Credit security law: land charges, guarantees
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Credit Collateral and Credit Security Law – Key Issues in Banking and Finance Law
Credit security law is a central component of banking and financial law and plays a crucial role in ensuring safe and reliable lending.
Loan collateral is essential because it protects banks from the risk of not recovering the full loan amount when it is due.
In order to minimize this risk of default, civil law provides a variety of proven security instruments that help to effectively protect against financial losses in the event of a loan default.
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3The Guarantee – The Most Important Security in Credit Security Law
The guarantee is one of the most important forms of credit security in banking and is often used to secure various types of loans, including consumer loans and corporate loans. As an accessory security right, the guarantor is liable exclusively for the claim that is specifically named in the guarantee declaration.
However, lenders are often interested in extending the guarantor's liability to cover other debts of the debtor (broad declaration of security purpose). Particular care must be taken when using general terms and conditions (GTC), as an excessive extension of liability may be legally inadmissible. According to the so-called case law of the Federal Court of Justice, the guarantee is otherwise limited to the original loan. In order to ensure clarity about the scope of liability, personal maximum amount guarantees are often used, which set a maximum liability amount. In particular, with spouse and family guarantees, care must be taken to ensure that neither the guarantor's inexperience nor a significant financial overburden are exploited.
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Common Forms of Guarantee in Credit Security Law
In credit security law, various forms of guarantees play a central role in protecting lenders against payment defaults. The most important types of guarantees are:
- Personal guarantee: The guarantor waives the right to a preliminary action and is directly liable in the event of the insolvency of the principal debtor.
- Guarantee on first demand: The guarantor is immediately liable upon request of the creditor, without the latter having to first take action against the principal debtor.
- Subsequent guarantee: This guarantee serves to secure the liabilities of another guarantor and thus strengthens the credit security.
- Counter-guarantee: Here, the counter-guarantor assumes liability for the recourse claim of the main guarantor if a claim is made against him.
- Default guarantee: The guarantor is only liable if the creditor has tried unsuccessfully to persuade the principal debtor to pay.
- In addition to the classic forms of guarantee, there are other personal securities that can be designed more flexibly:
- Guarantee: A non-accessory security with a direct payment obligation.
- Letter of comfort: Obligation of a third party to provide financial security for the principal debtor.
- joint liability: The co-debtor assumes the liabilities together with the principal debtor.
The choice of the appropriate form of guarantee depends on the respective risk assessment and the contractual framework conditions.
Retention of title as credit security in trade credit transactions – protection against payment defaults
Retention of title is an essential form of credit security in the trade credit business, which protects suppliers against payment defaults. Through this agreement, the supplier remains the owner of the delivered goods until the invoice has been paid in full.
A group retention of title offers special protection in that the transfer of ownership only takes place when not only the buyer but also companies affiliated with him have fully settled their liabilities to the seller.
Other forms of retention of title include the extended retention of title, which goes beyond the original claim and covers, for example, all outstanding claims of the seller. The forwarded retention of title also protects the supplier if the goods are resold to third parties, while the downstream retention of title only provides for the transfer of title after all claims have been paid in full. The retention of title with advance assignment clause provides for an advance assignment of the purchase price claim arising from a resale to the original supplier. In addition, the retention of title with processing clause enables the supplier to be protected even if the goods delivered are further processed.
Conflicts of interest can arise if the retention of title collides with the security interests of third-party lenders, for example in the case of a global assignment in which a credit institution has an entrepreneur's future claims assigned to it. Such agreements are only effective if they contain a release clause for collateral that is not required.
Retention of title is therefore a central instrument in credit security law, which offers suppliers a legally effective way to minimize payment defaults.
Transfer of ownership by way of security – effective credit security for movable property
The transfer of ownership by way of security is one of the main methods of securing loans with movable assets such as vehicles and electronic devices. This instrument enables lenders to have a legally secured hold on the collateral, while the borrower can continue to own it. For an effective transfer of ownership by way of security, precise contractual agreements are essential that define exactly under what circumstances and at what point the transfer of ownership will be reversed.
