Annette Krause-Thiel LL.M.
Rechtsanwältin u. Notarin

Fredericiastraße 12
14050 Berlin (Charlottenburg)

Telefon:   +49 30 8 83 85 16
    +49 30 89 09 54 30

Telefax:  +49 30 89 09 54 31






Financing a property

Difference between the German and the English System

Do you intend to buy a property in Germany, which you want to finance under commercial aspects? Soon you will get aware of the main differences between the German and the English system. One of the points in your decision to buy a property is the financing of the project.

German System

The loan contract under German law is ruled by sec. 488 German BGB. Here you find the typical contractual rights and duties of both parties. Usually the bank uses short contracts which refer to the respective bank’s Standard Terms and Conditions.

The bank requires lots of information from the customer, like an estimation of value of the property and its registration in the land register, insurances, financial statements and calculations concerning the property, the customer’s balance sheet, and profit and loss statements. In case a company intends to buy the property the bank requires the companies’ credit history, its registration in the companies’ register, etc.

Should the borrower not fulfill his contractual obligations, namely the payment of the installments and interests in due time, the bank can give notice and can cancel the contract in accordance with its Standard Terms and Conditions and in accordance with German BGB.

The bank demands securities. Therefore the borrower has to allow the registration of a land charge in favor of the bank in the land register. The land charge is a document signed in from of a notary in whom the borrower allows the registration of the land charge plus interests in the land register. The most important remedies in case of cancellation of the contract from the bank’s side are the seizure in the property – which means that the bank can start an auction – and the acceptance of the borrower’s personal liability for the loan. Both clauses allow the bank to foreclosure the property as well as the borrower’s personal property. Other securities demanded might be the cession of the rents in case the property is rented.

English System

The Loan Agreement under English law is quite different from the German system. Common law generally cannot refer to a codified law system but refers to previous court decisions.  Therefore the structure of the loan contract differs enormously from the German loan contract. The size of the contract is much more voluminous than in a German contract. The English loan contract starts with a glossary of definitions of terms that are used in the contract. The London loan market association has published a standard contract (LMA Style Contract) which is basically used in practice.

The English loan contract contains covenants, i.e. individually agreed clauses which secure the bank. They built an essential part of the loan agreement between the borrower and the bank. A covenant is a promise commonly found in form of restrictions in a loan agreement which are imposed on the borrower to protect the lender’s interest.

Affirmative covenants impose certain contractual duties or restrictions on the borrower, such as a negative pledge (i.e. not to sell, transfer, pledge, or encumbrance the property), pari passu (similar ranking of securities), investment clauses, clauses concerning the maintenance of the asset, etc..

Financial covenants include the customer’s duty to inform the bank about the financial situation by presenting regularly financial statements of different kind. These are the figures the borrower has to fulfill in order to secure the loan, e.g. not to allow certain balance sheet items or ratios to fall below or to go over an agreed limit.

The most popular instrument of real estate guarantee in England to secure a debt on land is by way of a mortgage. This is the legal agreement by which the borrower obtains a loan from the bank on the security of property. Meanwhile the borrower is obliged to pay back the loan in installments within a certain time.

In case the borrower does not fulfill the contractual obligations the bank can either give notice or reenter into the contract by modifying the conditions, by demanding other financial securities, by intervening into the management or by codetermining the borrower’s investment and finance policy. Limits are given by takeover.