DEALING WITH PROPERTIES IN GERMANY
The EC Regulation generally provides that the law applicable to the bankruptcy is that of the Member State in which the bankruptcy order was made [note 1]. There, however, are exceptions to this general rule which include special provisions in the case of property. In particular, the opening of insolvency proceedings does not affect the “rights in rem” of a creditor or third party in respect of assets belonging to the debtor which are situated in another Member State at the time of the opening of proceedings (see paragraph 43.1.10) [note 2].
Broadly speaking, “rights in rem” include security rights such as a mortgage, and it is the law of the country in which the property is situated that would take precedence when considering those rights (see paragraphs 43.1.14 to 43.1.17 for information on how the system of charges operate in Germany). For the purposes of this Part of the chapter, it is sufficient to say that those rights ought not interfere with the official receiver’s right to deal with the property as an asset anymore than would the rights of a chargeholder in relation to a property in England and Wales.
It is clear, therefore, that property belonging to the bankrupt in Germany would form part of the estate and should be realised as appropriate.
In the first instance, the official receiver should contact any chargeholder and request that they note the official receiver’s interest in the property (see paragraph 43.1.13). Paragraphs 43.1.16 to 43.1.19 give information and guidance on the operation of charges under German law.
In addition, it will be necessary to register the official receiver’s interest in the property at the land register office (see paragraph 43.1.14).
Annex B1 is an MP2 letter (seeking information from a chargeholder) that has been amended to be more specific in respect of a German property.
Annex B2 is an MP3 letter (requesting chargeholder to note official receiver’s interest) that has been amended to be more specific in respect of a German property.
The official receiver should take immediate steps to demonstrate that the property forms part of the bankruptcy estate. He/she can achieve this by registering a notice with the local land registry that bankruptcy proceedings in the UK have commenced. This is provided for in the EC Regulation [note 6] and in German law [note 7].
Such registration can be for
In Germany ownership of real estate by more than one person will normally be in the form of co-ownership (Miteigentum). Exceptions to this are rare. In this case, the joint owners would normally each hold 50% of the property. Each share of the property can be encumbered separately and can form part of the bankrupt’s estate separately. The basis on which property owned by more than one person is held is more akin to the English law principle of tenants in common, rather than joint tenancy. In simple terms, this means that the joint owners hold the property under separate legal titles, rather than a joint legal title.
In Germany, the most common charge over land is called a Grundschuld. There are two types of Grundschuld (charge), a certificated charge and an uncertificated charge (see paragraph 43.1.17 for information on the differences between the two types of charges). A charge gives a right to specified land and property thereon and no distinction is made between the two. Chargeholders are entitled to the proceeds of the property in accordance with the order of their ranking at the land registry.
All charges must be granted by the owner of the property before a notary public and must be for a certain specified sum. The use of the charge is governed by the security purpose agreement (see paragraph 43.1.18).
From the point of view of the official receiver, the difference between the two types of charges is largely academic, being that an uncertificated charge can only be assigned if the assignment is registered with the land registry (see paragraph 43.1.20), whereas a certificated charge may be transferred on a written agreement and the handing over of the relevant certificate – without land registry registration. Where a certificated charge is transferred without registration, this may result in some misleading information appearing on the land register, but most mortgage type charges are of the uncertificated variety (requiring registration) – so the instances of this should be rare.
Whilst the charge must be for a certain sum when granted, its existence does not depend on whether that sum is still outstanding. It is normal practice that the loan is linked to the charge by means of a security purpose agreement (sicherungszweck-vereinbarung). This is an agreement between the borrower and the secured creditor setting out which debts are secured for the benefit of the creditor. The creditor may only use the charge for the purposes set out in the security purpose agreement.
The security purpose agreement will normally take account of the fact that the debt owed will reduce over time with the effect that when the time comes for realisation of the charge (see paragraph 43.1.19), the chargeholder will only be entitled to the sums owed at that time.
German law does not provide a right comparable to the power of sale available to chargeholders under the law of England and Wales. The secured creditor has two choices:
Both these procedures are provided for under the Law on Public Auctions (Zwangsversteigerungsgesetz).
The chargeholder can by-pass this procedure by selling the property with the consent of the debtor or, following bankruptcy, the official receiver.
Germany does not have a centralised system of land (property) registration as operates in the UK. Instead, land is registered under a system operated by the district court (Amtsgericht), to which a land register office (Grundbuchamt) is attached.
Applications for dealings in the registration of land need, therefore, to be conducted through the local Grundbuchamt.
Where required, the official receiver is entitled to search the land register (see paragraph 43.1.20) in the same way as he/she is entitled to do in the UK. This may be necessary to confirm the ownership of the bankrupt in a property, or to establish what charges are outstanding.
If the postcode (postleizahl) of the land/property in question is known, then the correct land register office (see paragraph 43.1.20) can be identified on the following website:
The postcode should be entered into the box “PLZ” in the top left corner of the page.
The postcode can be established by reference to http://www.deutschepost.de/dpag?tab=1&skin=hi&check=yes&lang=de_EN&xmlFile=828#$35197. The postcode relates to the town, rather than (as in the UK) a part of a town.
Failing that, use of a good atlas, the list of district courts attached at Annex B11 and the assistance of the bankrupt may be required.
