Lien
A lien is a right in rem granted to a creditor, enabling them to realise the value of an asset should the debt not be settled by a specified date, in order to satisfy the claim. It serves to secure a claim. In practice, it is frequently used in connection with mortgages: In such cases, it serves as security for the bank in the event of a potential default by the borrower and grants the bank the right to realise the property (auction/sale) in order to settle the borrower’s debts. The lien is entered in the land register.
What is a lien?
A lien is a right in rem over another person’s property (the pledged property) which serves to secure a claim and is limited to the satisfaction of the pledgee through the realisation of the pledged property. It is governed by Section 447 of the General Civil Code (ABGB).
A lien must comply with the following basic principles:
- The title (e.g. a pledge agreement) and the method (the principle of possession for movable property, registration in the land register for immovable property) must be complied with
- Undivided liability of the lien for the entire claim
- Specificity: The lien must relate to a specific, precisely defined item. The claim secured by the lien must be precisely defined. It must be clear, at the latest at the time of realisation, which claim the lien secures.
- Accessory nature: The lien exists only to the extent that a claim to be secured exists. Once the claim has been satisfied, the lien automatically lapses
What are the different types of liens?
A lien may arise in various ways, and the manner in which it arises is determined as follows:
- Contractual charge: created by a legal transaction. This usually occurs in connection with a loan-financed property purchase. As a rule, a deed of charge is drawn up and signed alongside the loan agreement, and the charge or mortgage is entered in the Land Register to secure the loan.
- Judicial lien or attachment lien: established in the course of enforcement proceedings
- Statutory lien: arises directly from the law
What gives rise to the lien?
The creation of a lien requires not only a title but also a corresponding method in each case. The principle of possession applies to the pledging of movable property (such as goods or securities), whilst the principle of registration applies to the pledging of immovable property. Liens on immovable property are also referred to as mortgages, land liens or property liens. In principle, the pledgee has no right to use the pledged property. In addition to judicial realisation, the pledgee is already entitled by law – even without a separate agreement – to realise a pledge on movable property out of court. Immovable property can therefore only ever be realised within the framework of judicial enforcement proceedings (usually through judicial auctions). The contractual lien, in its various forms, is a common means of securing credit.
Does a mortgage constitute a lien?
A mortgage is a lien on immovable property, i.e. a plot of land or other real estate. It serves as security for a debt and is granted to the lender. The mortgage is entered in the land register (Encumbrances Section C). A distinction is made between a maximum-amount mortgage and a fixed-amount mortgage:
- Maximum-amount mortgage: With this type of mortgage, the lien is not tied to a specific loan but to a predetermined maximum amount. This means that the mortgage can be used for a further loan once the original loan has been repaid.
- Fixed-amount mortgage (also known as a loan mortgage): Here, the situation is the reverse: the lien is indeed tied to a specific loan and, once that loan has been successfully repaid, cannot be used for any further loans.
Example of a lien in the Land Register
In most cases where the purchase of a property is (partially) financed by a bank or credit institution by means of a mortgage, a lien is required as security, which is entered in the land register in favour of the financing bank.
If, for example, the borrower has own funds of 50,000 euros and wishes to purchase a property worth 250,000 euros, they will finance the remaining 200,000 euros through a loan. In this case, they will take out a mortgage loan (or fixed-amount mortgage) of €240,000 with their bank and have it entered in the land register: this is because 20 per cent is added to the loan amount to cover ancillary costs. These are intended to cover the fees, court costs and any interest incurred in the event of the borrower’s insolvency, arising from a (forced) auction of the property.
What are the costs involved in registering a lien in the land register?
The registration of a lien, which is carried out at the relevant district court, incurs costs. These consist of the application fee for the land register application, currently 47 euros, and the registration fee for the lien, which amounts to 1.2 percent of the value of the lien. In addition, fees amounting to 1.1 percent of the purchase price must be paid in advance for the registration of ownership in the land register (‘registration of title’).
Can a lien be removed from the land register?
The lien cannot be discharged during the term of the loan – that is, whilst the borrower still has repayments to make to the lender (without the lender’s consent). However, it lapses automatically as soon as the mortgage has been repaid in full. This requires a so-called ‘cancellation receipt’ and an application to the Land Registry for the cancellation of the lien. The discharge receipt, also known as a ‘declaration of release’, is a written declaration of consent from the bank or credit institution to discharge the mortgage. This can be applied for as soon as the loan has been repaid in full.
As a next step, the lien can be removed from the land register by submitting an application to the land registry. As certain substantive and formal requirements must be met, this is usually handled by a solicitor or notary. A fee of 47 euros is currently payable for the cancellation; in addition, there are the costs for the solicitor or notary.
Conclusion
A lien is an effective means of providing legal and financial protection for a lender in the event of the borrower’s insolvency. The fact that this is entered in the land register is not only advantageous for the lender: in most cases, it enables the borrower to secure more favourable terms when taking out a loan and to enter into a loan agreement even with limited own funds. The transfer of ownership by way of security, whereby the bank assumes ownership of an asset, or retention of title, whereby the purchased item remains the property of the seller until the purchase price has been paid in full, are alternatives to a lien.
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