Ein Schloss das zwei Ketten bindet, liegt im Vordergrund eines nach hinten unschärfer werdendem Zaun
Ein Schloss das zwei Ketten bindet, liegt im Vordergrund eines nach hinten unschärfer werdendem Zaun

Real estate crisis - What banks need to consider legally

Real estate crisis - What banks need to consider legally

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Stuttgart, 6 September 2023 | In particular, the rise in interest rates and the increase in material prices have significantly reduced the sales prospects of property developers and project developers for their properties in recent months. A number of well-known real estate companies have already had to file for insolvency or are about to do so. But consumers whose fixed interest rates are expiring are often no longer able to afford follow-up financing. This leads to both commercial and private real estate financing becoming non-performing. In this situation, the financing banks have to clarify a large number of legal issues. Even though each case has to be considered specifically, this article – without claiming to be exhaustive – is intended to provide a brief overview of the banks’ options for action.

Commercial real estate financing

  1. Due to the current situation, regular monitoring of the real estate client seems to be necessary not only from a credit supervisory point of view in order to recognise possible crises of the client at an early stage and to react to them. Under the law on general terms and conditions, the bank is entitled to regular self-disclosure from its client not only if the client’s creditworthiness or collateral situation changes. The violation of this duty to provide information may, under certain circumstances, entitle the bank to terminate the contract (without notice) pursuant to section 314 BGB in conjunction with section 10.1 ABK. Section 10.1 ABKD, 19.3 GTC may give rise to a right of termination (without notice) vis-à-vis the client.
  2. In good time before the crisis, the collateral for the exposure should be checked and, if necessary, a collateral reinforcement (no. 13 GTC) should be requested. The subsequent provision of collateral during the client’s crisis, on the other hand, is usually worthless, as it is likely to be contestable (cf. Sections 130, 131 InsO). In such cases, however, the taking of third-party collateral may be an option. If “fresh money” is to be made available to the company in crisis – against submission of corresponding restructuring reports (does not have to comply with IDW S6) – this financing should be secured separately. Under no circumstances should the previous commitment also be secured, e.g. by means of a “wide” declaration of purpose, when concluding the collateral agreement for the new loan. This “wide” collateral agreement would be contestable.
  3. If the bank has to separate from the non-performing commitment, it must first be examined when and under which conditions a termination can be issued to the client.Frequently, statutory (§§ 314, 490 BGB) or contractual grounds for termination (section 10 ABKD, 19 para. 3 AGB) will come into consideration for an extraordinary termination without notice. Before giving notice of termination, however, it should be checked what effect the termination will have, for example, on a current account relationship or the right of set-off, especially with regard to the right of rescission.

    It should also be noted that existing collateral is not ready for realisation until after the commitment has fallen due. Land charges as collateral must be terminated separately with a six-month notice period in accordance with § 1193 BGB before the forced sale or forced administration thereof is applied for.

    If the client has not yet filed for insolvency, the maturity of the exposure may cause the client to become insolvent. A premature termination could lead to claims for damages against the bank. In particular, the termination must not be “untimely” and, for example, prevent a restructuring process that has already been initiated and agreed with the bank.

    Even an (ineffective) notice of termination cannot be withdrawn as a formal declaration. Termination should therefore be the last resort if no other equivalent options remain for the bank

    It must also be examined to whom the termination must be declared, for example the managing director of the GmbH or the insolvency administrator. In preliminary insolvency proceedings this question can cause considerable problems.

    In the case of termination vis-à-vis a property developer, the consequences for the financed construction project and the purchasers will also have to be taken into account before issuing the termination, for example with regard to release obligations under Section 3 MaBV.

  4. If the bank is a member of a consortium of banks, be it in the context of financing and / or collateralisation, the measures to be initiated must be coordinated in advance with the consortium partners in case of doubt. The same applies to co-financing with e.g. development banks.
  5. After notice of termination has been given, it should be checked which claims need to be titled. This applies not only to the commitment claims against the client itself, but also to the collateral, e.g. guarantees, which become due with the principal claim and are then subject to the short three-year statute of limitations (§ 195 BGB), just like the principal claim itself.
  6. Collateral should – unless the power of realisation is transferred to an insolvency administrator (sections 165, 166 InsO) – generally be realised promptly so that the default claim can be quantified in the debtor’s insolvency proceedings if necessary.Depending on the status and direction of the insolvency proceedings, it may be advisable to consult with the debtor in this regard, for example if an insolvency plan is to be prepared or the business is to be transferred during the insolvency proceedings. However, the prompt realisation of collateral also offers itself outside of ongoing insolvency proceedings, especially in the case of property development objects. In particular, it may be necessary to clarify under which conditions the bank completes a non-performing property developer’s property that is secured in rem in its favour and what legal consequences this may have for the bank (e.g. warranty vis-à-vis purchasers).

 

Real estate financing vis-à-vis consumers

 

  1. In the case of real estate financing vis-à-vis a consumer, largely similar questions arise as in the case of a commercial loan, especially with regard to the question of monitoring the commitment in the context of monitoring, as well as with regard to the realisation of collateral. 
  2. If the bank wants to terminate a consumer loan because of payment arrears, the requirements of § 498 BGB must be observed. Based on a judgement of the Higher Regional Court of Stuttgart of 29 March 2017 (9 U 23/16), which was confirmed by the decision of the Federal Supreme Court of 28 November 2017 (XI ZR 295/17), it is clear that even before the arrears necessary for termination under Section 498 of the German Civil Code have been reached, termination is permitted for other reasons, even in the case of minor arrears, if, for example, there is an objective deterioration in the consumer’s assets due to enforcement measures by other creditors.

 

Disclaimer

The above is an overview of possible legal problems in connection with property financing in the current property crisis. As each case has its own individual characteristics, I will be happy to assist you together with my colleagues from our banking law team.

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