When selling real estate, the bank loans are usually repaid by the seller so that the property can be transferred unencumbered in the land register – with the existing encumbrances, the property would normally be unsaleable. The repayment of the loans is seen – merely – as a precondition for the bank to release the encumbrances in the land register.
Here, loan officers often err by agreeing to repay the loan without necessity and demanding an early repayment fee from the borrower – often too low. A legal, more bank-friendly application of the law could save many billions spent by the taxpayer on bank bailouts.
Regularly no extraordinary right of termination for fixed-interest loans
A loan agreement is (regularly) neither contractually – ordinarily – terminable by the borrower (DN) nor extraordinarily terminable due to the mere fact of the sale of the financed property – the Federal Court of Justice (BGH) also confirms this.
Only as an exception has Section 490(2) of the German Civil Code provided for this since 2002:
“The Borrower may enter into a loan agreement in which the borrowing rate is tied and the loan is secured by a real estate lien or a ship lien, subject to compliance with the time limits set out in § 488 par. 3 sentence 2 prematurely if his legitimate interests so require and six months have expired since full receipt of the loan.
Such an interest exists in particular if the Borrower has a need to realise the object lent against to secure the Loan in another way. The Borrower shall compensate the Lender for any loss incurred by the Lender as a result of the early termination (Early Termination Fee)”.
However, this is not a genuine extraordinary right of termination, otherwise the bank could not demand compensation. The provision is also contractually binding, see Palandt/Putzo § 490 marginal 4, which is only intended to codify the previous case law of the Federal Court of Justice. The Federal Court of Justice had only determined that the borrower’s freedom of action may not be unreasonably impaired by the fact that he is prevented from realizing the loan by selling a property because it cannot be transferred free of encumbrances in the land register because the loan cannot be repaid.
Even then, according to the Federal Court of Justice, there was no entitlement to extraordinary termination of the loan, because the Federal Court of Justice did not deviate from the principle “pacta sunt servanda” in this case – rather, it only permits a contract modification in the sense of bringing forward the repayment date. And this only if a “legitimate interest” of the DN exists and can be demonstrated.
No obstruction of the bank by exchange of loan collateral
If, however, it is not possible to demonstrate a legitimate interest because the lending bank does not hinder the sale in any way, but releases the encumbrances in the land register even without loan repayment, any claim to loan repayment shall lapse. For example, if the loan is also sufficiently secured by other land charges or other collateral – even if these have to be exchanged or increased. However, the bank could also simply demand the payment of the corresponding amount into a collateral account (or blocked account), for which the borrower would still have to pay interest in the current situation, after increasingly large credit balances at banks are being charged negative interest.
In the opinion of the Federal Minister of Finance, negative interest on deposits is “a kind of custodian or deposit fee, which is included in the income from capital assets as income-related expenses from the saver’s flat-rate amount pursuant to Section 20 (9) sentence 1 EStG” (BMF letter of 27 May 2015, DOC 2015/0411466). Consequently, they are de facto not additionally tax deductible. For savers, it is completely inappropriate anyway to expect anything other than a negative interest rate for money that is not needed now, but which they will gladly need years later.
In a soon to be global investment market with increasing unsatisfied demand for meaningful investment opportunities, this increased demand will inevitably cause the returns on many investments to fall – for investors into negative territory. Banks do not need a loan repayment at all in such times. Just like the person who lent his neighbour 1,000 cubic metres of water during the drought is not happy when the neighbour pumps 2,000 cubic metres back onto his property during a flood in heavy rain.
Without a “legitimate interest”, early repayment fees are a concession on the part of the bank.
Often, the desire for early repayment of a fixed-rate loan is primarily based on the hope of obtaining the loan more cheaply elsewhere. The bank is then free to conclude a termination agreement up to the limit of immorality and to have an early repayment fee promised. This is not compensation, as in the rather rare cases where the customer has a legitimate interest – the rules on early repayment compensation developed by case law are therefore not applicable.
The early repayment fee will be considered immoral if the fee exceeds the usual early repayment fee by up to more than 90 percent – if the customer’s situation is an emergency situation, up to 50 percent of the excess can be considered immoral (AG Dortmund, WM 1996, 135; OLG Munich, WM 1997, 521). Of course, the bank can also simply refuse to take the money back at all.
