– Credit institutions are liable for failure in real estate financing duration until retirement age –
Credit institutions often finance real estate in the foreseeable knowledge that the property will not be paid off by the time the borrower retires. If a failure of the financing and thus a forced sale of the property is foreseeable at the end, the credit institution shall compensate the customer for all disadvantages resulting therefrom.
Duty to inform about foreseeable failure of financing
Thus, the Regional Court of Berlin (judgment of 19 January 2012, Case No. 13 O 317/10) ordered the credit institution to pay damages by way of reversal. In this context, the bank also had to answer for the incorrect advice given by an investment intermediary involved, in particular for incorrect impressions about the income, so that the purchaser assumed incorrect ideas that he would be able to hold the property acquired for old-age provision in the long term – in particular after the start of the pension. For example, a rent supplement to an achievable cold rent must be disclosed. Also incorrect data to tax advantages and the wrong statement, the object pays off without own capital funds quasi by itself, obligate to the payment of damages. Also a notarial purchase without a previous financing offer thwarts that the prospective buyer can get an overview regarding the profitability. These errors had been identified by an expert.
Berlin Regional Court repeatedly sentenced banks to pay damages
Already by its judgement of 24.09.2010 (Az. 4 O 482/09) the LG Berlin had reproached a bank that a “trouble-free financing” cannot be expected foreseeably if living and income conditions on the one hand, as well as the framework data of a loan on the other hand do not match. This includes the case where the financing period extends more than marginally into retirement. Because here regularly not only the income sinks, but with this also the possible tax advantages estimated for the adequacy of the financing by the rented property. In the event of foreseeable difficulties, up to and including the impossibility of making up the loan instalments, the Bank may not justify itself either by reference to inheritances that cannot be specifically foreseen or by reference to any future lottery winnings.
Foreclosure foreseeable from the outset
A bank may not accept with a clear eye that the purchase of the property and its financing will only be of a certain duration because the foreseeable loss of the property at retirement age by way of a compulsory auction jeopardises the purpose of the contract from the outset. It does not depend on a special knowledge advantage of the bank, but simply on the fact that after the framework data the contract purpose of a Ausfinanzierung and Abbezahlung of the real estate cannot succeed in the long run.
Calculation shows error in financing
The spouses in question were between 47 and 48 years old at the time of the property purchase and financing in 2006. At an interest rate of 4.7% (initially fixed for 10 years) and an initial repayment of 2%, the loan would not have been repaid until 2032, i.e. at the age of 73 to 74. The rental income was far from sufficient, so that a considerable difference had to be added from the income of the buyers. Foreseeably, this could not have been coped with at the latest at retirement age. This was enough for the court to order reversal.
Often only an expert can determine the consulting error …
Even in the case of financing with life insurance and annuity policies, it has been found for years in most cases that at the start of the annuity often more than 25 % of the loan remains after repayment offsetting with the life insurance benefit. The consequence is a necessary follow-up financing far into retirement age, due to the reduced pension income under more difficult financing conditions – if not realistically impossible. In the case of complicated financing, in particular with life or annuity insurance policies, an actuarial opinion is regularly required in order to determine whether the financing is faulty. In view of the intransparency of private annuity or life insurance policies, the latter must examine and present in detail how the insurance policy works in order to determine whether it would only have been possible to finance the policy until retirement age. The mere fact that many life insurance policies are still up to 25% short of full repayment of the bullet loans when they expire does not mean that this was already foreseeable when the policy was taken out at a time when life insurance surpluses were better.
… and determine the amount of damage
However, even if an advisory error can be proven, the damage must still be determined by means of a comparison of assets. However, the shortfall between the loan and the final payment of the insurance does not represent the loss. Rather, it must be taken into account here that although life insurance policies have been generating 3 % to 4 % less annual interest surplus for a good 10 years, this is offset on the advantage side by a lower interest rate also for the financing loans, which may have regularly fallen similarly since the status at the time the contract was concluded. Only a precise actuarial calculation can even begin to determine the amount of loss ultimately incurred. Therefore, the more elegant way is always to sue for rescission instead of a claim for damages, and only in the alternative to also bring in any damages determined by an expert.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
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About the author
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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