Law of Property: Real security

Difference between personal vs real security (2×3)

Personal security:

• Gives rise to a claim against a person

• Law of obligations

• Contract law

Real security

• Gives the creditor a LRR over the property of the debtor (they are limited real rights over the debtors property ifo the creditor-if registered it burdens/encumbers the property)

• Stronger than a personal security right

• Law of property

Real security nature and functions (3×8)

1. EXPRESS real security:

• Mortgage bond

• Pledge

• Notarial bond

2. TACIT real security:

• Lessor’s and creditors Tacit hypothed

• Liens

• Statutory interpretation rights

3. By operation of law:

• Court order

• Judicial mortgage

Special mortgage bond

A special mortgage bond in immovable property may be defined as a limited real right in immovable property of another person to secure payment a principal debt, created by agreement between parties. The parties are the mortgagor and the mortgagee. The principle of specificity requires precise description of the property, more than one immovable property can be mortgaged at the same time.

What are the mortgagee’s legal benefits

A) The mortgagee’s right to preference

B) The mortgagee’s right to immediate execution

C) The mortgagor’s rights and duties

D) Types of mortgages

E) Termination of mortgages

A) The mortgagee’s right to preference

The most important right/entitlement that a mortgagee receives from the real security as soon as a mortgage bond is registered in the Deeds Registry = is a ‘preferential claim’ to the proceeds of the sale in execution of the mortgaged property, in the event of default in the principal debt.

Other creditors share in the proceeds of the sale of the mortgaged property, only if there is a surplus. Applies to the secured property of a declared insolvent debtor.

Multiple preferential claims on mortgaged property follows the order of ranking

B) The mortgagee’s right to immediate execution

The general rule requires creditors to levy executions against movables first, and then, if insufficient to recoup the debt, only then the immovable property. However, debts secured by mortgage allows mortgagee’s to levy execution immediately against the immovable property secured.

C) The mortgagor’s rights and duties

The mortgagor still has a right to possess or use and enjoy the secured object/immovable, like a pledge does, but the mortgage bond may limit the mortgagor’s exercise of certain entitlements in respect of the immovable property – in this way the mortgagee protects its real security right.

D) Types of mortgages (4)

• Kustingsbrief: special mortgage bond in immovable property that provides security for the payment of the purchase price of the mortgaged property. (most common)

• Covering bond: special mortgage bond in immovable property that provides security for payment of a future general or specific debt, must include max amount of future debt must bestated (exception to rule that principle debt must exist).

• Participation bond: special mortgage bond in immovable property provides security for funds various individuals have invested in a company that runs a collective investment scheme, amount is lent to a borrower who secures it over their property and the participants acquire the real security right.

• Surety bond: registered against property of the surety of the debtor.

E) Termination of mortgages (3)

• Principal debt no longer exists: Paid/settled or terminated by merger, no longer owner or party to the agreement, prescription (debt/claim no longer exists in law), release or set-off = The mortgage automatically terminates by operation of law.

• Total destruction of the security object/property: not applicable to partial destruction

• Mortgagee acquires ownership of the secured property

• Fulfilment or expiration of a resolutive condition to which the mortgage is subject

Pledge

A limited real right that the pledgee acquires in another person’s (the pledgor’s) movable property (corporeal or incorporeal movables) to secure payment of a debt. It is created by delivery of the movable object, pursuant to an agreement between the parties (pledgor and pledgee). In order to retain security in the form of a limited real right to the pledgor’s property, the pledged object must be delivered to the pledgee and controlled by them.

A pledge is distinguishable from a mortgage 2 ways:

1. Security iro movable property;

2. The debtor/pledgor cannot retain/keep the property while burdening it with the real security right.

Rights of a pledgee

• The pledgee obtains the limited real right to the pledge object as security for payment of the principal debt plus interest by the pledgor.

• The right exists as long as the principal debt exists, and the pledgee controls the property.

• Pledgee has a preferential claim if the pledgor does not pay the principal debt as agreed, summons and sale in execution of the pledged object/movable to cover the principal debt plus interest.

• The pledgee also has a concurrent claim against the proceeds from other assets where the proceeds from the sale of the security object does not cover the debt fully.

Obligations of pledgee to pledgor (6)

• Bonus paterfamilias (std of care): the pledgee must take care of the pledge object like a reasonable person.

• On termination of the pledge, the pledge object must be returned to the pledgor.

• The pledgee has no right to use, enjoy or alienate the property.

• The pledgee has no right to consume or alienate fruits, only if granted by pledgor.

• A pledgor can request the pledgee to provide security in the case of neglect of the property

• The pledgee is obliged to compensate intentional or negligent damage or destruction of the property. (NCA: object is held at pledgee’s own risk) (NCA also provides other instances pledgee could be held to compensate)