Too little compensation for credit institutions?
Case law protects the (future) profit of the Bank that would arise in the ordinary course of execution of the agreement. Previous benchmarks for comparison are either new lending (“asset-liability method”) or investment in mortgage Pfandbriefe (“asset-liability method”) as substitute transactions. In-house lawyers, legal advisors and specialist lawyers of banks have been content with this for years; apparently because they had previously only learned and worked for a banking business, but not in the banking business. This was probably an unnecessary waste of money – it can be repeated by the taxpayer in the bank bailout.
In fact, credit institutions are more often working with maturity transformations in that, in order to maximise profits – combined with higher risk – short-term “cheap” money (e.g. customer deposits, e.g. the existing sediment of savings book deposits) is lent out at normal interest rates than more long-term “expensive” loans (customer loans, e.g. at the market interest rate or more expensive). As long as no one presents the bank’s banking practice to a court in a suitably substantiated manner, including a mathematical explanation of the risk calculation, no judge can make even the slightest suggestion. The result is judgments that are unfriendly to banks. However, if there is no legitimate interest in the loan repayment because the bank allows an alternative, it can ignore restrictive judgments on early repayment penalties if repayment is nevertheless granted voluntarily.
Prepayment penalty requires specific explanations
Only in justified individual cases (BGH, judgements of 01.07.1997, Ref. XI ZR 197/96, XI ZR 198/96, XI ZR 267/96; judgement of 07.11.2000, Ref. XI ZR 27/00; judgement of 30.11.2004, Ref. XI ZR 285/03) and not as a rule when selling a property encumbered by a mortgage, or if the credit institution does not agree to the urgently required extension of an existing loan, early repayment of the loan can be demanded. The same applies if a real estate owner (after divorce or death of a relative) would get into greater financial distress, which could not be avoided otherwise.
If a justified interest in the repayment of the loan cannot be demonstrated in a concrete and substantiated manner in individual cases, any legal claim to early repayment shall also lapse. If the bank demands another loan collateral, such as money in a collateral account, in exchange for the release of a land charge, the borrower is free to offer the bank an alternative new loan collateral, i.e. to make it palatable in return.
No legitimate interest can be derived from the fact that less interest is earned from the blocked account than is payable on the loan. This is because, according to case law, there is also no entitlement to repayment of the loan on account of the interest rate advantages resulting from refinancing. Furthermore, even if the loan were to be repaid, the loss of interest incurred by the bank would be passed on to the borrower by way of an early repayment penalty, so that the difference between continuing to pay the loan interest and simultaneously investing the required amount at a much lower interest rate is not too great. A “legitimate interest” of the Borrower, which would have to be taken into account compared to the interest of the Bank in the performance of the loan agreement, is therefore not given.
Alternatives prevent right to repayment of loans
If the bank releases the encumbrances in the land register, for example, against provision of an amount as security even without repayment of the loan, or offers another alternative, there is under no circumstances a claim to repay the loan prematurely on the occasion of the sale of the property. This is because the credit institution is in no way impeding the realisation of the real estate. The Bank is also not obliged to act in good faith.
If it nevertheless accepts the customer’s money for early repayment of the loan, it is not limited to the prepayment loss according to the applicable rules, but may freely demand something by so agreeing with the borrower. Of course, agreed special repayments can be used, which would then be the practical exception. In any case, it would be a costly mistake on the part of the customer adviser to assume, in ignorance of the legal situation, that the bank must always allow the loan to be repaid.
Misjudgement by banks promotes low interest rates
Moreover, such misconduct on the part of the banks calls the ECB into action, because it believes that it must promote the lending of the banks through a policy of cheap money. The ECB’s low interest rate in turn leads to rising real estate prices and thus increased buying and selling. If the seller’s financing bank simply refused to repay the remaining loan debt in all appropriate cases, the ECB’s lending statistics would also look much better and interest rates would not have to remain at an extremely low level.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
www.experten.de (published on 19.08.2016)
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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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