As with a property in England and Wales, the official receiver should seek to transfer the dealings in relation to the property to the appropriate RTLU as soon as possible after his/her interest in the property has been protected (see paragraph 43.1.12).
As outlined in paragraph 43.1.9, the Act gives the official receiver, as trustee, the power to take possession of and sell a property that forms part of a bankrupt’s estate. Under the provisions of the Regulation [note 8] [note 9] [note 10], however, the official receiver must have respect for domestic (German) law when taking steps to realise the interest in the property. In particular, he/she must follow rules in German law in regards to the process of the conveyance of the property (see paragraph 43.1.29).
Whilst the following paragraphs (43.1.25 to 43.1.29) give an overview of the procedures and processes for dealing with a bankrupt’s property in Germany, it is not recommended that the official receiver should enter into such a procedure without expert guidance from a lawyer well versed in German law (see paragraph 43.1.29).
Where the property is solely owned, it can be sold through the normal German conveyancing process (see paragraph 43.1.29). The official receiver has power in the law of England and Wales to sell the property, and this would not be affected by any provision in German law. The agreement of the chargeholder(s) to the sale should be obtained as, under German insolvency law they have the power to require that the property is sold through an auction process. Their agreement to the official receiver, as trustee, conducting the sale should avoid any complications later on (in case, for example, they try to sell the property separately).
See also paragraph 43.1.27 regarding relatives’ rights.
Whilst the bankrupt’s legal title and beneficial interest in his/her share of the property vest in the official receiver, the share in the property owned by the spouse does not (see paragraph 43.1.15). German law provides a special procedure for selling a jointly owned property, and this procedure must be followed by the official receiver by operation of the EC Regulation [note 11] [note 12].
The procedure is for the official receiver, as trustee, to apply to court for a division of the property by means of a compulsory public auction [note 13]. This process is set out in the Law on Public Auctions [note 14] and can usually be expected to take about a year to conclude.
Once the property has been sold the joint owner would have to vacate the premises (with the buyer being the one to enforce this right). A spouse may seek to stop the proceedings [note 15] in such cases where the loss of the property could have serious effects for the wellbeing of any children of the bankrupt and the bankrupt’s spouse.
In theory, the official receiver could effect a sale of the bankrupt’s half of the property through the normal conveyancing process (avoiding the auction process), but it is considered unlikely that this would be viable unless the sale was to a party introduced by the bankrupt or co-owner(s).
If the property is solely owned, family members living in a bankrupt’s property would be required to vacate the property on sale, but not before [note 16]. Family members can apply for protection [note 17], giving special reasons why the general principle that the property has to be vacated should be overridden.
As a result of provisions in The Regulation [note 18], tenant’s rights (where a property owned by a bankrupt has a tenant) are decided by German law. Under German law, when the official receiver realises a property, any tenancy relationships would stay in place by virtue of provisions under the German Insolvency Code [note 19]. The only way that the official receiver could sell the property with vacant possession is if the tenancy agreement expired naturally, or if the tenant gave some other reason for it to be terminated (for example, a failure to pay rent).
Following the sale, the buyer of the property would have a right to terminate the tenancy agreement [note 20]. So far as residential properties are concerned, the buyer has to provide a justifiable reason for termination.
German law requires all real estate transactions to be signed at the office of the notary public, who is a solicitor who acts on behalf of the government. This is known as the legalisation process. This means that, for a property sale to be valid, the buyer and the seller (or their legal representatives) have to attend at the offices of the notary public to sign the deeds to the sale. Once the contractual deed has been read aloud in front of all parties involved, the deed is signed by all parties and sealed by the notary – after which it is irrevocable.
It is not expected that the official receiver would be required to travel to Germany to undertake this procedure. Instead, it is envisaged that local legal representation (see paragraph 43.1.30) would deal with this part of the process. For this to happen, though, the local representation would need to be given a power of attorney to deal with the matter. Again, it is envisaged that the official receiver would be led in this process by the local representation.
It is not envisaged that official receivers should attempt to deal with the sale of a property in Germany directly, and it is recommended that local legal representation is obtained to deal with the particular aspects of the German conveyancing and insolvency systems – not least the need to be personally present at the signing of sale contracts (see paragraph 43.1.29).
Local solicitors normally engaged by the official receiver may be able to recommend a solicitor in Germany with which they have some connection or commercial arrangement.
The firm of Cobbetts (http://www.cobbetts.com/OurServices/InternationalServices/GermanTeam/German_Solicitor_UK), which has offices in Birmingham, Leeds, London and Manchester has lawyers who are qualified in German and English law and have representative contacts in most of the major German cities.
Alternatively, Annex B14 is a list provided by TLT (The Service’s property conveyancing solicitors) of German solicitors that they have dealt with in the past for real estate work.
Where there is no prospect of the property achieving equity sufficient to make realisation worthwhile, the official receiver, as trustee, may cease to take any active steps in dealing with the property – effectively, ‘abandoning’ the property to the mortgagees. Where the property’s value is affected by some onerous obligation (to insure or make the property safe, for example) a disclaimer would be the more appropriate course of action (see paragraph 43.1.14).
Where this position is apparent prior to the process of registering his/her interest at the Land Registry (see paragraph 43.1.61), the official receiver may discontinue that process. The official receiver should, though, ensure that his/her interest in noted by the mortgagees in the event of a surplus arising.