REALWorld Law

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?



The most common form of security in the financing of real estate is a right of mortgage (hypotheekrecht) over the real estate. Mortgages are established by way of a notarial deed, which must be registered at the Land Registry (a public register, which provides notice and information to third parties of the registered deed). Mortgages secure a specific amount of money (usually the principal amount of the loan plus a surcharge of 40% for interest and costs) and can be divided into two categories: credit mortgages (krediethypotheek) and bank mortgages (bankhypotheek).

Credit mortgages only serve as security for obligations of the obligors under or in connection with a specific loan agreement while bank mortgages secure all amounts owing by the borrower to the lender including, but not limited to, a specific loan agreement 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 addition to a right of mortgage, borrowers usually create security over the following assets: rent receivables, insurance receivables, bank account receivables, receivables under management contracts, receivables under sales contracts or property development contracts and, if applicable, receivables under hedging agreements, moveable assets located on the property or shares in the borrower.

Receivables can be pledged on a disclosed or undisclosed basis. A disclosed right of pledge (openbaar pandrecht) is notified to the relevant debtor. While a disclosed right of pledge entitles the pledgee to collect the relevant receivables immediately after the creation of the pledge, it is common practice that the pledgor continues to collect the receivables until the pledgee notifies the relevant debtor to the contrary. Such notification usually takes place if an event of default has occurred under the finance agreement. 

An undisclosed right of pledge (stil pandrecht) will not be notified to the debtors of the pledgor and is perfected by offering its registration to the competent tax authorities. In order to cover receivables against new debtors, supplemental deeds of pledge need to be registered on a regular basis. An undisclosed right of pledge will only be notified to the relevant debtor upon the occurrence of an event of default. After notification, the relevant debtor will need to pay the relevant receivable to the pledgee directly. A right of pledge can be created by means of a separate deed of pledge, or included in the mortgage deed.