Civil Law Notaries as Advantage of Business Location in Real Estate Finance Andreas Luckow, Head of international real estate finance TAIEX - Conference, Berlin, 15th March 2013 Multi country workshop: Beyond borders - the role of civil law notaries in the support of legal systems Berlin, 15th March 2013

Civil Law Notaries as Advantage of Business Location in Real Estate FinanceBerlin, 15th March A)Banks in Real Estate Finance B) Creation of mortgage - simple and effective C) Reliable Property Disgression: vdp Round Table on Security Rights over Immovable Property D) Effective protection of rights in land E) Efficient Enforcement F) Efficient alterations - sale G) Good protection of the owner / borrower H) Involvement of civil law notaries in real estate finance

Civil Law Notaries as Advantage of Business Location in Real Estate FinanceBerlin, 15th March ead x pd x lgd x m = rwa exposure at default (amount of the loan) probability of default (risk that the borrower will not pay) loss given default (ead, mitigated by mortgage, auction proceeds) maturity risk weighted assets  The mortgage (security right over immovable property) mitigates the risks of default and makes real estate loans favorable loans  If a mortgage should be not effective or not enforceable, the differences in loss / in risk weighted assets would be immense.  Banks must verify, if a mortgage is  effective  enforceable  Law should give certainty about that.  Verification should be easy and without toi much costs and effort. A)Banks in Real Estate Finance

Civil Law Notaries as Advantage of Business Location in Real Estate FinanceBerlin, 15th March A bank can accept a mortgage as a collateral for a loan only if the mortgage has been created correctly and is effective.  Identity and power of attorney of the creator = the owner  risk of mortgage fraud! key function of a notary in each country: verify the identity  Documents and contracts correct and sufficient to make the mortgage effective?  Must the bank verify? Does a solicitor verify? Does a notary verify? Risk that documentation will prove insufficient later! Function of a notary: legal survey and instruction B)Creation of a Mortgage – Simple and Effective England: "mushrooming growth in identity and registration fraud“ provisions of the Land Registry: 2007 GBP 2.8 mn GBP 57.3 mn. U.S.: General opinion was that a promissory note is not important for enforcement. Now courts say in many states that the mortgagor must hold the note or even show it to court.

Civil Law Notaries as Advantage of Business Location in Real Estate FinanceBerlin, 15th March  Priority rights or legal barriers?  check land register and documents Function of the notary: legal survey and instruction  Dischargement of prior rights: Who runs the process? bank – notary  Verifying scope and restriction of rights - e.g. leasehold - erfpacht Netherlands: Notaries give a Notarisverklaring that an erfpacht has what a bank needs. B)Creation of a Mortgage – Simple and Effective

Civil Law Notaries as Advantage of Business Location in Real Estate FinanceBerlin, 15th March Creation of a mortgage can only be effective if the legal relations of a property can be checked easily.  land register: reliable information, legally protected  wide differences of land register systems  mirror function  curtain function A land register can be only as good as the information given to it. Notaries are a filter for the land register a the means of verification. Notarial documents are much less likely to be disputed. Notarial documents have been made by professionals, give a clear information C)Reliable Property

Civil Law Notaries as Advantage of Business Location in Real Estate FinanceBerlin, 15th March Project at vdp: Round Table „Flexibility, Security and Efficiency of Security Rights over Real Property in Europe  Method of operation Easy exposure: One question for all countries with 2 – 7 answers One qualified expert per jurisdiction Selected questions on security rights over real property in procedure, utilisation in practice, registration, enforcement and insolvency C)Reliable Property Disgression: Round Table on Flexibility, Security and Efficiency of Security Rights over Real Property in Europe

Civil Law Notaries as Advantage of Business Location in Real Estate FinanceBerlin, 15th March workshops since 2005 contributing countries integration planned in JP C)Reliable Property The Round Table at vdp Illinois / US

Civil Law Notaries as Advantage of Business Location in Real Estate FinanceBerlin, 15th March C)Reliable Property The Round Table at vdp