In order to avoid over-collateralization, which occurs when the value of the collateral significantly exceeds the loan amount, release clauses are essential. These clauses ensure that the borrower is not overly burdened by excessive collateral.
In practical application, the transfer of ownership of a room as security is often used, where all movable items in a defined room, such as a warehouse, serve as security. Challenges arise when the items within the room cannot be clearly assigned or when new objects are added without adjusting the security status accordingly.
In addition, legal difficulties can arise if the collateral provider has previously acquired the deposited objects under retention of title or processes them as part of its business model. Such conflicts of security rights require careful and precise contract drafting in order to protect the legal position of the collateral recipient.
Thus, the transfer of ownership by way of security offers a flexible and legally robust solution for securing loans through movable assets, provided that the contractual terms are clearly and unambiguously defined, particularly with regard to retransfer and ownership.
Do you need support in preparing or reviewing your loan security agreements? Contact our specialist banking law attorneys now for individual advice!
Assignment of security and global assignment – effective credit security through transfer of claims
The security assignment is considered an established instrument for securing loans by transferring claims to the lender. This often includes wage and salary claims, rent claims, claims from life insurance and building society contracts as well as claims from business relationships.
A key feature of the security assignment is the lack of a notification obligation to the third-party debtor. This applies both to the assignment of individual claims and to the global assignment, in which several claims are assigned together. If the third-party debtor pays the original creditor without knowing about the assignment, he is still released from his liability.
The global assignment, a special form of security assignment, includes all current and future claims of a borrower to secure several loans. In order to secure the legal positions of the contracting parties, it is important to define the claims to be assigned precisely in order to exclude legal uncertainty. In addition, the risk of over-collateralization, especially in the case of fluctuating claims, should be avoided in order to ensure a balanced relationship between security and loan volume.
Land charge: Effective loan security and land mortgage for property owners
The land charge has established itself as a tried and tested means of securing loans through land mortgages. It offers property owners a flexible option for securing their loans. In comparison to a mortgage, the land charge is not accessory, i.e. it is not tied to a specific claim. This characteristic makes it possible to use the land charge as security for various liabilities and thus increases its practicality.
One of the flexible features of the mortgage is the possibility of encumbering several properties with a single mortgage. This is particularly advantageous in complex financing structures. Another advantage is that the mortgage can remain in place even after the original debt has been repaid and can be used again for future loans.
In order to assign the mortgage to a specific loan in a legally secure manner, a security purpose declaration must be concluded. This declaration defines which claims are secured by the mortgage. The extended security agreement, which also allows the mortgage to be used for future liabilities, is particularly common.
When structuring a land charge, general terms and conditions must be taken into account. A security purpose declaration that is too broad can be legally inappropriate and result in the clause being ineffective. The integration of additional liability provisions that could disproportionately disadvantage the borrower is also problematic.
In summary, the land charge as a mortgage on real estate offers a flexible and long-term option for real estate financing, provided that it is designed in a legally precise and balanced manner.
Lawyer for banking law – Professional support with credit security agreements
An experienced banking lawyer is your ideal partner for drafting and reviewing loan security agreements in a legally secure manner. The role of loan security is crucial in securing loans and loan agreements so that both lenders and borrowers are legally protected.
The services of such a specialist lawyer include advice on the selection of suitable loan collateral such as land charges, mortgages, guarantees, security assignments or retention of title. The lawyer also draws up loan security agreements in a legally secure manner in order to avoid later conflicts and checks existing agreements for their effectiveness. His tasks also include checking the general terms and conditions, in particular security purpose declarations and release clauses. He represents your interests effectively in legal disputes.
The importance of a legally secure loan security agreement cannot be underestimated. Faulty or inaccurate contracts can lead to ineffective security and significant financial risks. A lawyer specializing in banking law will legally secure your claims and protect you against possible defaults.
The advantages of working with a specialist lawyer for banking law are his comprehensive expertise in banking and credit law, individual advice for private individuals and companies as well as secure contract design for long-term protection.
Have your loan security agreements drawn up and secured by an experienced lawyer specializing in banking law. Arrange a non-binding consultation now to put your loan transactions on a legally secure footing.
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