Disservice to investors?

Expert Johannes Fiala on the consequences of the ECJ rulings on “junk real estate”.
After the current “junk real estate judgments” of the European Court of Justice (see box), the banks are calm, while investor lawyers speak euphorically of a “breakthrough”. The reality, however, is more modest. The know-how problem should be mentioned: While the higher courts assume that an investor (must) have the legal risks explained by a lawyer, the tax sustainability by a tax advisor and the intrinsic value of the investment/property by an expert, in practice bank advisors are often not in a position to critically assess the prospectuses – let alone recalculate them. And while the courts also expect independent investment advisors and brokers to be able to check their offers from a legal, tax and economic point of view, in reality, as is well known, there has been no standardised admission to the profession to date. Anyone can register the business as an initiator or financial services provider. If however an investor saves the purchase of specialized knowledge, the cat’s whine is large: With “scrap real estates” up to one million Federal citizens are to have been “legally cheated”. A typical sales pitch was: “Your property is bank-approved, after all you pay a valuation fee in the loan agreement and no bank will give you a loan if your property is not worth more than the loan amount”. This was of course incorrect: the investor pays for the valuation of the property – but it is also a cost of the loan. However, this is not revealed to the client using this appraisal. Moreover, little help can be expected from the state, because the judicial scandal is in reality a political issue: where the threads converge, above all in the bank, hardly any public prosecutor shows his face. Investor protection lawyers allege that some banks have systematically colluded with distributors to the detriment of investors. At the Sparkasse Mannheim one or the other member of the Managing Board had to go to prison, and also at the Badenia building society a special internal expert opinion of the Federal Financial Supervisory Authority has revealed the participation in or the joint knowledge of the “investment fraud”.
Banks preferred
The numerous proceedings before the ECJ in the area of “junk real estate” and not least the statements by the government and banks show what is at stake: namely the threat to the existence of some credit institutions through the financing of dubious transactions. In view of this, the citizen wonders why fare evaders are punished, why the public prosecutor seems reluctant to prosecute banks and why criminal charges are dropped en masse. Even the benefit of private insolvency, a light at the end of the tunnel on the way out of the debt trap, is now to be restricted for cost reasons: Some state ministers of justice have already posted their drafts in this regard on the Internet before the Bundestag elections. It should be noted that the ECJ takes a decidedly consumer-friendly line. In the past, this court, like the Federal Constitutional Court, corrected the predominantly bank-friendly case law of the Federal Court of Justice. The current judgements – and incidentally also quite current German instance courts – show that a so-called doorstep selling can be given also with switching to friends and acquaintance. The typical
Expert Johannes Fiala on the consequences of the ECJ rulings on “junk real estate”.
Structural salespeople first use existing contacts through family and work colleagues to then make referrals. A doorstep situation can therefore also exist within the family, as the Verden Regional Court stated in its judgment of 14 July 2005 (Case No. 4 O 600/04). Another issue is the concern of many investors that a revocation of the loan agreement under the Doorstep Selling Act leads to the immediate maturity of the loan – the ECJ has confirmed this in principle. The question was whether the bank was then also entitled to interest and, if so, in what amount. The ECJ assumes that the “normal market” interest rate must be paid by the consumer in this case.
sales reps in the line of fire
So what is left behind is a mountain of (residual) debt after the junk property is sold. This situation usually gives consumers the choice between negotiation with a lawyer and insolvency proceedings: The advantage of a negotiation lies in the faster settlement and sometimes also economically noticeable benefits. In addition, intermediary and distribution liability always comes into question: every year, around 30,000 intermediaries are sued by consumers. The ECJ further states that in certain constellations national courts should ensure that the consumer is not burdened with “risks inherent in the investment”. This area may include differences between the purchase price and the actual value, the risk of loss of rent and so on. For this, the consumer will need an expert opinion if necessary – the ECJ has only defined a “corridor” for the details. Therefore, there are still many issues to be litigated in this field. The outcome is mostly uncertain. It is expected that this will only affect cases where the loan agreement was concluded before the purchase of the property – the rule is the reverse. The burden of proof is on the plaintiff. In view of this, the PR euphoria of some self-proclaimed investor protection lawyers is hard to understand.
The author
Johannes Fiala is a lawyer in Munich. Contact: www.fiala.de
(1-2/2006 Cash, 134)
Courtesy ofwww.cash-online.de.

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About the author

Dr. Johannes Fiala
PhD, MBA, MM

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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