choice made in good faith, the Japanese courts will generally give effect to it, subject to statutory mandatory provisions of Japanese law, eg with regard to perfection by registration of mortgage over real estate located in Japan.  It would generally not be advisable to choose a law other than Japanese law to govern a security document under which a Japanese company creates security over assets situated in Japan.

Netherlands

Netherlands

All mortgages on Dutch property are governed by Dutch law. Pledges on moveable assets that are situated in the Netherlands, must be governed by Dutch law. Pledges on Dutch receivables can be established under the law of the agreement which obligates to create the right of pledge.

As such, provided the obligation to create the right of pledge is included in the relevant deed of pledge, the right governing such deed of pledge can in principle be any (foreign) law. In practice, Dutch law deeds of pledge will be used to pledge Dutch law governed receivables as foreclosure on such receivables will be subject to Dutch law.

Generally speaking, a choice of law in a contract will (in most cases) be recognized by the Dutch courts, provided however that, notwithstanding such recognition (i) the chosen law may be rejected to the extent that it is manifestly incompatible with the public policy of the Netherlands, and (ii) the Dutch courts must give effect to mandatory rules of Dutch law if such rules must be applied whatever the chosen law. In addition, when applying the chosen law of the relevant contract, the Dutch courts might give effect to mandatory rules of law of another country with which the situation concerned has a close connection. If and insofar as under the law of that country such rules must be applied whatever the chosen law and regard will be have to the law of the jurisdiction in which performance takes place in relation to the manner of performance and the steps to be taken in the event of defective performance.

Nigeria

Nigeria

Parties have the freedom to decide the governing law of a contract and the courts will generally give effect to the parties’ choice of law and only intervene where the terms of the contract are contrary to public policy. However, there are instances where the local court may not be deprived of jurisdiction and this includes where the subject matter of the dispute is real estate, the applicable law with respect to real estate is the lex situs, the law of the place where the property is located.

Norway

Norway

If a choice of law is a sensible choice (ie not chosen to deliberately avoid a national law or policy), the Norwegian courts will give effect to it, but Norwegian law will apply in certain circumstances, eg regarding perfection of security in Norway.

Norwegian law should be chosen to govern any security document under which a Norwegian company creates security over a Norwegian asset.

Where the asset that is the subject of the mortgage or charge is situated in another country, a security document governed by the law of that country will often be appropriate, and the choice of that law will be recognized by the local courts.

Poland

Poland

Pursuant to the Polish Private International Law any acquisition, disposal or any changes to limited property rights such as a mortgage should be assessed in light of the law of the state in which the subject of those rights is situated at the time of the relevant acts. This means as long as the real estate is situated in Poland, any legal acts concerning the mortgage over it will be governed by Polish law and a clause in a security document intending foreign law to apply will not be recognized and will not have any legal effect.

Portugal

Portugal

As a general principle the physical location of the property determines the applicable law. However, for those matters not directly related to real estate, but rather with lenders/borrowers rights and obligations under finance agreements and security documents, a foreign law may be recognized and applied by Portuguese courts, provided that certain conditions are met, including:

  • The choice of the relevant law not flowing from fraudulent intentions in order to avoid the application of mandatory provisions
  • The law chosen does not contradict the principles of public international legal order expressly recognized under Portuguese law, in which case the foreign law would apply, however it would be subjected to any relevant limitations
Romania

Romania

Security documents, such as mortgage agreements, which refer to assets located in Romania can be governed only by Romanian law. The courts will not recognise clauses which purport to make a foreign law apply.

Mortgages created by entities over their shares in Romanian companies, must be governed by Romanian law unless the shares belong to a listed company, in which case the law of the market on which the shares are being traded is applicable. 

Slovak Republic

Slovak Republic

The EC Regulation No. 593/2008 of 17 June 2008 on the law applicable to contractual obligations (Rome I Regulation) which applies in Slovakia as of 17 December 2009 regulates that contract shall be governed by the law chosen by the parties. The choice of law applies to security documents as well. The Slovak courts must then recognise the choice of law. However, the application of a provision of the law of any country specified by this Regulation may be refused if such application is manifestly incompatible with the public policy of the country in which it is being applied.

Given that the statutory requirements for registration of a pledge/mortgage with the respective register must be complied with, it is advisable to choose the law of the country where the real estate is situated.

In the case of proceedings, the subject of which is

  1. a right in rem (eg pledge right, easement) affecting real estate, or
  2. a lease of real estate situated in Slovakia,

the matter will be settled exclusively by the Slovak courts.

Spain

Spain

In relation to securities over both real estate and moveable assets, the jurisdiction of the place where the asset is located is mandatory.

In relation to the assignment or pledge of credit rights, the law applicable is the law governing the contract from which the credit right arises.

Application of foreign law by a local court will require evidence of the applicable rules in accordance with such foreign law.

Sweden

Sweden

In terms of the contractual obligations as such, a clause providing for the applicability of foreign law will be recognized by the local courts (Sweden being bound by the Rome Convention). However, in relation to the property law aspects of a given transaction, established general principles of Swedish international private law provide that the law of the territory where an asset or the instrument representing the asset is located, as the case may be, is to apply irrespective of any agreement to the contrary (property law aspects here include the creation, maintenance and change in status of any security interest). It should be noted that these principles are not codified by statute and Swedish jurisprudence has not conclusively determined all of the features of these principles or formulated rules in respect of all asset classes. For real estate, though, the applicable law in this respect will always be the law of the country where the real estate is located (ie Swedish law).