Civil Law Notaries as Advantage of Business Location in Real Estate FinanceBerlin, 15th March Methodology of the Round Table: At first: country reports for particular countries by standardized questionnaires: (property Law Project der EUI) Vol. I and II (vol. 23 and 32 vdp publications’ series) Later: cross sectional approach with geographical slides Deficits: -Dogmatic of one country is not regarded; concentration of practical results -only clear answers, no details -only one type of security type per country Advantages: -clear overview -surprising insights by comparison C)Reliable Property The Round Table at vdp

Civil Law Notaries as Advantage of Business Location in Real Estate FinanceBerlin, 15th March C)Reliable Property The Round Table at vdp

Civil Law Notaries as Advantage of Business Location in Real Estate FinanceBerlin, 15th March C)Reliable Property The Round Table at vdp

Civil Law Notaries as Advantage of Business Location in Real Estate FinanceBerlin, 15th March C)Reliable Property The Round Table at vdp

Civil Law Notaries as Advantage of Business Location in Real Estate FinanceBerlin, 15th March C)Reliable Property The Round Table at vdp

Civil Law Notaries as Advantage of Business Location in Real Estate FinanceBerlin, 15th March C)Reliable Property The Round Table at vdp

Civil Law Notaries as Advantage of Business Location in Real Estate FinanceBerlin, 15th March C)Reliable Property The Round Table at vdp

Civil Law Notaries as Advantage of Business Location in Real Estate FinanceBerlin, 15th March C)Reliable Property The Round Table at vdp

Civil Law Notaries as Advantage of Business Location in Real Estate FinanceBerlin, 15th March D)Effective Protection of the mortgage and other rights The bank must be sure that the mortgage and the rights that are important for the value of the mortgage (servitudes, leasehold rights etc.) will persist. function of notaries: verify identity and authority in future transactions Rights must be protected from fraud by third parties. Scotland: (2013) CSOH 24: The owner forged the signature of the mortgagee bank and had the mortgage discharged; then created a new mortgage with another bank. Outer House Ct. of Sessions: No compensation from the land register ("keeper"), no compensation from the second bank

Civil Law Notaries as Advantage of Business Location in Real Estate FinanceBerlin, 15th March E)Efficient enforcement An efficient enforcement procedure must give  a speedy process with good results  ead x pd x lgd x m = rwa  protection of the owner to make the system acceptable  efficient procedure to bring buyers. Notarial documents have been made by professionals, give a clear information

Civil Law Notaries as Advantage of Business Location in Real Estate FinanceBerlin, 15th March E)Efficient enforcement

Civil Law Notaries as Advantage of Business Location in Real Estate FinanceBerlin, 15th March E)Efficient enforcement

Civil Law Notaries as Advantage of Business Location in Real Estate FinanceBerlin, 15th March Frequently, the terms of a mortgage loan and / or the security right are changed after some time by agreement.  new interest rate  new term in time additional loan amount etc  new owner, sale Changes in documentation and in the land register should be practicable without to much effort and with speed.  quality of the existing documentation  new documentation Function of the notary: draw documents on the basis of those in force. F)Efficient Alterations - Sale

Civil Law Notaries as Advantage of Business Location in Real Estate FinanceBerlin, 15th March Content customers are important for a bank.  more business in the future  less litigation Protection in contracts: quality of the existing documentation  Customers should understand what they are doing Function of the notary: ensure that the customer concludes the contract only on the basis of careful consideration. Adjustment of interest. G)Good Protection of the Owner / Borrower

Civil Law Notaries as Advantage of Business Location in Real Estate FinanceBerlin, 15th March G)Good Protection of the Owner / Borrower Protection in law

Civil Law Notaries as Advantage of Business Location in Real Estate FinanceBerlin, 15th March Legal System that involve civil law notaries in real estate finance  may guarantee more legal certainty  may create less litigation  release the bank from expenses and time for legal surveys  Quicker enforcement  More content customers  Acceptance of the system However, this is dependent on the  details of the law  organization of the notarial system  the quality of the land register The advantage from notaries is larger in standard cases. for big loans, extensive checks by lawyers and solicitors can more easily be afforded. In cross border lending, notaries may be particularly important for the comfort of banks. H)Involvement of Civil Law Notaries in Real Estate Finance

Civil Law Notaries as Advantage of Business Location in Real Estate FinanceBerlin, 15th March