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Initial situation: Land charge as loan security and the interest in releases
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In real estate financing, a land charge is regularly created in favor of the financing credit institution. It serves to secure claims arising from the loan relationship and, in many cases, remains entered in the land register even when the economic circumstances change—for example through ongoing repayment, increases in value, or the sale of individual properties from a loan-secured portfolio. In practice, this can give rise to the desire to achieve a full or partial release of properties or partial areas from liability under the land charge.
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Conceptual classification: release of a land charge and partial release
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Difference between full release and (partial) release of a land charge
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A land charge release is generally understood as the creditor’s declaration that makes it possible to delete the land charge or to reassign it back to the owner. This must be distinguished from a (partial) release, in which the security does not cease altogether, but is removed from the security pool only with respect to a specific part of the collateral—for example a single plot of land, a partial area, or an asset within a portfolio.
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Importance of the security agreement
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As a matter of law, what is decisive is regularly not only the land charge entered in the land register, but also the contractual security arrangement under the law of obligations (security agreement). It typically stipulates which claims are to be secured, how the scope of security is determined, and under which conditions adjustments to the pool of collateral may be considered.
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Questions of entitlement: When a (partial) release may be considered
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Over-collateralization as a possible point of connection
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The starting point of many disputes is the question of whether the bank holds more collateral than is required to secure its claims. If there is a significant discrepancy between the collateral value and the secured claims portfolio, the issue of over-collateralization often becomes relevant in this context. The focus is not on every arithmetical deviation, but on the assessment of whether, under the contractual and legal standards, an unreasonable imbalance exists.
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Particularities where there are multiple securities or multiple objects
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In financings with multiple securities—for example several land charges, additional guarantees, or assignments of receivables—the question arises as to the relationship between the individual securities. Likewise, constellations involving several encumbered plots of land or real estate objects may lead to disputes over which security is to be reduced or released. In such cases, what is decisive is the agreements in the security agreement as well as the structure of the financing.
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Importance of the individual case and the contractual allocation of risk
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Whether and under which prerequisites a (partial) land charge release can be demanded depends substantially on the design of the underlying loan and security contracts. The repayment status, the economic development of the collateral object, and the overall risk assessment—each within the agreed parameters—may also play a role. Blanket statements are therefore inappropriate; what is decisive is the specific contractual allocation of risk.
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Typical lines of conflict between borrower and credit institution
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Divergent valuation of collateral values
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In practice, the assessment of a property’s collateral value may differ between borrower and bank. Different valuation approaches, valuation dates, or safety discounts have a direct impact on whether, from the respective perspective, over-collateralization is assumed and whether a reduction of the collateral pool is considered at all.
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Sale, partition, or restructuring of real estate assets
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If an encumbered object is sold or a plot of land is partitioned, the need may arise to limit liability under the land charge with regard to individual units. The question of whether a release declaration can be demanded or whether other structures are contractually provided for this is regularly the subject of intensive coordination and—if no agreement is reached—legal disputes.
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Procedural reference and delineation: No statement on specific individual cases
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Reports on court disputes concerning questions of (partial) release of land charges typically reflect that the courts decide on the basis of the respective contractual situation and the concrete valuation of the collateral. To the extent proceedings are pending or have concluded, the following applies: transferring the considerations made there to other circumstances is not possible without examining the relevant documents and circumstances. For ongoing proceedings, the presumption of innocence must also be observed; any classification requires a robust evidentiary basis (source of the original article: Juraforum, accessible via the link provided by the client).
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Classification for practice: relevance for companies, investors, and high-net-worth private individuals
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In complex financing arrangements, larger real estate portfolios, or differing creditor structures, the question of adjustments within the collateral portfolio can take on considerable economic significance. The legal assessment regularly ties in with the contractual structure, the security agreement, and the specific development of the financing. Accordingly, careful analysis of the documentation and the actual framework data is regularly the basis of any robust assessment.
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Point of contact for further clarification with MTR Legal
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Anyone who, in connection with real estate financing, has questions regarding the scope of collateral, the requirements and limits of a (partial) release of land charge, or the interpretation of security agreements, may consider a structured classification within the framework of legal advice in banking law by MTR Legal attorneys.
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