To sum up then, the parties may agree on the applicable law to govern the contractual obligations as between them but the creation and perfection of the relevant security interest will always be determined under Swedish law.

Thailand

Thailand

Yes, generally the foreign law will be respected.

United Arab Emirates - Abu Dhabi

United Arab Emirates - Abu Dhabi

As a general rule, the principle of lex situs would apply in the UAE to assets or property located in the UAE and the creation of security interests in those assets would therefore need to be carried out under local law.

UAE law recognizes the principle of freedom of contract, which theoretically also extends to choice of law provisions. In practice however, UAE courts are reluctant to recognize the choice of a foreign law as the governing law of an agreement on grounds of public policy. Even if a UAE court is prepared to recognize a choice of foreign law, that law must be proven as an issue of fact and might still be ignored by the UAE court. On this basis, it is likely that a UAE court would apply UAE law in any action brought before it.

If a foreign judgment was obtained in relation to a document governed by foreign law, when it comes to enforcement of foreign judgments in the UAE, a judgment of a foreign court may be enforced by a UAE court if:

  • the UAE court does not have jurisdiction in the dispute and the foreign court did have jurisdiction;
  • the parties in relation to which the judgment was issued had been given due notice of the proceedings and were represented;
  • the foreign judgment is final; and
  • the judgment does not conflict with any judgment issued by a UAE court and contains nothing that would be in breach of public policy or morals.

As a matter of practice, however, a UAE court is likely to apply these provisions restrictively and it is therefore unlikely that a judgment given by, for example, an English court in relation to a loan would be enforced or recognised by a UAE court. A UAE court would consider the matter afresh.

United Arab Emirates - Dubai

United Arab Emirates - Dubai

As a general rule, the principle of lex situs would apply in the UAE to assets or property located in the UAE and the creation of security interests in those assets would therefore need to be carried out under local law.

UAE law recognizes the principle of freedom of contract, which theoretically also extends to choice of law provisions. In practice however, UAE courts are reluctant to recognize the choice of a foreign law as the governing law of an agreement on grounds of public policy. Even if a UAE court is prepared to recognize a choice of foreign law, that law must be proven as an issue of fact and might still be ignored by the UAE court. On this basis, it is likely that a UAE court would apply UAE law in any action brought before it.

If a foreign judgment was obtained in relation to a document governed by foreign law, when it comes to enforcement of foreign judgments in the UAE, a judgment of a foreign court may be enforced by a UAE court if a relevant treaty arrangement exists or in circumstances where:

  • the UAE court does not have jurisdiction in the dispute and the foreign court did have jurisdiction;
  • the parties in relation to which the judgment was issued had been given due notice of the proceedings and were represented;
  • the foreign judgment is final; and
  • the judgment does not conflict with any judgment issued by a UAE court and contains nothing that would be in breach of public policy or morals.

As a matter of practice, however, a UAE court is likely to apply these provisions restrictively and it is therefore unlikely that a judgment given by, for example, an English court in relation to a loan would be enforced or recognised by a UAE court. A UAE court would therefore consider the matter afresh.

UK - England and Wales UK - England and Wales

UK - England and Wales

If a choice of law is a sensible choice made in good faith, the English courts will generally give effect to it. It would generally not be advisable to choose a law other than English law to govern a security document under which an English (or Welsh) company creates security over land situated in England or Wales.

If a foreign law applies to a security document which is then sued on before the English courts, those courts will expect the parties to bring evidence as to what the foreign law is on the relevant point and if no such evidence is led will generally assume that the foreign law is the same as English law.

UK - Scotland

UK - Scotland

If a choice of law is a sensible choice (ie not chosen to deliberately avoid a national law or policy), the Scottish courts will give effect to it. It would probably not be sensible to choose a law other than Scottish law to govern a security document under which a Scottish company creates security over a Scottish asset. Where the asset that is the subject of the mortgage or charge is situated in another country, a security document governed by the law of that country will often be appropriate, and the choice of that law will be recognized by the local courts.

Ukraine

Ukraine

Generally, the parties' choice of foreign law may be recognized and enforceable under Ukrainian law. However, in relation to Ukrainian immovable property and any security agreement over such property Ukrainian courts may and, most probably, will disregard the parties' choice of foreign law given that only Ukrainian law can regulate issues related to real estate located within the territory of Ukraine. Ukrainian law provides that all disputes over real estate which are located in Ukraine must be considered exclusively by Ukrainian courts.

United States

United States

Each state has its own rules regarding conflicts of laws. In many instances, the validity of a provision stating that a foreign law should govern an agreement will be ascertainable only in light of the facts and circumstances of the individual case indicating the strength of the nexus to the foreign jurisdiction.

Zimbabwe

Zimbabwe

Foreign law will be applied provided that the clause does not seek to oust the jurisdiction of local courts completely and does  not  conflict with Zimbabwean law.